OPEC Remains an Obstacle for Biden’s Green-Energy Fantasy

C an it surprise anyone that the multiple Biden–administration gambits intended to save the planet are proving perverse in every possible dimension? This is the case in particular for the fossil-fuel industry, both in the U.S. and internationally: In a nutshell, the administration seeks a long-term decline in investment and production on deeply dubious “climate” grounds, while at the same time begging foreign producers to increase output so as to moderate politically damaging price increases in the here and now.

Nor can it come as a surprise that the Biden policies have increased the market power of foreign producers, the latest manifestation of which is the recent decision by OPEC+ to cut crude-oil output by about 1.2 million barrels per day (mmbd). This is in addition to the production cut of about 2 mmbd announced last October, which was “criticized by the White House.” It seems that the White House lately has come to recognize its impotence, as it responded to the latest announcement by expressing “disagree[ment]” with the OPEC+ announcement and calling it “inadvisable.” That’ll show ’em — as will the powerful proclamation from the president that “it’s not going to be as bad as you think.”

Let us review some basics. Global crude-oil output is approximately 100 mmbd. U.S. output declined from about 12.3 mmbd in 2019 to 11.9 mmbd in 2022, with an uptick more recently, but we must not allow such short-term fluctuations to obscure the larger realities. A conservative estimate of potential U.S. production capacity is 13.5 mmbd, but it is clear that the Biden policies have yielded and will continue to yield a reduction in investment in exploration, development, field operations, pipelines and other ancillary capital, and the like. A reasonable estimate of that longer-term output level is roughly 9 mmbd, which was the approximate average annual U.S. production from 2010 to 2019.

Accordingly, the market must expect the net effect of Biden-administration policies to be a decline in annual U.S. production over the medium and longer terms of almost 5 mmbd, as a rough approximation. A compensating increase in overseas production is problematic at best, because global excess production capacity was less than 4 mmbd in 2022, engineering realities prevent the use of all excess capacity, and market forces will not allow a reduction in excess capacity to very low levels except under the most extreme circumstances. Moreover, the Biden administration and international lending agencies are reducing international financing of fossil-fuel projects in the developing world, and much of the developed world continues to pretend to believe green dogma in opposition to fossil fuels, although it does seem that reality is beginning to exert an influence. But at a minimum, the economic risks of investing in fossil-fuel-production capacity clearly have increased: The same political imperatives driving oil markets now are likely to continue.

Under reasonable assumptions about demand and supply conditions, the expected decline in long-run U.S. output attendant upon the Biden policies — roughly 5 percent of global output — would result in a long-run global price increase of at least 20 percent. And that (or more) is what we have seen since early 2021. The economic recovery from the Covid downturn explains only a small part of this; it is the expectation of future price increases for crude oil that has the effect of driving current prices up, because market forces allocate production over time so that at any given moment the expected market-price path rises at the market rate of interest. Nor can the administration blame the dollar exchange rate for this, as the real dollar index has increased by almost 12 percent since January 2021.

The upshot is that the Biden policies will increase the longer-term OPEC+ market share from about 51 percent in 2022 to 55 percent or more over time. That may not look like much, but the decline in U.S. production capacity will allow OPEC+ to exercise more market power, even with the obvious frictions within the group. Again under reasonable assumptions about market conditions, the increase in market share — the increase in OPEC+’s perception of its market power — will result in a longer-term price increase from, say, $75–80 per barrel to around $100.

Because the Biden administration is unlikely to undertake the actual reforms that would reverse these adverse outcomes, poor substitutes now are being proposed, the most prominent of which is the reintroduction of “NOPEC” legislation, which would allow the Justice Department to sue OPEC for purported price fixing. The problems with this idea are legion, but in a nutshell: The reaction from the Saudis and others would not be salutary, because control of their oil-production policies is not a second-order consideration for them. Another production cut in retaliation would be likely. U.S. litigation against OPEC generally or the Saudis in particular would strengthen a Saudi–Russian oil alliance, not an outcome that would further U.S. interests. The investments of U.S. firms in their territories would not be immune to various kinds of retaliation. More broadly, the NOPEC proposal is an attack on the sovereign immunity of national governments. Whatever the virtues and downsides of that time-tested system, the impacts of eroding it will be complex and difficult to predict in advance.

Back to the newest OPEC+ production cut. We can quibble about the numbers, and political factors obviously will exert a substantial influence. There is considerable uncertainty about the political viability of the crusade against fossil fuels, as many Europeans, Californians, and others are learning to their surprise and consternation. But the central principle is incontrovertible: The Biden policies will reduce U.S. output and increase international prices, and thus transfer enormous wealth from Americans to Saudi Arabia, Russia, and the other foreign oil producers. Nor will this prove salutary for the lives of many hundreds of millions of the world’s poor, for whom energy both efficient and inexpensive — fossil fuels — is a central component of an escape from grinding poverty. Can Biden possibly justify such perverse outcomes with more than a rote “climate” mantra? Well, no. Do he and the rest of his administration care? Ditto.