Drill, Baby, Drill

National Review Online

Saturday, October 08, 2022

 

The only surprising thing about the production cuts announced by OPEC+ (a grouping consisting of OPEC and fellow travelers including, critically, Russia) is that they had not been agreed to before now. The international benchmark oil price (Brent) had slumped from a little over $120 in early June to the low $70s in late September, for reasons ranging from China’s Covid lockdown to fears of an economic slowdown in much of the Western world (drawdowns from the Strategic Petroleum Reserve would likely have had only a marginal effect).

 

Expectations of a reduction in production have already gone some way to reversing the falling oil price in recent days, and after the larger-than-expected cut (2 million barrels a day, as against expectations in the 1-1.5 million range), the price firmed still more, and now stands at around $97. The production cut, a clear rebuff to President Biden’s begging-bowl diplomacy, will take effect in November. In the end, it will, due to various technical factors (and that’s before taking cheating into account), end up being less than 2 million barrels, but it is still enough to prompt criticism from a president both humiliated and worried about the midterms. He complained that OPEC+’s move was “short-sighted.”

 

In fact, it was anything but. Russia, angered by the new Western price caps on its oil, had already warned that it might cut production. More importantly, cutting production makes sense for the Saudis and other producers. Freed for now, thanks to the impasse between the U.S. and Iran, from the threat that sanctions affecting the export of Iranian oil will be lifted, it is difficult to see, from an economic perspective, why they should not cut production and reap the proceeds. Their only task is to make sure that they do not push the price so far up that the damage to the economies of its customers leads to a fall in the demand for oil so great that it wipes out the financial rewards that the production cut is meant to bring.

 

European and U.S. climate policies have, of course, made it even easier for OPEC+ to take this decision. The most effective response would be to boost oil production in Europe and, given the size of our reserves, the U.S. Even if there is a limit to how much production could be increased in the short term, the mere prospect that more will be on the way in due course ought to act as a brake on the oil price (which partly reflects future supply) and encourage OPEC to tread more carefully. Unfortunately, the way Western climate policy is going, OPEC knows that there is little danger of that happening. Making matters worse still, that climate policy, which is focused primarily on weaning the West’s economies off their “addiction” to fossil fuel, is an incentive to OPEC’s producers to maximize revenues from this source as quickly as possible.

 

There has been talk that the U.S. should respond to the production cut with political or legal reprisals, including passing legislation that would designate OPEC a cartel for the purposes of U.S. antitrust law. However emotionally satisfying, this is a move that would, in all probability, both be ineffective and damaging to U.S. strategic interests in the region, which are, as OPEC’s move shows, clearly in need of repair. Running from Kabul and flirting with Tehran has had consequences. Suggestions that the U.S. should “hit back” with increased investment in renewables would, almost certainly, be greeted with laughter and expressions of gratitude.

 

Grown-up policy-making recognizes the need for trade-offs and a setting of rational priorities. It makes no sense to seek to “save the planet” with costly measures that will, even based on optimistic assumptions, have very little effect on global temperatures decades from now while benefiting regimes that are, at best, frenemies, and often something far more sinister. The U.S. should have zero hesitation to make use of its energy resources in ways that will not only benefit our economy, but also cut OPEC down to size.

 

As someone once said, “Drill, baby, drill!”