ELECTIONS HAVE CONSEQUENCES – OPEC IS BACK!

In a number of papers posted in www.georgeeconomics.com, the topic of energy has been front and center. In current posts, and the sections marked as archives. There are only a few primary conclusions and datapoints covered and reported in those papers that are relevant for the purpose of this paper. One important point is that due to Trump era energy policies, not only did the United States rapidly expand oil and gas production during that period, the country became energy independent. An equally important point made is that the United States became the largest volume global producer of oil and gas prior to the Pandemic lockdown. Given that domestic producers were the most efficient and dynamic producers in the world, the United States moved from being a price acceptor to the global price setter. The OPEC+ cartel was no longer the price setter of crude oil on the margin. In the paper “World Oil Market – Post Trump Election 2017”, in recognition of the increasing role of the American free market in the domestic and global price of oil, I projected that the price of oil (both WTI and Brent) would stay, for a vast majority of the time, in the range of $50.00 per barrel for the foreseeable future. This projection, in fact, was accurate during the Trump Administration while unrestricted domestic producers forced competitive pricing on the OPEC+ cartel. OPEC’s pricing power was dead.

The favorable economic environment created by the Trump era fiscal and monetary policies came to an abrupt halt with the poorly handled pandemic lockdown and the Biden victory in the 2020 presidential election. As so many conservative economists have said so many times, whenever politics and political agendas shackle the free market, bad things happen. The unnecessary shutdown of the economy stopped nonessential commerce in its tracks and the massive hand out of free money under the guise of covid relief, was, for the most part excessive. It also boosted demand at the same time supply was being constrained by the lockdowns. Together these two critical miscalculations, launched the imbalance between demand and supply that became massive under the misguided fiscal and monetary policies of the Biden Administration.

The single most economically disastrous action that he took immediately upon entering the White House was to throttle the domestic oil and gas industry. Together with the ESG “green” environmentalists who endeavor to limit oil and gas financing, the Biden administration waged war on oil and gas producers in the United States. By curtailing oil and gas exploration on public land and blocking virtually all permitting of oil and gas production and pipeline infrastructure through the regulatory process, domestic oil and gas production has been radically depressed below Trump era levels. Prior to the pandemic, at the end of 2019, domestic oil production reached 13 million barrels per day (b/d). The July 2022 figure is 1.2 million b/d lower at 11.8 million b/d. If the Biden Administration in coordination with the ESG green social warriors had not created such a hostile environment for investment in oil and gas production, domestic production would be at least 14 million b/d. In effect, Biden and the American left, rendered sightless by their “green” blinders, resurrected and breathed life back into the OPEC+ cartel. The global oil cartel that was held at bay during the Trump Administration is now alive and well, and behaving like a cartel.

The European union has been even more myopic than the American left in their unscientific approach to minimizing environmental damage for whatever reason. In a previous paper I noted that their myopic “green” push to eliminate their dependency on coal and oil, and in the case of Germany, nuclear power, lefty them dependent on Russia to supply natural gas and to a lesser extent heating oil. The lesson they learned is that when you deal with a snake you get bitten, THAT IS WHAT SNAKES DO! Their monumental error has and will continue to cost them dearly as Russia continues its assault on Ukraine while benefiting from the high price of oil controlled by the OPEC+ cartel. The European left would have escaped their dilemma if their comrades, the American left, had not crippled American domestic production and allowed the most efficient and environmentally friendly producers in the world to perform their magic and continue to be the global price setters.

If it weren’t so pathetic, it would be humorous to watch the inept Biden Administration cozy up to dictators and sovereign players in the global oil market begging them to increase production. They have chosen to deal with hostile parties and dispense minor amounts of oil from the Strategic petroleum reserve in hopes to bring down the price of oil and petroleum products. The OPEC+ cartel has already told Biden to “pound sand”, and any deals he makes with dictators and sovereign entities will be short lived because these hostile players will ultimately side with the OPEC+ cartel. The only realistic source of sufficient existing and potential production capacity to force OPEC+ to become a price taker rather than a price setter is American production. American producers are a diverse bunch who, if set loose, could increase production over time at a pace that would prevent the OPEC+ cartel from controlling total output. The Biden Administration, a puppet of the American left, however, is not going to adjust its “socialist green” agenda and will have to live with the elevated global prices controlled by the OPEC + cartel. As stated earlier, when Biden and the hyper-green ESG community waged war on the American oil and gas industry and stymied domestic production, they put the OPEC+ cartel back in the driver’s seat with control of global oil pricing. The Biden Administration is sinking in the inflationary swamp they created as oil and gas prices (along with excessive agenda driven spending) are weighing down the economy. It is a shame that the entire country must suffer because the American left does not understand or care that they have supported a cartel that is trying to maintain monopoly level prices. Surprise, surprise – THAT IS WHAT CARTELS DO!

The price of West Texas Crude today is close to $90 per barrel and the futures price (December 2022) is near $100. If the far left had not won the 2020 presidential election and the price of oil only increased at the rate of inflation from its $50, today the comparable midpoint of the price range of crude oil would only be approximately $60.00. Actually, the midpoint price would probably well below the $60.00 level because inflation would have been significantly lower without the spike in oil prices. The damage being done to the economy as the Fed aggressively increases the federal funds rate has been and will continue to be unnecessary. If the American economy hits a hard landing (which is now expected) demand destruction will, at some point, reverse the price of crude oil, but at what price to both the domestic and global economies. The American left, which loves the phrase “follow the science”, is completely blind to optimization theory and, therefore, their unscientific hysterical “green” policies that ignore constraints such as existing infrastructure produce erratic if not dangerous outcomes. Their “hyper-green” plan for controlling the environment can be expected to severely miss the optimal path to net zero pollution over time. The domestic and global economic issues being experienced today offer a prime example of the problems created by the misguided unscientific approach to the environment by the American and European left who really do not have a comprehensive, well designed, plan for the environment going forward that is not guilty of partial analysis.

ELECTIONS HAVE CONSEQUENCES!