Market

Senator Warren’s Oil Price Conspiracy Theory

As Friday’s 10% oil price plunge demonstrated, there is only one truth when it comes to oil prices: if you don’t like the price today, just wait a little.

Yet for some, everything is politics, and the recent increase in gasoline prices has seen many from both parties weighing in, responding to public anger. Sadly, little of the discussion involves supply and demand, nationally or globally, but rather finger-pointing and trolling.

Take for example, the recent appearance by Massachusetts Senator Elizabeth Warren on Joy Reid’s MSNBC show, where the host expressed consternation that people had been staying home but gasoline prices had risen anyway. In response, the senator replied, “If this were just ordinary inflation, we might see prices go up, but prices at the pump have gone up why? Chevron
CVX
, Exxon, have doubled their profits. This isn’t about inflation, this is about price gouging for these guys.”

Both the question and the reply were nonsense.

Ms. Reid apparently thinks demand determines prices, rather than both demand AND supply. Last year, soaring inventories led to a collapse in oil prices, briefly below $25/barrel (ignoring the one day’s negative price). OECD oil inventories rose by a phenomenal 300 million barrels in three months, far above normal.

Then two things happened. First, OPEC and its allies (OPEC+) cut production by an astonishing amount—but not an outrageous amount, given the collapse in demand. This brought inventories down to a more normal level, as the figure shows. However, the global economy recovered faster than expected: the July 2020 IEA forecast for 2021 demand was low by about 3 mb/d, which translates into an annual amount of over 1 billion barrels. Add Hurricane Ida which caused a loss of over 40 million barrels of production at a time when inventories were already low, and you have the (cough) perfect storm.

But Senator Warren’s comment is problematic for a number of reasons, not just because she ignores the actual market developments. First, she conveniently ignores the huge financial losses that the oil industry in 2020. If she called for their losses to be subsidized, or bailed out, I must have missed it. Her focus on only most recent quarterly profits certainly confirms her political bias.

More bizarrely, she adopts the not uncommon view that the oil industry, especially the big companies, can control the price—but usually choose not to. Does she think that last year, the industry ‘allowed’ the price to collapse? Then this year, just by coincidence, they choose to raise prices as global oil inventories shrank?

She is hardly alone in thinking that the invisible hand of the market is really a group of individuals or companies who control it for their own interests. In fact, there are those in the oil industry who think the market is being controlled by outsiders such as traders on Wall Street who are antagonistic to them and periodically drive the price down to their detriment. The reality is that the price is the result of myriad decisions by thousands of traders and producers in the short-run and millions of consumers in the long run.

As Senator Warren has shown repeatedly over her career, her progressive instinct is to distrust and “fix” seemingly inefficient markets, believing that she knows better than the collective decisions of thousands of market participants what is best for the citizenry. Percolating from the progressives are suggestions that exports of oil and gas should be banned on the grounds that creating a domestic surplus would lower prices — at least for the U.S. The next time gasoline prices surge, watch for Senator Warren to embrace her inner Richard Nixon and propose oil price controls.

As of Monday morning, oil is up 6% to $72 per barrel.

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