At the same time, the administration should keep in mind that, paradoxically, one of the biggest risks to the continued supply of oil is fear that prices may crash. To insure the economy against future price spikes, the administration needs to encourage investment in oil production — and so it should try to offer the industry insurance against the risk of a price crash.
In other words: Biden should promise to bail out the oil industry.
Consider the main tool the Biden administration has used to alleviate pain at the pump — the Strategic Petroleum Reserve. The Treasury Department estimates that the administration’s historically large releases have reduced the price of gasoline by between 17 and 42 cents per gallon.
In March 2020, when oil was cheap, Donald Trump’s administration proposed purchasing enough oil to completely fill up the SPR. Democrats rejected the idea, with Senate Majority Leader Chuck Schumer congratulating negotiators for having “eliminated a $3 billion bailout for big oil.”
Had Trump gotten his way, Biden’s SPR releases would have been slightly larger and more potent, and gasoline prices would now be a bit cheaper. But beyond that, a partial bailout of the oil industry would have made investing in new production when prices rose last year less risky, and companies might have done it faster.
Fast forward to 2022, and the Democratic Party realizes that surging gasoline prices are political poison. And now that Democrats have passed the largest investment in zero-carbon energy in the world, they can’t afford to be complacent about falling gasoline prices. Democrats need to remember how bad things got when prices spiked, and recognize that the opposition to bailouts was a tactical and strategic error.
Some history: Oil industry figures remain scarred by the oil price war of 2014-2015, when OPEC got tired of facing competition from US shale and deliberately drove down the price of oil to the point where North American shale would be uneconomical. Investors lost tons of money. Production rebounded over subsequent years, only to crash again during the pandemic — when investors, again, lost tons of money. That’s why, by February 2022, major shale players were saying that they wouldn’t make major investments even if oil reached $200 a barrel.
Thankfully for the US economy, that was an overstatement. According to the Energy Information Administration, US oil output for 2022 is tracking to be higher than in any year except 2019. Especially given the war between Russia and Ukraine, production needs to continue to rise to help the world economy recover from the pandemic. And OPEC’s most recent move, cutting production slightly to discourage prices from falling further, was ideal from an American point of view: The cut wasn’t big enough to spike prices, but the communicated intent of preventing oil from getting much cheaper encourages US producers to keep investing.
The problem is that OPEC decision-making can be fickle. US shale players are aware they’re currently hostage to international events.
Biden could improve the situation by clearly communicating an intent to refill the SPR if oil prices start to fall substantially — buying oil at a price that’s still profitable for US producers. Not only would that commitment make a difference to the industry’s bottom line, it would also show that the Democratic Party is no longer trying to bankrupt the domestic oil and gas industry.
That would be helpful above and beyond any financial impact of the promise. Biden could further strengthen his commitment by engaging congressional Republicans in talks about expanding SPR capacity or finding other legislative solutions to help the industry deal with the fallout of a hypothetical future price war.
Democrats don’t customarily see themselves as the party that runs interference for the oil industry. But they ought to see that symmetrical price stabilization is not only consistent with their climate goals but also complementary to them.
Soaring prices are politically painful. But plummeting prices would discourage electric vehicle adoption and other eco-friendly measures. Favoring domestic production over foreign production aligns with Biden’s foreign policy goals, supports his interest in encouraging domestic manufacturing, serves his short-term political needs and helps the Federal Reserve fight inflation.
Granted, an oil bailout is a little bit out of the Democratic Party’s comfort zone. But it would be the connective tissue that cements the Biden legacy on multiple fronts. If he doesn’t do it, things might still work out — recent events have broken in his favor — but they also might not. Hope is not a plan. The White House should demonstrate more wisdom than Schumer did two years ago and act now to head off oil price spikes before they happen.
More From Bloomberg Opinion:
• Big Oil’s Climate Has Changed Forever: Liam Denning
• Bashing Big Oil Won’t Save the Planet: Julian Lee
• Ending the Energy Crisis Doesn’t Mean Giving Up on Climate: The Editors
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew Yglesias is a columnist for Bloomberg Opinion. A co-founder of and former columnist for Vox, he writes the Slow Boring blog and newsletter. He is author, most recently, of “One Billion Americans.”
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