By Steve Chapman
For decades, American presidents and American consumers have complained when oil prices rose and rejoiced when oil prices fell. But this week, President Donald Trump helped forge an agreement with Russia, Saudi Arabia and other oil-producing nations to raise prices by slashing production. Then he bragged about it.
“The big Oil Deal with OPEC Plus is done,” he tweeted. “This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia … Great deal for all!”
Well, not all. Right now, pump prices are below $2 a gallon, down from a national average of $2.66 in January. In normal times, the decline would yield a handsome windfall for motorists. Most Americans aren’t driving much these days, but for those who have to, it’s a welcome consolation.
The administration, however, won praise for supporting the oil industry. Bob McNally, an analyst at Rapidan Energy Group, told The Wall Street Journal, “President Donald Trump proved to be master of the deal.” Amy Myers Jaffe, a senior fellow at the Council on Foreign Relations, told The New York Times, “Hopefully, the American oil industry has avoided a worst-case scenario.”
Yes, the deal is good for that particular sector. But there are a lot more Americans who buy oil and gasoline than there are people who produce them. Ordinary people will foot the bill for Trump’s dubious triumph.
Most of the benefits, however, will go abroad, to the likes of Vladimir Putin and Mohammed bin Salman. That’s because Russia and Saudi Arabia have much lower production costs than oil companies that are fracking in West Texas and North Dakota.
As University of California at Berkeley economist Severin Borenstein has noted, if it costs an average of $40 a barrel to produce oil here and $10 a barrel in Saudi Arabia, raising the world price to $50 a barrel will yield a nice profit to our producers and a huge one to the Saudis. But Americans will pay more for all the oil they use.
Ryan Kellogg, a former oil company engineer and now an economist at the University of Chicago, says now is an especially bad time for this deal. “Increases in oil prices hurt consumers, many of whom now have reduced or even zero income but still need to drive to the store or run errands,” he told me. “The gains go to oil company shareholders and debtholders, and to royalty owners — folks that tend to be higher income.”