Presidents and the Price of Oil

Posted by Scott Bittle and Jean Johnson of Public Agenda

If you’re a primary voter, you’ve got your pick of candidates who’ll promise to bring down the price of gasoline. Unfortunately, whoever wins is going to run up against the limits of presidential power pretty quickly.

The fact is that presidents don’t have that much authority over the price of oil, for a number of virtually inescapable reasons.

  • Oil is a truly global commodity. There’s a lot of anger over the fact that the U.S. can be exporting oil even as prices remain high at home. But that’s based on a false assumption: that somehow we should use up all the oil we have at home first, and then export whatever’s left (or import if we come up short). But in fact oil is sold on global commodities markets like the New York Mercantile Exchange. It’s one big market out there, and whoever’s willing to pay the most per barrel on a given day gets the oil. Even oil-rich countries may buy on the spot markets to smooth out production.
  •  Oil markets are vulnerable to speculation. Because oil is bought and sold on a daily basis in markets that operate more or less like the stock market,  the price of oil is sensitive to all kinds of political and weather events.  Oil traders can be a little like nervous people stocking up on bottled water and canned goods before a storm. Sure, the hurricane may veer out to sea, and the latest tensions with Iran may get resolved over time but in the meantime, people will clear out the shelves. The price of oil can shoot up in the face of hurricanes, coups, embargoes—or even just talk about them. And news that the crises are easing—or that there are big new oil discoveries somewhere—can bring them down again.
  • Producing more oil here doesn’t mean it’ll stay here. Because of global markets, if China, India or some other country is willing to pay more on a given day, then that’s where the oil is going. As China and other developing countries boom and buy cars, we’re going to see more and more competition for the oil that’s on the market. Unless the next president and Congress are willing to dramatically change how oil is sold – like imposing a tariff on overseas sales – then there’s no guarantee that oil produced here will stay here. And a tariff wouldn’t keep prices low for Americans; quite the opposite in fact.
  • Prices move fast, but energy policy doesn’t. It actually takes years for policy changes to take effect, because energy projects don’t spring up overnight. Even if we choose to open up more areas to drilling, the Energy Department estimates it will take a minimum of five years for any expanded offshore drilling to actually be in production, and 10 years for expanded Alaskan fields to reach the market. It could be longer:  the Thunder Horse platform in the Gulf of Mexico took eight years to get into production, and Canada’s Hibernia platform took 19 years.

With time frames like that, what the next president should do, and has to do, is get us to an energy policy that deals with our long term issues: the soaring worldwide demand for energy, and how we meet it without ending up with ruinous global climate change. That means going back to fundamental questions about the kinds of vehicles we drive, and the kinds of power plants we build.

But that’s not the conversation we’re having. And until we start having it, promises to lower prices at the pump are going to be empty ones—and misleading and manipulative ones at that.

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