Energy Panic Only Serves Putin

Actually, today’s oil price isn’t that high. The recent peak of $128, after inflation, is still $33 lower than the price in April 2011. For all the talk of Ukraine, 55% of the current increase since last December occurred prior to the Russian invasion. Even more important to note: The rise in retail gasoline has been disproportionately large in relation to the underlying oil price hike. If gasoline had risen as much in April 2011, consumers would have paid the equivalent of $6.72 a gallon (in fact, they paid about $5 in 2022 dollars). So something else is going on and that something is a normal adjustment to an abnormal event: a two-year global pandemic that knocked gasoline demand for a loop. It caused dozens of refineries to be idled, some of which (especially in the U.S.) were so creaky that it made no sense to restart them. Then, on top of these supply-demand effects, add 13% cumulative inflation since early 2020. So if you suspect $5 gas is due to the U.S. and the world keeping Russian energy off the market, think again: The U.S. and its allies have largely failed to keep Russian oil off the market. This has been the alliance’s great dereliction. It goes a long way to explaining Energy Panic Only Serves Putin Mr. Putin’s jaunty recent confidence that he can survive his botched war. It also means Joe Biden’s constant invocation of the “Putin price hike” is false advertising three times over: it largely misattributes the cause of higher gas prices, it exaggerates Mr. Putin’s leverage, and it exaggerates the courage of the Western response. Unfortunately all this manifests a deeper problem that isn’t down to Trumpism, Bidenism or any other ism. The nature of Western politics has evolved in the post-Cold War era to undermine its own best strength, the ability of its market-based economies to adapt, innovate and roll with punches. Having broadly if unsatisfactorily addressed basic problems (food, housing, health, income security), it’s hard to see that Western politics in the intervening decades has consisted of anything other than enabling what economists call “rent-seeking,” or the frittering away of competitive dynamism in payola for organized interests. This is a column, not a book, so let three examples suffice: the U.S. ethanol mandates (payola for farmers) that distort the allocation of cropland at a time when food grains are needed; the Jones Act restrictions (for organized labor) that hinder the ability of oil products to be shipped between U.S. ports to help bring down prices; and, in a class by themselves, America’s convoluted fuel-economy rules. Though you won’t read it anywhere but here, these rules exist to generate rents from a large, protected U.S. pickup-truck market to fund various green priorities. As such they are a model for a greenhouse politics that threatens to be terminal for Western society but not in the way advocates think. Climate change has become the philosophical justification for systematizing rent-seeking across the entire economy. As we can already see, these greenhouse actions have no effect on climate, pose no incentive to consumers to use less fossil energy (as a carbon tax would). They have succeeded, however, in shrinking the U.S. refining industry while building up China’s, though Beijing so far has restricted its exporters from using their 30% idle capacity to come to the aid of U.S. motorists. Yet not even Mr. Putin’s invasion can shock our politicians out of the mindset that more redistributionism must be the answer to every problem. Mr. Biden’s angry demand, in a letter, that refiners forgo their current profits would only deter investments to increase output. It would have no effect on prices. Somebody else in the supply chain (likely gas station owners) would have to expand their own margins to keep pump prices at a level to balance supply and demand. Ditto Mr. Biden’s toying with taxpayer-financed rebates for gasoline purchasers. He would recapitulate the worst mistake of the 1970s, when price controls on gasoline prodded Americans to demand more fuel than industry could supply, leading to gas lines, fistfights and service stations running out of gas. Economist Bruce Yandle, a veteran of government as well as dean emeritus of the Clemson College of Business and Behavioral Sciences, writes with deceptive simplicity about the underlying challenge—so deceptive that you might want to read the words twice even with emphasis added. The problem is how to bring forth government actions that are designed “less in terms of politics and more in terms of real-world outcomes.” Real-world outcomes. This has become a mouthful. After 50 years of soaking in the political realities of rent-seeking Washington, you might wonder if Mr. Biden has sight of the real world. If there were ever a time for realism to reassert itself in Western governance and politics, it’s now, when the stakes of politics and policy suddenly aren’t so trivial.