Oil Price Controls Won’t Solve The Energy Crisis


This crude bull is showing no signs of slowing down, with oil prices at 7-year highs. Brent prices crossed $85/barrel in Monday trading, with WTI flirting with $84/barrel. Inevitably, gas prices have skyrocketed, with the national average gas prices currently sitting at $3.387 per gallon, nearly 60% higher than prices 12 months ago. Motorists are feeling real pain at the pump, with “Why are gas prices going up?” and “When are gas prices going down?” now trending on Google.

It’s a well-known fact that gas prices have an outsized impact on the consumer psyche, something that’s not lost on the Biden administration as oil and gas prices creep higher.

99.9% of motorists are not buying gasoline over $5,” UC Berkeley energy economist Severin Borenstein has declared.

Back in August, the Biden administration made a rather unusual move by urging OPEC+ to pump more oil to tackle rising oil prices amid the oil price surge. Biden told reporters that the United States told OPEC that “the production cuts made during the pandemic should be reversed” as the global economy recovers “in order to lower prices for consumers.

OPEC+, of course, declined the offer, and the administration appears to have resigned itself to fate and expects oil prices to fall in 2022 as OPEC+ opens up the taps to meet growing demand.

A couple of weeks ago, the Financial Times reported that US energy secretary Jennifer Granholm raised the prospect of releasing crude oil from the government’s strategic petroleum reserve containing nearly 620 million barrels of crude, declaring that “all tools are on the table” in the war to tame rising gas prices.

Bob McNally, president of consulting firm Rapidan Energy Group, has likened the government selling its SPR to “bringing a squirt gun to a fight.” 

Granholm, reportedly, also does not rule out a ban on crude oil exports, a move that has been described as “truly disastrous.”

The government also has another ace up its sleeve that it could use as a last-ditch effort to contain oil prices: Oil and gas price-fixing.

Though offering a potential instant fix to a problem that threatens to spiral out of control, there are several solid reasons why even a desperate U.S. government will think twice before instituting any form of price controls on oil and gas prices.

Oil Price Fixing

The biggest reason why the government might not want to try and directly cap oil and gas prices is that it has not worked very well in the past.

On August 15, 1971, President Richard M. Nixon imposed wage and price controls on commodities including oil and gas, declaring that putting the U.S. economy “into a permanent straitjacket would … stifle the expansion of our free enterprise system.” After a 90??day freeze, increases would have to be approved by a “Pay Board” and a “Price Commission,” with an eye toward eventually lifting controls–conveniently, after the 1972 election.

Inflation stood just above 4 percent in 1971 but was in double digits when the controls were lifted.

By the time Nixon reimposed a temporary freeze in June 1973, it was obvious that price controls didn’t work as Daniel Yergin and Joseph Stanislaw explain in The Commanding Heights: The Battle for the World Economy: “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”

A Brookings Op-Ed notes that crude oil price controls put in place in 1971 ended up creating a situation in which “rich producing wells were left to expire because producers had no incentive to maintain them, while investments poured into very small wells that would never make a difference to the nation’s energy future”.

President Carter took the bold and controversial step of removing price controls on oil and introduced windfall profits tax on producers, which Congress enacted in 1980. The tax took anywhere from 30 percent to 70 percent of windfall profits generated by prices above the previous controlled prices and recycling them in consumers and in the development of alternative energy sources. The windfall tax was eventually removed by Congress in 1988, when crude prices dipped much lower than pre-set prices, leading to the tax-generating zero revenue.

Voters don’t like high gas prices and have a history of blaming whoever is in the White House. The Biden administration says it’s ready to use “all tools in the toolbox” to combat high energy prices. Unfortunately, that toolbox is quite limited right now.

By Alex Kimani for Oilprice.com

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2021-10-26 17:00:00

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