It is impossible to pursue an aggressive anti–fossil-fuel agenda and not harm an economy that is still largely powered by oil and gas, but the Biden administration apparently believes that it can square the circle with blame-shifting.
It is both pressing on with its extreme decarbonization plans and bullying oil companies to step up their production. The administration has alleged that Big Oil and those who sell its products are engaged in price-gouging, quite possibly acting in collusion. Less elaborately, it has asserted that Big Oil’s profits are simply too high.
Such allegations are the product of ignorance, a politically opportunistic disregard for the truth, or both. With this White House, we wouldn’t rule out ignorance, but we suspect that scapegoating to deflect attention away from the damage caused by the administration’s energy policy deserves most of the blame. Moreover, these allegations come with threats. Suggestions of price-fixing typically go hand in hand with an antitrust investigation. Sure enough, in November, the administration asked the FTC to see if high gas prices were the result of illegal price-fixing. Mysteriously, those investigations appear to have led nowhere. Never mind that the president’s declaration this week that oil company profits were “outrageous” was accompanied by the threat of a tax on “excess” profits, unless prices were cut or Big Oil plowed more money into increased production. No matter that the president has consistently said that he wants to reduce our oil consumption.
Increasing production would, beyond a certain point, involve a serious capital commitment by oil companies. It is not a matter of flicking a switch. But if Big Oil is going to deploy capital in increased production, it needs to have reasonable expectations of a sufficiently high return on its investment. The oil price is highly volatile. In 2020, oil companies reported, to borrow an adjective, “outrageous” losses. And, as many of them discovered during the shale boom, increased production is no guarantee of increased profits. That’s why, in considering whether to invest in more production, oil companies must “price in” the risk that the oil price goes the wrong way. The higher the risk, the higher the targeted rate of return will need to be. The higher that rate rises, the more of an obstacle it becomes to new investment.
The climate-related hostility that oil companies have faced from the Biden administration, its regulators, and its enforcers in the ESG investing community have added to the risks that an oil company must consider before investing in new production. The result? Reduced investment. The consequences can already be seen in the way that U.S. oil production has grown by less in response to the current surge in prices than the pattern in the years immediately prior to Covid and then Biden would suggest.
Climate policy-makers who wish to pursue decarbonization without laying waste to the economy or, for that matter, this country’s geopolitical position, unless they have lost all touch with reality, must accept that oil, as well as gas, will have a role to play in our energy mix for quite some time yet. And if enough oil is to be available from within the U.S. rather than from less-reliable suppliers abroad, American oil companies will have to believe that making the investment necessary to deliver that result is a reasonable decision to take. But the administration’s current approach — threats, bullying, and smears — is pushing their decision-making in the opposite direction. That’s already costing Americans a lot of money at the pump, and if things carry on as they are, there will be worse to come.