Philip Verleger - Jun 28,2021

Joe Biden is no Donald Trump. Trump attacked Opec for high prices in April 2018. Prices began to fall. When prices rose again that July, then-President Trump tweeted that Opec “better stop” manipulating prices. He tweeted similarly whenever he thought gasoline prices were too high. Crude prices fell as a result. President Biden does not tweet, and he has said nothing about crude oil prices, nor is he likely to. Instead, he is exercising “benign neglect” toward oil markets. Increasing oil prices serve the purpose of the president and others supporting a rapid end to fossil fuel use -- without requiring him to expend political capital trying to pass a carbon tax or fee. Opec is imposing the equivalent of a $50 per ton carbon charge on oil by withholding supply to push up prices.

High oil prices help realize a goal sought by many economists and policymakers: implementing a carbon tax. Treasury Secretary Janet Yellen is a founding member of the Climate Leadership Council. She and the other members advocate a carbon tax or fee. The oil industry has also recently called for a carbon “fee,” avoiding the word “tax.”

The Democrats, however, are unlikely to propose a carbon fee or tax. They understand that backing such a program is a trap Republicans could use to make them the minority party for years. The White House even opposed a proposal to index the gasoline tax to inflation that was originally in the smaller “bipartisan” version of Biden’s infrastructure plan that got the president’s backing in late June.

Higher crude prices resulting from production cutbacks by oil-exporting countries are another matter. Politicians have often tried to persuade Opec and other oil exporters to increase output to lower prices. These efforts have repeatedly failed. Given this history, an attempt today to push Opec-plus beyond its cautiously paced production hikes would likely do so, as well.

Benign neglect of the oil market, then, appears to be the administration’s optimal course, given the need to raise fossil fuel prices to curtail their use and the failure of most past presidents to influence oil exporters.

The term “benign neglect” was first used in 1970 in a memo on race relations to President Richard Nixon from Daniel Moynihan, then a Harvard professor and domestic policy adviser to the president, and later a senator. Moynihan asserted that Black Americans “had made extraordinary progress.” He wrote: “The time may have come when the issue of race could benefit from a period of ‘benign neglect.’ The subject has been too much talked about. The forum has been taken over by hysterics, paranoids and boodlers on all sides.”

Substitute the phrase “oil price” for the word “race,” and Moynihan’s statement would be as relevant today as he thought his comments were in 1970.

A Favor to the World

The Biden administration may also want to ignore oil because producers are doing the world a favor. By restraining production, they in effect impose a tax of between $50 and $75/ton on carbon emissions from burning oil. Under these circumstances, the White House has no reason to complain. It does not need to waste political capital on a carbon tax or fee.

The oil-exporting countries have implemented their “carbon tax” by shutting in substantial production. The International Energy Agency’s Oil Market Report shows that members of Opec-plus have sustainable capacity of 50 million barrels per day but produced only 38 million b/d in May. Prices would likely be around $50 per barrel, not $70, if most of these countries were producing at capacity. The $20/bbl difference caused by producer cuts is roughly equivalent to a $50/ton tax on carbon.

Of course, the Opec carbon tax does not apply to natural gas or coal. However, neither competes heavily with oil. Rather, coal and natural gas compete primarily in the electricity generating market, where they are being aggressively pushed out today by renewables in all parts of the world. The shift is occurring quickly. It might happen even faster with a comprehensive carbon tax or fee, but the falling cost of renewables is doing an excellent job without it.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980.


Further disruption lies ahead. The 2021 Outlook provides important context and pointers to help you navigate these changes, and understand how sometimes confusing events fit the broader picture.
Oil market disruption like that seen in chipmaking could result from an IEA-advocated halt to exploration. VIEW HERE