Markets and consumers, not president, control oil’s future
The following appeared in the Columbus Dispatch on November 4, 2020:
Brent Sohngen, AED Economics, Ohio State University
For practically 150 years, oil has been at the center of the American economy. At first, it provided a source of light that was far better than the alternative – whale oil – and as a result it saved whales from extinction in the late 1800s. Through the 20th century, it powered mobility, enabling middle class Americans to travel to places within and outside the US that previously only the wealthiest among us could experience. And as we increasingly worry about the legacy of climate change, the impact of oil on our national conversation looms large.
When Joe Biden exclaimed that he wanted to transition the American economy from oil, the opposition pounced. I must say, I was a bit surprised by the uproar over the former Vice President’s comment, given that every American President since the Arab Oil Embargo in 1973 has tried in vain to reduce our dependency on oil. They have tried everything, from banning crude oil exports, to instituting fuel efficiency standards in automobiles, to subsidizing alternatives like ethanol made from corn, corn stalks, and even trees. Heck, government even subsidized diesel made from cooking oil. Of course, none of these things actually worked. Only high prices back in the 1970s, which ushered in a recession in the early 1980s, lowered net imports for a time. Once the economy grew again, imports rose to meet demand.
But something changed in the early 2000s, having lots to do with markets and innovation and little to do with anything any of our presidents did. As oil prices rose due to economic growth in China, fracking became economically feasible on a large-scale in the US. Investors who spent massive amounts of money drilling wells in exotic places, starting looking to North Dakota and Texas. At first, the money trickled in, but then it flowed, and with it, the US oil economy exploded, driving production up and costs down.
Over the decade from 2008 to 2018 US crude oil production more than doubled, and we once again became the world’s largest producer. Even President Obama, who briefly banned fracking on federal lands and who stopped the Keystone pipeline for a while, couldn’t slow fracking. Of course, this has always been a story about private investment on private land, where government exerts less influence. Federal lands just haven’t been a big part of the revival of American oil production.
And what about Teddy Roosevelt, who perhaps more than any other president left a strong Progressive mark on our economy? He and his successor, Ohioan William Howard Taft, famously went after the world’s largest oil company, Standard Oil, with an anti-trust lawsuit. They prevailed, and in 1911, Ohio oil tycoon John D. Rockefeller’s company was broken into 34 separate parts. Extraordinary though this was, it didn’t even dent the industry. Over the next century, the former Standard Oil companies, including Exxon-Mobil, Chevron and Marathon, grew bigger than ever.
So, should the US oil industry be scared of presidential power? No way. But if I was an oil company, I would be far more worried about consumers and markets because they are infinitely more powerful than presidents. Right now, consumers are sending strong signals that the future won’t be like the past. Oil prices are down, and not just due to the pandemic. Efficiency is up, and electric cars are building market share because renewables and natural gas have driven electricity prices down. People in smog-choked cities around the world can gain relief by substituting electric cars for gasoline.
Some companies have gotten the signal. BP, another legacy of the Standard Oil Trust, has stated its intention to be carbon neutral by 2050. Even Saudi Aramco, the world’s largest oil company (albeit state-owned), has gotten into the act, undertaking efforts to reduce the carbon intensity of the oil it sells.
A decade ago, peak oil enthusiasts scared people into thinking we were running out of oil, but they were wrong. It turns out that the world is awash in the stuff, and more frequently now, consumers are saying they want mobility with fewer carbon emissions. The problem for the oil industry isn’t regulators, or that we’ll run out of the stuff. It’s that consumers just won’t want it.