Oil price controls will not solve the energy crisis

This crude bullish shows no signs of slowing down, with oil prices at 7-year highs. Brent prices crossed $ 85 / bbl in Monday’s trading, with WTI flirting with $ 84 / bbl. Inevitably, gas prices have skyrocketed, with the national average gas prices currently sitting at $ 3.387 a gallon, nearly 60% higher than prices 12 months ago. Motorists feel real pain at the pump, with “Why are gas prices rising?” and “When do gas prices go down? now trending on Google.

It is a well-known fact that gas prices have a disproportionate impact on the psyche of consumers, something that is not lost on the Biden administration as oil and gas prices rise.

99.9% of motorists do not buy gasoline over $ 5UC Berkeley energy economist Severin Borenstein said.

In August, the Biden administration made a rather unusual move in urging OPEC + to pump more oil to deal with rising oil prices amid soaring oil prices. Biden told reporters that the United States told OPEC that “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 seems to have resigned itself to fate and expects oil prices to fall in 2022 as OPEC + opens the taps to meet growing demand.

A few weeks ago the Financial Time reported that US Secretary of Energy Jennifer Granholm has raised the possibility of releasing crude oil from the government’s Strategic Petroleum Reserve containing nearly 620 million barrels of crude, saying “all the tools are on the line. table ‘in the war to control rising gas prices.

Bob McNally, chairman of the consulting firm Rapidan Energy Group, compared the government selling its SPR to “bring a water pistol to a fight.”

Granholm would also not rule out a ban on crude oil exports, a move that has been described as “really catastrophic. “

The government also has another trump card up its sleeve that it could use as a last-ditch effort to contain oil prices: the pricing of oil and gas.

While it offers a potential instant solution 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 oil and gas price controls. .

Oil price fixing

The main reason the government might not want to try to cap oil and gas prices directly 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 US economy “in a permanent straitjacket … would suffocate the expansion of our free enterprise system ”. After a 90-day freeze, the increases would have to be approved by a “wages board” and a “prices commission”, with a view to possibly lifting the controls – practically after the 1972 elections.

Inflation was just over 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 evident that price controls were not working, as explained by Daniel Yergin and Joseph Stanislaw in Dominant heights: the battle for the global economy: “Pastoralists have stopped shipping their cattle to market, farmers have drowned their chickens and consumers have emptied supermarket shelves.”

A Brookings Opinion Notes that the crude oil price controls put in place in 1971 eventually created a situation in which “rich producing wells expired because producers had no incentive to maintain them, while investments went into very small wells that would never make a difference to the nation’s energy future ”.

President Carter made the bold and controversial decision to remove oil price controls and introduced a windfall profit tax for producers, which Congress enacted in 1980. The tax took between 30 and 70 percent of windfall profits generated by prices higher than previous controlled prices and recycling them to consumers and in the development of alternative energy sources. The windfall profit tax was finally removed by Congress in 1988, when crude prices fell much lower than pre-set prices, resulting in zero revenue generating taxes.

Voters don’t like high gas prices and have a habit of blaming anyone in the White House. The Biden administration says it is ready to use “any tool in the toolbox” to fight high energy prices. Unfortunately, this toolkit is quite limited at the moment.

By Alex Kimani for Oil Octobers

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