Today’s Oil Drama Is No Rerun of “That ’70s Show”

By David Henderson.

"When I talk to people about the current oil market and oil prices, I often come across three misconceptions. The first is that the high price of oil today will cause a replay of the tremendous losses and dislocations of the1970s after OPEC raised the price of oil. The second is that because the United States had become a net exporter of oil and petroleum products before the recent price increase, we American consumers should be able to buy oil at the old lower price. The third is that countries that rely more on imports will be at risk of not getting the oil they want.

On the first, there are three big differences between the 1970s: (1) the latest price increase of oil since President Trump attacked Iran is substantially smaller, percentagewise, than the increase engineered by OPEC in 1973; (2) the United States is now a net exporter, not a net importer, of petroleum and petroleum products; and (3) so far, we have avoided price controls on oil and gasoline.

The second misconception—that our status as exporter should insulate us from higher oil prices—betrays a misunderstanding of the how the oil market works and, indeed, and how markets work in general. The third misconception—that import-dependent countries will be more at risk than oil-rich countries—is closely related to the second misconception.

These are the opening three paragraphs of my latest Hoover article, “Today’s Oil Drama Is No Rerun of ‘That ’70s Show.’” The title of the piece was chosen by my Hoover editor, Charley Lindsey. He has a way with titles: I like this one better than the blah title that I chose: “An Energy Economist’s Perspective on the Oil Market.”

And:

There’s a further loss from the price controls. When US refiners who had to buy oil at the world price complained that some of their competitors were locked into contracts that provided them oil at $4.25 per barrel, the government could have seen the folly of its ways and ended the price controls. But no. As Austrian economist Ludwig von Mises explained about a century ago, when governments see their regulations causing havoc, they often step in with further regulations that also cause havoc. In this case, President Ford introduced the entitlement program that gave refiners that bought foreign oil an entitlement to buy domestic oil at the regulated price. The price of gasoline at the pump, therefore, was based on a blended price of foreign and domestic oil. For much of the rest of the decade, that program led to enough gasoline being sold to satisfy demand. But it also gave an artificial incentive to buy foreign oil and that strengthened the hand of the OPEC cartel, thus making the world price higher than otherwise. That made the loss even higher than the 2 percent of GNP estimated above."