Mission Accomplished: The Price of Oil Hits the Biden Administration’s Official Target

W ith gasoline topping $5 per gallon in some parts of the country, and the price of oil topping $110 per barrel, President Biden and his team have bluntly stated that the high prices are Putin’s fault. Biden went so far as to say, “It’s going up, we can’t do much now. Russia is responsible.”

This stance seems a bit odd, as there are any number of things that could, in principle, be done, such as opening up leases for oil and gas exploration, accelerating the permit process for new wells, allowing pipeline construction, and so on. Which brings up the question, is it possible that Biden is doing nothing about high oil prices because he secretly likes them?

Well, actually, it’s not a secret. Biden has stated that he does desire high fossil-fuel prices. During the Democratic primary, he was asked point-blank whether he would support a carbon tax, and with classic Biden clarity, he responded, “Yeah, no, I would.”

A carbon tax, which I am on the record as favoring if it is combined with tax cuts elsewhere, would force consumers of fossil fuels to pay for the harm they do when consuming the fuel if it is set at the price of the true harm. Hence the obsession with estimating the “social cost of carbon.” Once you know that, you know the optimal size of the carbon tax. As one of his first acts after inauguration, Biden reestablished the Interagency Working Group (IWG) on the Social Cost of Greenhouse Gases, a group disbanded by President Trump, charging its members with estimating the value of the harm caused by carbon dioxide and other greenhouse gases.

In February 2021, the group issued its report — proving that government can be quite efficient if it wants to be. According to the White House document, the social cost of carbon emitted from a metric ton of carbon dioxide is $116 in 2050 for the average estimate, and $260 for the worst-case estimate.

Unless you are a chemistry major, these social-cost-of-carbon estimates, certified to be accurate by the White House itself, are hard to connect to things you do in everyday life. But don’t fret. Economists Geoffrey Heal and Wolfram Schlenker in 2019 published a paper on how to estimate the economic effects of taxes on carbon-dioxide emissions. Their Table 1 allows one to take estimates of the social cost of carbon and turn them into estimates of the appropriate tax on a barrel of oil.

Heal and Schlenker find that the cost of a $50-per-ton carbon tax would be $17.60 per barrel of oil. It follows from their calculations that a $100-per-ton carbon tax would be accomplished with a $35.20 tax per barrel of oil. A $200-per-ton carbon tax would double that, with the tax rising to $70.40. So the IWG’s report guides the optimal tax conversation to a very high number.

Oil prices go up and go down, and people tend not to change their behavior very much when they do. After all, if you have to drive ten miles to work every day, you have to drive ten miles to work every day. That is true if gasoline costs $2 or $5.

Voters feel this, and climate-policy experts know this, and have argued that the only way to truly change energy consumption is to do something like a carbon tax, and then promise to keep it in place for a very long time. If gasoline is going to be $5 per gallon forever, a more fuel-efficient car becomes much more attractive. Over time, the theory goes, people move toward more and more efficient vehicles, reducing the carbon-dioxide emissions of the economy as a whole.

Oil prices are highly variable, but since 2000 they have averaged about $60 per barrel. If one assumes that the White House believes its own estimates of the social cost of carbon, then it would prefer, under the base case, that the price of oil be higher by $35.20, which would take the price to $95.20 per barrel. Undoubtedly some on the IWG believe the more extreme case (otherwise they would not have included it in their tables). Under that case, the carbon tax that optimally forces the economy to adjust would be $70.40, and the price of oil would be $130.40 per barrel.

In other words, the current price of oil is exactly in the range that the White House itself has said is optimal, and the administration’s unwillingness to do anything about it might well stem from a desire to signal to the masses that this higher price is here to stay.

But they refuse to declare victory even though their target has been hit. If the Biden administration truly cared about climate change, it would argue that today’s high price is unfortunate but necessary if we are to save the planet. Indeed, now would be an opportune time to propose a policy that locks in today’s high price with a carbon tax that goes up as the oil price goes down. The Biden administration’s stance reveals that it is playing climate believers for fools who vote for Democrats without thinking. No wonder Greta Thunberg is so angry.