After OPEC+ announced a 2 million barrels of oil per day production cut, President Biden said he wants to reevaluate America’s relationship with Saudi Arabia. The president’s desire to reduce the influence of hostile actors on energy markets is admirable, but the administration must start by reevaluating its relationship with American energy producers.
>>>READ: OPEC Can’t Solve Our Long-Term Energy Problems
To effectively combat OPEC+ and attempts by Saudi Arabia and Russia to manipulate energy markets, the Biden administration needs a change in posture and policy toward domestic energy production. Encouraging more supply and diversification will be better for consumers, geopolitics, and the planet.
Unfortunately, on day one in office, the Biden administration canceled the permit for the northern half of the Keystone XL pipeline, which could be in operation and supplying nearly half of OPEC+’s production cuts. Furthermore, the administration halted new lease sales on federal land and waters. At one point processing applications for permits to drill on federal lands at an effective clip, the U.S. Bureau of Land Management declined significantly before picking back up in recent months.
There is also a matter of financial risk and uncertainty. Partly driven by the oil price collapse at the beginning of the pandemic and partly driven by fears of a recessionary environment, there is certainly some hesitancy in the market to invest in new production. Regulatory actions have only served to exacerbate the reluctance from financial institutions. Whether it be the 14 years of regulatory and legal purgatory for Keystone XL or new SEC regulations on climate disclosure, the federal government has thrown up its fair share of stop signs to lenders. Large capital investments in new energy infrastructure with long time horizons will have a difficult time operating in that kind of environment.
A change in the Biden administration’s posture toward OPEC+ should recognize three simple truths. First, America and the rest of the world will use a lot of hydrocarbons well into the future. According to the U.S. Energy Information Administration’s Annual Energy Outlook 2022, conventional resources of energy will supply roughly three-quarters of America’s energy needs in 2050.
>>>READ: Biden Should Reach Out to Republicans, Not Riyadh
Second, it is better for the U.S. economy, energy security, and the environment if oil production occurs domestically. As energy analyst David Blackmon recently wrote in Forbes, “Assuming Biden and his officials recognize that all countries share the same climate and atmosphere, a true ‘green’ energy agenda would logically seek more oil production in the United States and less from Venezuela and other high-polluting countries.”
And third, diversification and choice are critical. The United States is a global leader in energy production and energy innovation. Europe is regrettably experiencing first-hand the costs of true energy dependence. More supply, energy efficiency, and electrification can all be part of a market-driven solution that is consumer-centric, provides more security, and is compatible with climate ambitions. Placing all your eggs in one basket and ignoring market realities is economic and environmental folly.
The harsh reality is the national average for a gallon of gas is again approaching $4. Several states in the west and Midwest have already surpassed $4 per gallon. Some states are above $5 per gallon (Washington, Oregon, and Nevada) and Californians are paying $6.25. The economic pain at the pump ripples throughout the economy as families spend less elsewhere and also pay more for food and other goods that rely on hydrocarbons to make and transport. Several regulatory and policy fixes such as waiving the Jones Act, reducing ethanol volumes, and harmonizing fuel specification standards would offer some near-term price relief. Beyond that, however, the quick fixes are in short supply.
Rather than casting misplaced blame, the way for President Biden to give consumers confidence and to combat OPEC+ is to empower American energy producers and innovators.
