Whitehouse Is Right and Cruz is Wrong
The United States Joins OPEC.
What does it tell you about Republican sincerity when supposedly “free market” Republicans are out supporting a cartel, and lose it when the cartel breaks and prices go down for consumers? As long as it’s fossil fuel interests, nothing else matters. houstonchronicle.com/news/article/T
So tweeted Democratic Senator Sheldon Whitehouse of Rhode Island on April 7.
And how did Republican Senator Ted Cruz answer that same day? As follows:
For a sitting Dem senator to be openly cheering for Saudi Arabia to bankrupt thousands of US energy producers, unemploy millions of Americans, and profit to the tune of billions—even in today’s angry partisan Left—is just remarkable. And sad.
I have no love for Senator Whitehouse. He has been awful on many issues. And I think I’m probably closer on economic issues to Senator Cruz. But on this one, Whitehouse wins hands down.
Ever since the fall of 1973, when the OPEC cartel got powerful and raised the world price of oil from $3 a barrel to $11 a barrel in the space of a few months, most Americans, I dare say, have thought that such a cartel was bad. So when a cartel breaks down, as OPEC had temporarily, thus causing the price of oil to plummet, most Americans, and almost all economists, think that’s good. I wrote about it here.
Now it’s possible that Whitehouse is cheering for the many U.S. energy producer bankruptcies that are likely to occur if the price stays down much longer, but I don’t know that. I bet Ted Cruz doesn’t either. What we do know is that he’s cheering for the fact that a cartel has broken down.
After I conceived of this post on Saturday, I now learn that President Trump has been instrumental in strengthening OPEC. Oh joy. Thus the subtitle above. Actually, there is some joy. It looks as if the agreement has not had much effect on the spot price of oil. I suspect that the main reason is that market participants expect the cartel to break down, presumably with widespread cheating.
I do wonder about one other thing, though. Senator Whitehouse has been a real hawk on global warming. He wants to reign in our, and the rest of the world’s, use of oil. The lower price will cause more oil than otherwise to be consumed. I wonder how Whitehouse trades off the gain to consumers with the loss to one of his favorite causes.
By the way, here’s an interesting piece on OPEC from The Concise Encyclopedia of Economics. In it, energy economist Ben Zycher notes how OPEC was an unintended consequence of President Eisenhower’s import quotas on oil.
Apr 14 2020 at 10:21am
Bethany Mclean has been writing about the fracking industry for a couple of years now and her book, “Saudi America: The Truth about Fracking and how It’s Changing the World” predicted what has come to pass with the crash of oil prices. Here is an NY Times op-ed on this. These companies were overloaded with debt and their production costs were higher than the sales price of fracked oil even in good time. Of course Senator Cruz has a vested interest here as over 100,000 people are losing their jobs in Texas because of the cratering of oil prices. These jobs are not coming back any time soon as demand for oil will continue to be slack. The large integrated petroleum companies will do OK though dividends may get shaved (disclosure: I am a Cheveron shareholder).
I wonder if Senator Cruz realizes that a lot of us directly benefit from low oil prices!
Apr 14 2020 at 11:00am
Good piece by McLean except for this:
The price didn’t plummet. It rose. Although to be fair, as I have written elsewhere, it didn’t rise mainly because of the invasion but mainly because the U.N., at the behest of the U.S., Britain, and a few others, kept Iraq and Saudi oil off the market.
The big learning for me from her article was about the amount of debt and the low and often negative profitability of producers even at a $55 per barrel price.
Apr 14 2020 at 3:05pm
The debt levels and profitability are not much different from the railroad wars in the 19th century. “Railroaded: The Transcontinentals and the Making of Modern America” by Richard White is well worth reading. He goes into quite a bit of detail about Leland Stanford, founder of you know what.
Apr 14 2020 at 1:40pm
The idea of Republicans as a pro-markets, pro growth party died sometime back in the Clinton administration when they opposed higher taxes to reduce the Federal deficit. Then came Bush’s deficits and trade restrictions, warm-up for Trump’s deficits and trade restrictions and now the bailouts for firms instead of expansive monetary policy. Did I mention more restrictions on immigration? Frankly, I prefer a party ready to sacrifice some growth in order to redistribute income downward to one that ready to sacrifice some growth in order to redistribute income upward.
Apr 14 2020 at 11:38pm
Sacrificing economic growth for the sake of redistribution is short-sighted. Economic growth over the last couple of centuries has produced our present prosperity, in which even the “poor” are very well off by historical standards. (Of course, I don’t advocate “redistributing income upwards”! Why is that even worth mentioning?)
Apr 15 2020 at 5:23am
Both major American parties seem pretty awful from an econ perspective.
Good luck picking the smaller evil.
Alternatively, you can vote with your feet. Even though that’s made harder by your tax system.
Apr 15 2020 at 3:54pm
I would agree to the general point that there is conflict between Republicans’ rhetoric and their specific policy choices and preferences (as here with Sen. Cruz), but opposing higher taxes is not inconsistent with a pro-growth, pro-market position, as you claim.
Apr 14 2020 at 9:12pm
That is an amusing point about global warming, and I think it’s a bit of a ‘short circuit’ in the minds of many environmental activists: they dislike the fossil fuel industry because they blame it for global warning, and thus they like seeing its profits drop, but the conditions under which the industry’s profits are lowest – a perfectly competitive market – are the conditions that maximize fossil fuel output. This confusion may be a result of the tendency of people who dislike both corporate profits and free markets to associate the two in their minds, though as we learn in introductory microeconomics class, free competitive markets actually drive profits down toward zero.
And of course the erstwhile ‘free market’ Texas senator putting the oil industry ahead of consumers is a nice little vindication of public choice theory.
Apr 15 2020 at 5:25am
Free markets drive return to capital to what’s prevailing in the rest of the economy. Not necessarily zero.
Though in the very long run, zero might be the natural rate of return. Or perhaps the long run natural rate is minus pi percent? Who knows. (Just saying that zero is also somewhat arbitrary.)
Apr 15 2020 at 9:31am
Mark is talking about profit, not return to capital. In a perfectly competitive market, profit is indeed driven toward zero because P=MC=MR=ATC. See more here
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