DANIEL VAUGHAN: Biden’s New Oil Policies Make Things Worse

I need the Democratic Party to get serious about energy policy for five minutes. It’s getting ridiculous that they can’t see the obvious problems in front of the United States and refuse to act. Instead of looking for solutions, President Biden and Democrats are looking at policy measures that would exacerbate inflation and shortages, not fix them.

When talking to reporters, House Speaker Nancy Pelosi announced that Democrats were considering a range of ideas to tackle rising energy costs. Pelosi said, “the idea of giving Americans rebate cards or a direct payment was brought up” and “those are things that are being considered,” but “Pelosi rejected the idea of a gas tax holiday.”

Pelosi’s idea builds off proposals from Democratic California Governor Gavin Newsom. He has suggested an “$11 billion plan [where] every owner of a registered car in California – including owners of electric vehicles – would receive a tax refund in the form of a $400 debit card regardless of their income. An owner of more than one registered vehicle would receive $800.”

Democrats’ plan would increase inflation.

The policy proposal of paying for people’s gas may seem nice, but it worsens the problem. If you examine current supply and demand trends in the United States and the world, demand is rapidly outpacing supply. That is what leads to higher prices. If there are more people than gallons to buy, the person willing to pay more will get what is there.

This principle isn’t about capitalism 101. It’s the basics of supply and demand.

Democrats see this issue and want to increase demand. If you give people more money to spend on gas, that necessarily drives the demand for oil higher. The Democratic plan is to pour even more gasoline on the raging fire of inflation. And because petroleum gets used in thousands of products, the higher demand placed on fuel by rebates will lead to higher prices everywhere.

The secondary Biden plan of releasing oil from the Strategic Petroleum Reserve (SPR) at least acknowledges the real culprit: low supply. But the White House still gets this wrong.

First, we never designed the SPR to be an inflation stopgap. We created the SPR as part of the fallout after the Arab Oil Embargo of the 1970s. We need the SPR there for instances of war or if another power tries to prevent us from accessing our energy. Biden using it to offset gasoline prices undermines that backstop.

The US must produce more oil.

Second, the release from our reserves does not fix the real problem: the United States has to produce oil. Our reserves will only last so long, and it does nothing to encourage domestic production. In attempting to lower prices, the Biden administration is undercutting oil firms that could use the extra margins to pay for the development of domestic oil sites.

The Biden administration has a fundamental problem of failing to understand how the world works. An example of the reverse way this works is Donald Trump during the pandemic. The United States faced dramatic shortages of everything from hand sanitizer to ventilators. Trump encouraged domestic production. The Trump administration paused regulations, worked with producers, and the market filled needs across the board.

We’re getting none of that leadership there. In Biden’s speech, he spoke out of both sides of his mouth to oil companies on production. On the one hand, he blasted them for not drilling and wrongly profiting. And then he turned around and begged them to produce more oil.

Biden wants investment in a recession.

Think about this from oil and gas companies’ perspectives for a moment. The White House is pushing the Federal Reserve to raise interest rates, making loans and credit more expensive. Those rate hikes are, in turn, supposed to curb the demand side of the economy. In the face of rising interest rates, people will spend less on everything, including products that rely on oil.

On top of that, Wall Street is signaling that a recession is near. These conditions are not conducive to the investment and development of more oil. A recession means a tightening of the belt. These companies are deciding to take the extra money they’re earning now to survive a recession.

The Biden invitation to drill can seem like an invitation to light a giant mountain of money on fire. That’s not the intelligent investment of capital by any CEO in America, no matter how hard Democrats bloviate about profits.

If Biden wanted to encourage production, he should acknowledge this reality and seek to protect US producers. Biden could call for legislation that sought to boost production by subsidizing the cost of developing these oil sites. We could explore protectionary policies that prevented foreign governments from sinking US producers (like what happened after the US Shale Boom). 

These kinds of policies would introduce economic inefficiencies into the markets. But in a geopolitical contest, the protection of the state is above that of economic efficiencies and savings. Biden is unserious in solving any of these problems.