Political, economic responses to high oil price no longer in lockstep

Consumers this summer will be paying the highest prices at the gasoline pump that they’ve seen in four years. With higher prices come the predictable howls of protest from politicians — about everything from oil-producer cartels to Wall Street speculators.

President Trump last week attacked Organization of Petroleum Exporting Countries (OPEC) countries for causing “artificially very high” oil prices. But while the political response to higher gasoline prices may feel like Groundhog Day, the economic response this time around reflects the new Goldilocks reality of the U.S. shale boom. 

{mosads}Oil prices have surged this month to levels not seen since November 2014, the same month oil-producing countries, led by Saudi Arabia, made a fateful decision not to cut oil output and triggered one of the steepest oil price collapses in history.

The oil price rebound reflects not only tighter market conditions, as strong demand and OPEC cuts have succeeded in drawing down excess inventories, but also heightened geopolitical risks. These include:

• the possibility of renewed oil supply disruptions in Libya and Nigeria;
• rapidly falling oil production in Venezuela;
• recent missile strikes against Syria and missile attacks from Yemen targeting cities and oil facilities in Saudi Arabia;
• upcoming elections in Iraq;
• the prospect that President Trump may cancel the Iran nuclear deal in mid-May;
• not to mention fears of a trade war.

Higher oil prices, in turn, mean higher gasoline prices. The U.S. Energy Information Administration projects gasoline prices this summer will be 26 cents higher than last summer, averaging $2.74 per gallon, and much higher in some parts of the country like California.

On average, Americans are projected to spend around $400 per household more on fuel this year than they did in 2016. 

While these prices are far short of the $4 per gallon consumers faced earlier this decade, Trump’s tweet blasting OPEC is a harbinger of what’s to come. The political response to higher pump prices is predictable:

• Call for a Federal Trade Commission investigation;
• call for a release of oil from the Strategic Petroleum Reserve;
• call for expanded drilling;
• call for a gas tax holiday;
• call for the U.S. government to take legal action on antitrust grounds against OPEC.

Bad oil price policy ideas — like the Dude — abide. 

Not only are such policy ideas ill-advised — none changes the global oil market forces that ultimately determine gasoline prices — but the predictable outrage over higher pump prices does not reflect the reality of how oil’s role in the U.S. economy has changed in recent years. 

Since 2008, as a result of the shale revolution, U.S. oil production has more than doubled. U.S. net petroleum import dependence has fallen from around 60 percent to below 20 percent and is projected to decline still further. 

As net oil import dependence in the U.S. approaches zero, the impact of higher oil prices on the economy changes as well. Oil prices are still set in a globally integrated market. So if oil prices spike, say in response to a conflict or natural disaster, U.S. consumers will still see pump prices go up regardless of how much oil the U.S. imports.

But the effects on the U.S. economy overall are more muted as more of that increased consumer spending circulates within the U.S. economy rather than flows overseas. This is known as the terms of trade effect.

Based on past experience, an oil price collapse of the magnitude seen in 2014-2015 would have been expected to boost U.S. GDP by around one percentage point.

Instead, the U.S. economy saw almost no benefit from the oil price collapse because the boost in consumer spending was almost entirely offset by a reduction in oil-related investment. 

In this way, the Trump administration’s goal of increasing oil and gas production, framed around the murky concept of “energy dominance,” can help make the U.S. economy more resilient to oil price swings. But it does little to help households who shoulder the burden of those swings. 

Rather than revisit the same tired and ineffective playbook of attacks on speculators, OPEC or environmental regulation, lawmakers concerned about high gasoline prices should recognize that the best way to reduce the vulnerability of households to the inevitable boom and bust of the oil market is to lower the share of oil in the economy.

Yet the Trump administration’s recent announcement to roll back planned increases in fuel economy undermines this objective.

Rather than let oil producers — at home or abroad — reap all the gains as oil prices rise, policymakers might also take advantage of a period of lower prices to reduce oil use (and greenhouse gas emissions) and help pay for much-needed infrastructure, by heeding the advice of the U.S. Chamber of Commerce and others to raise the gasoline tax, which has remained unchanged for a quarter century.

Many oil-producing countries followed this approach, taking advantage of a period of low oil prices to phase out fuel price subsidies.

Higher oil prices are inevitable — it’s just a question of when. Yet the changed U.S. energy landscape requires policymakers to rethink traditional assumptions of how they impact households and the economy.

Rather than repeating past mistakes, policymakers should take this opportunity, before the pain at the pump is acute, to protect consumers as well as the planet.

Jason Bordoff (@JasonBordoff), a former special assistant to President Obama, is a professor of professional practice in international and public affairs and founding director of the Center on Global Energy Policy at Columbia University.