The Saudis and Russians have reportedly agreed to cut their petroleum production by 3.3 million and 2 million barrels per day, respectively, in a bid to shore up global oil prices. Other members of the Organization of Petroleum Exporting Countries (OPEC) are supposed to cut an additional 5 million barrels by next month.
Owing to the free fall in the price of crude oil in the wake of the global COVID-19 pandemic, the price of regular gasoline at the pump in the U.S. now averages under $2 per gallon. My wife (using her Kroger points) just purchased premium gasoline at $1.40 per gallon.
“Good for the consumer, gasoline prices coming down!,” tweeted President Trump on March 9. Just the day before, Saudi Arabia launched an oil price war against Russia because President Vladimir Putin refused to cut back his country’s production. By then rising global supplies had already pushed the price of benchmark WTI oil down from $63.05 per barrel at the end of 2019 to just over $40 at the beginning of March. Toward the end of the month, the price of WTI oil had dropped to $21.50 per barrel before bouncing back to just over $26 now.
Of course, driving is way down as a result of pandemic lockdowns. In fact, vehicle miles traveled were down in March about 70 percent in major U.S. cities.
The oil consultancy IHS Market projects that the economic retrenchment in response to the coronavirus pandemic lockdowns will reduce global oil demand in the second quarter of 2020 by 16.4 million barrels per day, and that the decline in April steepened to 20 million barrels per day. The world was recently producing 100 million barrels per day, so that much of a decrease in demand roughly means that there are 20 million barrels per day in excess capacity.
No longer touting lower gasoline prices, Trump has instead begged the Saudis and Russians to cut their oil production. On April 2, the president tweeted: “Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” He further tweeted: “Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!” Everyone except American drivers and anyone else who uses petroleum products.
“I am a big believer in our great energy business, and we’re going to take care of our energy business,” Trump said during a Saturday press briefing. “If I have to do tariffs on oil coming from outside, or if I have to do something to protect—or thousands and tens of thousands of energy workers, and our great companies that produce all these jobs—I’ll do whatever I have to do,” he added.
Trump has denied that OPEC and Russia are demanding comparable cuts in the U.S. oil production. With respect to cutting domestic production, the president, much to his credit, said, “I think the cuts are automatic if you are a believer in markets.”
In other words, Trump proposed imposing a tax that will end up increasing the price of gasoline for American consumers. Why? Because of the bigger role that energy companies are playing in the economy as the U.S. last year became the world’s largest oil producer at 12.8 million barrels per day. As oil prices fell, the domestic industry began to shrink while layoffs swelled.
Trump has clearly calculated that paying less at the pump is no longer a vote-getter. Instead, the president is worried about the effect of the loss of tens of thousands of oil industry jobs on his re-election chances as higher cost U.S. oil production loses out to cheaper imported oil.