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Benjamin Zycher: Should U.S. Policies Transfer Our Wealth to OPEC+?

The Biden administration is fine with fossil-fuel production, as long as it happens overseas. Incoherence is nothing new in the Beltway, but it's still quite something to see the Biden administration simultaneously pursue new constraints on U.S. production of fossil fuels as a central component of its "climate" policies, while at the same time attempting to avoid the adverse price effects of that production stance. The administration on August 11 issued a plea for another increase in crude-oil production by OPEC+ (the 13 members of OPEC and ten other major international producers):

While OPEC+ recently agreed to production increases, these increases will not fully offset previous production cuts that OPEC+ imposed during the pandemic until well into 2022. At a critical moment in the global recovery, this is simply not enough. President Biden has made clear that he wants Americans to have access to affordable and reliable energy, including at the pump.

This follows the Biden administration effort in July to urge OPEC+ "to quickly come up with a compromise [there had been a dispute over increasing production quotas] 'that will allow proposed [OPEC+] production increases to move forward.'"

Increases in gasoline prices in particular are highly visible, and thus politically damaging. And so it is both distressing and amusing to observe these efforts by the administration even as it remains busy proclaiming its climate credentials.

The basic laws of economics are difficult to defy: As fossil-energy demand strengthens alongside the global recovery from the COVID-19 downturn, sharp price increases follow, an effect reinforced by previous cutbacks in crude-oil production by OPEC+. The Biden administration may believe that its July pronouncements carried weight, but, in the end, OPEC+ made its own decision in its own interests. Accordingly, OPEC+ in July agreed to increase production as a response to the increase in the international demand for crude oil. OPEC+ production will increase by about 2 million barrels per day (400,000 barrels per day each month) through the end of this year, and the overall OPEC+ production cut of 9.7 mmbd – about 23 percent – implemented in May 2020 will be phased out fully by September of next year.

This decision was going to be forthcoming with or without the statements from the Biden administration. Fossil-fuel resources are one central form of national wealth – at least in countries where it is recognized as such. The increase in demand for crude oil allows producers to realize the wealth value of those resources, a reality ignored by the Biden administration and its allied opponents of fossil fuels. This national-wealth dynamic is not a mere intellectual exercise: Competitive market forces combined with long-standing legal arrangements yield a distribution of that national wealth consistent with the contributions of workers, asset owners, investors, suppliers, and others whose efforts, risk-taking, and ownership rights make the acquisition of the increased national wealth a reality.

In other words, the enhanced production of fossil resources improves the economic wellbeing of actual people. U.S. production of crude oil was 13.1 mmbd at the end of February 2020, fell to 10 mmbd one year later, and since then has increased only to 11.2 mmbd in late July. For federal lands (onshore and offshore) managed by the Bureau of Land Management, total production of crude oil increased by about 3.4 percent from February 2020 to March 2021 (the latest month for which official data are available).

Accordingly, the Biden pause on new leasing on federal lands is perverse. Even if maintained permanently, it would have an impact on future climate phenomena literally equal to zero; the entire Biden net-zero greenhouse-gas emissions policy would reduce global temperatures by 0.173°C by 2100, using the EPA climate model under assumptions that exaggerate the effects of reductions in GHG emissions. Note that this outcome is independent of assumptions and views of the science and evidence on anthropogenic climate change.

As an aside, this dismal benefit/cost reality applies to international climate policy proposals also. The entire Paris agreement: about 0.17°C. Net-zero emissions by the entire Organization for Economic Cooperation and Development: 0.352°C. A 50 percent reduction in Chinese GHG emissions: 0.184°C. A global 50 percent reduction in GHG emissions implemented immediately and maintained strictly: 0.687°C. Because "climate policy" in its essence means a reduction in the wealth expansion represented by fossil fuels, and a sharp increase in energy costs, it is difficult to see how it can satisfy any rational benefit/cost test.

That international reality applies a fortiori to the U.S: There is no good reason that the U.S. should engage in mindless economic sacrifice. Nonetheless, it is clear that the Biden administration is determined to find ways to impose artificial restrictions on expanded fossil-fuel output, simply as a matter of ideological imperative: a self-defeating increase in the royalty rate on production from federal leases, disapprovals or restrictions on investments in pipelines and other fossil energy infrastructure, a deeply dubious tightening of methane-emissions standards, and a general shift away from fossil fuels in favor of an energy system producing "net-zero" greenhouse gas emissions by 2050.

This stance is perverse: Whatever one believes about climate issues, a reduction in U.S. fossil-fuel production will yield an offsetting increase in production by non-U.S. producers. That is the ongoing reality – no other outcome is plausible – and nothing can change it in a world in which individuals, groups, and governments are interested in wealth acquisition greater rather than smaller. When we observe the opponents of fossil fuels arguing for reduced U.S. production but increased output overseas, it is time to recognize that Bizarro World is not merely a comic-book construct.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.

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Posted: August 13, 2021 Friday 06:30 AM