Back in February of 2009, when I was a foreign affairs writer at a US news magazine, I penned a piece on the decline of the oil tsars, which looked at how the plunge in oil prices (from $147 to $37 in about six months) had curbed the power and geopolitical aspirations of oil autocrats such as Russia’s Vladimir Putin, Venezuela’s Hugo Chávez and Iran’s Mahmoud Ahmadi-Nejad. They went from stirring up trouble on the global stage, to eagerly accepting invitations to talk to Barack Obama’s administration. How times change . . .
I wonder if we aren’t headed in the opposite direction today. Oil prices are rising, as are many commodities (our colleague Martin Wolf wrote a smart piece about why we should worry about inflation). While we are hardly in bubble territory yet, there’s reason to worry that we could be at the beginning of a new, longer-term commodities spike.
For starters, neither Russia nor Saudi Arabia have increased production in the past decade — most of the new supply has come from US shale production. All of this speaks to a boom-bust cycle in oil that has been with us for decades. As I wrote back in my 2009 article:
That’s similar to the situation now. Back in 2014, when oil prices fell, shale production declined, because you need a high price to get that supply out of the ground. The petrol tsars themselves didn’t invest as they should (because they rarely do), which further constrained supply.
On top of this, the global push towards a carbon neutral economy has led to calls for an end to new oil and gas exploration by the International Energy Agency. That’s a good thing in the long term, of course, but ironically, in the short term, Joe Biden’s climate change plans and similar goals in Europe and Asia could actually increase the need for fossil fuels initially, to produce all the green vehicles and such that will be required for the transition.
Higher oil prices mean higher petrol prices, and that’s never a good thing in advance of a contentious midterm election. Federal Reserve chair Jay Powell could, of course, tighten monetary policy to try to curb inflation. But that would, in turn, probably lead to a stock market correction, which would have its own political impact. (As I’ve written, it’s tough for an economy to grow without high equity prices when net capital gains plus taxable distributions on individual retirement accounts equal to 200 per cent of year-on-year growth in personal consumption, which makes up two-thirds of the US economy).
I don’t actually agree with the Larry Summers argument that we are back in the 1960s and headed for years of higher inflation (I think technology will be an incredibly disinflationary force). But I do think the trade-off between low stocks and higher prices at the petrol pump is a tough one. I’m inclined to think the Federal Reserve and the Treasury department should think more about commodities inflation because they hit the poor and middle class much harder than any bursting of the stock market bubble that would hurt the equity-owning class.
Meanwhile, I see the petro-dictators are feeling emboldened: Iran, for example, is shipping more oil, snubbing the US and flouting American sanctions.
Ed, any advice to the White House and/or Treasury on these matters?
Back in 1999, The Economist ran its infamous cover story predicting that oil would never exceed $10 a barrel again. I’m sure Daniel Yergin (the energy analyst and author Rana cited last week) could tell us that not even the best brains in the business can avoid embarrassment from time to time. But generally speaking, the higher the price of oil, the quicker the markets will move to cheaper and cleaner substitutes. So higher oil prices are what those wishing to tackle global warming ought to want to see. The federal government can boost domestic supply when there are disruptions, such as the recent Colonial Pipeline ransomware attack, but it can do very little to shape global aggregate demand and supply in the short term.
The best thing Biden can do for the long term is to impose a price on carbon. Unfortunately he’s imprisoned by his pledge not to raise taxes on those earning under $400,000, which he interprets to mean any kind of tax, including gas or mileage taxes. This is a major self-imposed handicap in his quest of reducing emissions and I wish he could break the pledge. A carbon tax need not hit the middle classes since he could make it revenue neutral and send annual carbon dividend cheques to households earning less than $100,000. This idea has been around for some time and I’m hoping Biden will see its logic.
Many years ago Tom Friedman coined his “first law of petro-politics” that the higher the price of oil, the deeper the political repression in oil-exporting countries would be — and vice versa. There is not much we can do about that. But it offers another compelling reason why diversifying away from oil should be an overriding goal.
And now a word from our Swampians . . .
In response to ‘The reckless legacy of Benjamin Netanyahu’:“I have always been a Democrat but have also long been concerned by the far left’s anti-Semitism (not ‘just anti-Israel’) . . . Yet Israel has been divided by Bibi just as the US has been divided by Trump. The extremes in both countries should be ashamed of themselves but of course only care about themselves. As I age, I am comforted by the fact that Bibi and Trump are ageing too and hope that younger people in both countries become more inclusive and focused on social health and cohesion. A pipe dream perhaps, but I need to have hope!” — Rick Solway, New York, New York