Guan’s blog


Oil, Putin and windfalls

11 Mar 2014

John Aziz argues that unleashing the US Strategic Petroleum Reserve won’t hurt Russia. The premise is a proposal to release oil from the reserve to lower oil prices:

As of now, Putin is profiting from his invasion. That is because oil prices are up on the risk of a supply disruption. This enriches the Russian state budget, half of which is supported from oil and gas exports. But economist Philip Verleger notes that prices can go down as well as up, and he recommends inflicting pain by engineering the former.

John makes some good points. I found this one particularly interesting:

Second, even if the strategy lowers oil prices, it will injure large American and European companies, as well as their employees and customers. The revenues of oil giants like Shell, Exxon Mobil, and BP — each of which employs thousands of people — are dependent on the price of oil. The costs of a global price drop will either be felt in falling profits, or passed onto consumers.

Presumably the plan is to release just enough crude oil to lower prices to the level they would be at were it not for the Ukrainian crisis, and perhaps even stopping short of that. The oil industry would lose a windfall that they only gained because of a political crisis. Maybe you believe that windfalls should be protected at all costs, but I think there’s a case to be made that confiscating this windfall is an acceptable cost if the rest of the case for releasing reserves is solid.

He goes on to propose freer natural gas exports instead:

As I have argued before, natural gas is a far more appropriate tool to gradually undermine Putin's leverage over Europe. The U.S. has world-leading natural gas reserves, and boasts very cheap natural gas prices compared to Europe. Many countries in Europe are totally dependent on (expensive) Russian natural gas that Putin can cut off whenever it is politically convenient.

If unrestricted natural gas exports are allowed, natural gas prices in the US will probably rise, with the consumers paying much of the cost. Why is it okay to take away US natural gas consumers’ windfall (caused by a government policy of restricting exports), but not oil company shareholders’ and employees’ windfall (caused by a government policy of restricting the petrolum reserve)?