The “idea” is to somehow increase domestic oil production by 3 million barrels daily from the current 13.5 or so million. That will drive the world price down by–my guess is by15%-20%, but let’s just say by 10%–simultaneously encouraging higher petroleum usage and lowering inflation.
The oil revenue numbers that this supposition generates are as follows:
13.5 million x $75 = $1.025 billion daily
16.5 million x $67.50 = $1.112 billion daily
Not a huge difference in spending. In addition,
the US uses about 20 million barrels of oil daily, more than any other country in the world. The increase in domestic output would shrink our imports, much of it from Canada, by 3 million barrels as well. That would also improve our trade position by $70 billion+ yearly.
This isn’t the end of the story, though.
What happens to the 3 million daily barrels the US is no longer importing?
If we assume it just goes away–that is, that non-US producers decrease their overall output by 3 million–then the administration calculation is reasonable. To the degree that the administration has thought this through, this is what they are banking on. But how likely is that?
A related possibility, I suppose, is that the world stores the excess production. But this costs money and just kicks the can down the road.
The most likely scenario, in my view, is that the major oil companies yes Washington to death and do nothing to increase domestic production.
During the 1970s, for example, when OPEC boosted the oil price from below $2 a barrel to over $30, the US passed a series of laws aimed a controlling the price of oil produced from domestic wells. The price of “old” oil, that is, output from wells drilled before 1973, was capped at about $5 a barrel. The response of the oil majors was to cease production from “old” oil wells and to concentrate on “new” oil that could be sold at the market price. The industry was convinced, correctly, as it turned out, that regulation wouldn’t last forever and producing “oil” oil was like flushing money down the drain.
As it was back in the 1970s, the oil majors’ conduct will likely be colored by their assessment that the administration won’t be astute enough to figure out what’s going on and/or that the current administration won’t be around long enough to exact any price for their non-compliance.
It does seem contradictory for production to increase at current or falling prices. Even if production did increase, US refineries depend on imports of heavy crude from Canada and Venezuela, so lighter crude might be exported. Current investors in energy have liked the industry’s improved capital discipline after the 2020 near death experience.
Thanks for your comment. I hope you’re enjoying your retirement!
My guess is that the administration just doesn’t understand the potential consequences of adding an extra 3 million barrels to daily world production. It’s also possible that it does, and assumes the rest of the world’s producers will quickly come to realize that their best choice is to make corresponding production cuts. Kind of a gigantic game of chicken.