Obama vs. Wall Street Journal on Global Oil Markets
By David Henderson
Both Obama and the WSJ are wrong: The WSJ is more wrong.
Here’s an excerpt from the Wall Street Journal‘s Review and Outlook (unsigned) editorial, “Obama on Oil Markets: Supply and demand seem to be elusive concepts,” on President Obama’s statement about the Keystone pipeline and its impact on U.S. gasoline prices:
Mr. Obama’s market analysis is more remarkable and worth quoting at length: “So there’s no–I won’t say ‘no’–there is very little impact, nominal impact, on U.S. gas prices–what the average American consumer cares about–by having this pipeline come through. And sometimes the way this gets sold is, let’s get this oil and it’s going to come here. And the implication is, is that’s going to lower gas prices here in the United States. It’s not. There’s a global oil market. It’s very good for Canadian oil companies and it’s good for the Canadian oil industry, but it’s not going to be a huge benefit to U.S. consumers. It’s not even going to be a nominal benefit to U.S. consumers.”
Let’s break that down. The oil market is global, but somehow adding to the global supply of oil via the pipeline is not going to affect the global price for oil, so it won’t affect American gasoline prices. That doesn’t seem to pass the basic supply-demand test.
But it also overlooks that refiners on the Gulf Coast can handle Canada’s heavy crude, which means more lighter crude from the Bakken and Eagle Ford Shales would be available to export onto the global oil market. If global supplies increase, all other things being equal, the global oil price would fall for everyone–including American consumers.
Obama contradicts himself here. He goes from “there is very little impact, nominal impact” to “it’s not even going to be a nominal benefit.”
The Wall Street Journal editors are making a good point but they go too far. It’s absolutely correct that adding to the world oil supply will, ceteris paribus, reduce gasoline prices in the United States. So they’re right on that. But they seem to suggest that not allowing x barrels of oil to flow through the United States will make the amount supplied at a given price x barrels fewer. This is false. If Canadian producers don’t get to use the least-cost means of transportation, as the Keystone Pipeline appears to be, they will use the next least-cost means, which might be a pipeline to the West Coast and tankers to China. That will also increase the world oil supply. Will it do so as much as if the oil went through the Keystone Pipeline? No. With higher transport costs, the Canadian producers will produce marginally less. With marginally less world oil supply, world oil prices will be slightly higher than otherwise and gasoline prices will be slightly higher than otherwise. So Obama’s first statement quoted by the WSJ was actually correct, but then he blew it.
Of course, the WSJ editors might have had my point above in mind when they wrote their op/ed, but they certainly did not communicate that to their audience. They seemed to prefer the “gotcha” over good economic analysis.