At the same time, the administration should keep in mind that, ironically, one of the biggest risks to continued oil supply is the fear of falling prices. To insure the economy against future price spikes, the administration must encourage investment in oil production – and so it should try to offer 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 used by the Biden administration to ease the pain at the pump – the Strategic Petroleum Reserve. The Treasury Department estimates that the administration’s historically large outflows have reduced the price of gasoline by 17 to 42 cents per gallon.
In March 2020, when oil was cheap, Donald Trump’s administration offered to buy enough oil to completely fill the SPR. Democrats rejected the idea, with Senate Majority Leader Chuck Schumer praising negotiators for “eliminating a $3 billion bailout for big oil.”
Had Trump been successful, Biden’s SPR versions would have been slightly bigger and more powerful, and gas prices would now be a bit cheaper. But beyond that, a partial bailout of the oil industry would have made it less risky to invest in new production when prices rose last year, and companies could have done so more quickly.
Fast forward to 2022, and the Democratic Party realizes that skyrocketing gas prices are political poison. And now that Democrats have embraced the largest carbon-free energy investment in the world, they can’t afford to settle for falling gas prices. Democrats need to remember how bad things got when prices soared and recognize that opposing bailouts was a tactical and strategic mistake.
A bit of history: Oil industry figures are still scarred by the 2014-2015 oil price war, when OPEC grew tired of competing with US shale oil and deliberately lowered the oil prices to the point where North American shale would no longer be profitable. Investors lost tons of money. Production rebounded in the following years, only to slump again during the pandemic – when investors, again, lost tons of money. This is why, in February 2022, the main players in shale were saying that they would not make major investments even if oil reached $200 a barrel.
Fortunately for the US economy, that was an overstatement. According to the Energy Information Administration, U.S. oil production for 2022 is expected to be higher than any year except 2019. Especially given the war between Russia and Ukraine, production must continue to increase to help the global economy to recover from the pandemic. And OPEC’s most recent decision, cutting production slightly to discourage prices from falling further, was ideal from a US perspective: the cut wasn’t big enough to drive prices up, but the a communicated intention to prevent oil from becoming much cheaper encourages American producers. to continue investing.
The problem is that OPEC’s decision making can be fickle. American shale players are aware that they are currently hostage to international events.
Biden could improve the situation by clearly communicating his intention to fill the SPR if oil prices start to drop significantly – buying oil at a price that remains profitable for US producers. Not only would this commitment make a difference to the industry’s bottom line, but it would also show that the Democratic Party is no longer trying to bankrupt the domestic oil and gas industry.
This would be helpful beyond any financial impact of the pledge. 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 from a hypothetical future price war.
Democrats generally don’t see themselves as the party that meddles in the oil industry. But they need to understand that symmetrical price stabilization is not only consistent with their climate goals, but also complementary to them.
Soaring prices are politically painful. But falling prices would discourage adoption of electric vehicles and other environmentally friendly measures. Favoring domestic production over foreign production aligns with Biden’s foreign policy goals, supports his interest in encouraging domestic manufacturing, addresses his short-term policy needs, and helps the Federal Reserve fight inflation. .
Admittedly, an oil bailout is a bit out of the Democratic Party’s comfort zone. But it would be the connective tissue that holds Biden’s legacy together on multiple fronts. If he doesn’t, things could still work out – recent events have turned in his favor – but they could also not. Hope is not a plan. The White House should be more wise than Schumer did two years ago and act now to prevent oil price spikes before they happen.
More from Bloomberg Opinion:
• Big Oil’s Climate Changed Forever: Liam Denning
• Bashing Big Oil won’t save the planet: Julian Lee
• Ending the energy crisis does not mean giving up on the climate: the editorial staff
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Matthew Yglesias is a columnist for Bloomberg Opinion. Co-founder and former columnist of Vox, he writes the Slow Boring blog and newsletter. He is the author, most recently, of “One Billion Americans”.
More stories like this are available at bloomberg.com/opinion