Petroleum’s rising price depends on supply and politics

Petroleum’s rising price depends on supply and politics
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The price of oil is going up but the good news is that there isn't going to be a shortage — or so our Saudi allies tell us. Supplies are ample despite “recent market volatility.”

It is some consolation that there shouldn't be lines at gas stations, but why are we having to pay so much? There are multiple reasons and you will probably hear all of them during the coming summer-driving season, as lobbyists for oil companies, OPEC members, electric cars and others try to spin the narrative.

With midterm elections in November, the chorus will be joined by thousands of politicians anxious about their futures, or seeking to take advantage of incumbents threatened by voters concerned about the new realities in their household budget calculations.


Don’t expect to hear much economic jargon. Hardly surprising: The notion that oil supply is inelastic reminds too many of why they avoided taking Economics 101 at college. Yet, that is the simple reason. Increased demand and cutbacks in supply prompt higher prices but it takes time for new supplies to emerge.

Additionally, this is affecting the whole world rather than just the United States. Yes, horrors, oil is a “global commodity,” whatever that is. The United States is not yet “energy independent,” although it is increasingly so. And even if it were, it would not be a great idea, either economically or politically, to pull up the drawbridge and mouth an expletive at the rest of the world.

So, what to do? Politically, there are several factors that have introduced uncertainty into the market, prompting upward pressure on oil prices. Economically, there are short-term distortions but, good news, not so many further down the road. From the perspective of an American consumer — that’s me, as well as you — the following may help:

Tell our Saudi allies to increase production to make up for any shortfall in Iranian supplies, rather than conspiring with Russia to maintain cutbacks that have sharply reduced stock levels in recent months. (The Saudi minister is meeting with his Russian counterpart in St. Petersburg this week. His boss, Saudi Crown Prince Mohammad bin Salman, temporarily needs a high price because of budget strains, despite his vision for a post-oil kingdom.)

Hope, and pray, for real political change in Venezuela where Sunday’s election reinstated President Maduro, who is an economic and political disaster. (By one measure, the country has the largest oil reserves in the world but production is falling drastically because of incompetence and the continuing belief of many that socialism is the best way.)

Save a few prayers for equivalent change in Iran, where the clerical regime is similarly incompetent and uncaring towards to its population, as recent and continuing street demonstrations attest. (As you may have guessed, I don’t regard the rule of Iran’s mullahs as the natural and only possible form of government in Iran. And, with the world’s largest gas reserves and fourth largest oil reserves, Iran shouldn’t need to be a nuclear power.)

Domestically, encourage further increases in shale oil production by allowing more fracking and the expansion of the domestic pipeline network taking the oil to refineries. Shale oil (and gas) is arguably the best economic good-news story in decades, but it has to be allowed to succeed. (That does not mean to say that its exploration and production should not be appropriately regulated.)

Don’t think about restricting American oil and gas exports as the nation’s historical standing as an oil importer shrinks. We are part of a global market and the world economy is better for it — which does not mean to say we have to be taken for a ride by the Chinese. Indeed, it can be argued that the pain for consumers is being matched by the current benefit for American oil and gas companies.

What will be the oil price in early November? The recent rise to just over $80 per barrel would have embarrassed those who said it was never going beyond $60. One adage of recent decades remains valid: It is a mug’s game to predict the future price of oil.

My bet is an obvious one: That the average voter will want a price which suggests that $80 has been an anomaly. But that may require a calmer world than we currently have.

Simon Henderson is the Baker Fellow and director of the Gulf and Energy Policy Program at the Washington Institute for Near East Policy. He has written about energy since reporting for the Financial Times from Tehran during the 1979 Islamic revolution.