A new oil deal led by the United States, Russia, and Saudi Arabia promises to withhold 9.7 million barrels of crude oil a day from global markets – over 13 percent of the world’s daily supply. The deal is in response to cratering demand for gasoline as millions stay home to prevent the spread of COVID-19 and as businesses reduce their energy utilization.
Limiting crude oil supply to inflate oil prices is a sharp reversal of previous U.S. policy. As recently as last September experts worried of the damage that high oil prices would cause the U.S. economy, and the U.S. has a historically antagonistic relationship with OPEC. Current worry over low prices is, at a minimum, surprising.
So why the change of heart? A glance at the S&P 500 Energy Sector tells part of the story. From January 1 to March 18 the index dropped by 60 percent. Markets have rebounded somewhat since then but still remain at barely half their six‐month high.
The other part of the story is crony capitalism: after the oil sector lobbied for but failed to get $3 billion in stimulus funding, President Trump directed the Department of Energy to make purchases to fill the strategic petroleum reserve anyway. More explicitly, he said, “[Russian President Vladimir Putin, Saudi Arabian King Salman, and I] had a big talk as to oil production and OPEC and making it so that our industry does well and the oil industry does better than it’s doing right now.” Later he directly acknowledged the change of heart, saying, “I hated OPEC. You want to know the truth? I hated it — because it was a fix. But somewhere along the line that broke down.”
Yet trying to raise oil prices is insane economic policy. Lower prices are bad for sellers but good for consumers and non‐oil‐producing businesses. Thus the dramatic drop in oil prices over the past two months is one of the few silver linings in the current economic situation.
At best, the oil deal will temporarily prop up the struggling U.S. energy sector. At worst, it will enrich oil companies and their shareholders at the expense of struggling Americans. The U.S. has criticized OPEC’s manipulation of oil prices for decades, but now we are complicit.