Energy Independence Redux

President Trump raised eyebrows with a social media post Wednesday in which he argued that soaring oil prices are a good thing:

He wasn’t wrong about the U.S. being the world’s largest oil producer. We are, however, also the world’s largest oil consumer, which should curb our enthusiasm. Still, the U.S. produces more oil than it consumes. Doesn’t that mean that on net we gain from higher oil prices?

The answer is, what do you mean by “we”?

A rise in oil prices, which leads in turn to higher prices of gasoline, diesel, and heating oil, hurts U.S. consumers. On the other hand, U.S. oil producers do indeed “make a lot of money,” a gain that ultimately accrues to their stockholders.

A new report from the investment bank Jeffries estimates that if oil stays near $100 a barrel this will generate more than $60 billion in windfall gains for US oil companies. If oil prices go much higher, as I’ve suggested they may, the gains will be much bigger.

The crucial point is that even within the United States, consumers and the beneficiaries of higher oil prices are different people. I don’t know of data on who exactly owns oil-company stock, but if the composition of ownership resembles ownership of U.S. equities in general, a large fraction — possibly as high as 40 percent — is owned by foreigners, and of the share owned by U.S. residents, almost 90 percent is owned by the richest 10 percent, half by the richest 1 percent.

Before the Iran war, some commentators argued that the U.S. was well positioned to weather a shock to oil prices, because as a nation we are more than self-sufficient in oil, indeed a net exporter. But this self-sufficiency is irrelevant to the great majority of U.S. households, who are hurt by higher prices at the pump while having little or no share in the gains to domestic oil producers. In this sense U.S. households are in the same position as households in, say, Europe or Japan, even though the U.S. is a major oil producer and most other nations are not.

Is domestic production of oil always irrelevant to most people? No.

In the 1970s the U.S. imposed price controls on both oil producers and refiners as oil prices soared. These price controls had problems — they led to shortages and the infamous gas lines — but did initially limit the hardship faced by families. When the controls were gradually lifted beginning in 1979, they were followed by an excess profits tax (actually an excise tax on domestic oil) designed to capture part of the gains to oil companies.

Today, with America a net exporter of oil, the U.S. government could devise policies that would largely insulate U.S. households from the Iran war shock. But it’s hard to imagine either price controls or excess profits taxes being imposed in the current U.S. political environment.

The politics of oil prices are different in other nations. China has price controls on gasoline and other energy products that will insulate consumers if the world oil price rises above $130 a barrel. And Russia, the world’s second largest oil exporter after Saudi Arabia, has a “mineral extraction tax” tied to world oil prices, which means that soaring oil prices translate into a large gain in Russian government revenue.

Under the current rules of the game, then, the disruption of oil supplies resulting from the Iran war will hurt consumers around the world, even if they are living in countries with large domestic oil production. Companies that produce oil, and hence their stockholders, will gain. And the Russian government will be a major beneficiary.

That being said, the impact on consumers will vary around the world, because there are significant differences in how much oil nations consume relative to the size of their economies: The U.S. economy is “oil-intensive” compared with Europe and especially China.

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To summarize: Because there is effectively a single market for oil, US households are facing the same price shock as residents of other nations, even though the US is a net exporter of oil. We are somewhat insulated from the rise in prices of liquefied natural gas, but also exposed to a sharp rise in fertilizer prices. And it seems all too possible that the surge in oil prices has just begun, that prices will go much higher than they are.

There are some winners from the Iran war oil disruption: mainly oil producing companies and the Russian government. That’s cold comfort to ordinary families.

And U.S. families are arguably even more exposed than their counterparts in other advanced economies because of the U.S. economy’s high oil intensity.

I wish I could paint a less depressing picture, but that’s where we are as the war enters its third week.

• The U.S. imports about 2% of the oil we need from the Middle East

• Companies in the U.S. produce more oil than we use, so we actually export oil to other countries

• Yet oil is a single world market, so the price around the world is relatively the same no matter how much is produced in any single country

The result is “Drill, Baby, Drill” has led us down a path of absolute energy dependency - the exact opposite of what we have been told/promised by feckless, mostly Republican politicians.