It is easy to see that the price of oil is one of Joe Biden’s biggest problems, but harder to figure out whether Biden can do much about it. If he can’t, who can? An entire industry exists to predict future changes in the price of oil. Oil companies themselves try to imagine where the price will be, so that they can schedule capital expenditures to meet future demand, often without much success.
Today, the volatility of oil prices is taken for granted. But this was not always the case. From the early 1930s to the 1970s, the price of oil in the United States was managed through a combination of voluntary action by private actors and regulatory oversight from state agencies. Crisis in the early 1970s motivated the federal government to institute formal controls over the price of crude oil. While these controls were inexpertly administered and pursued contradictory goals, they succeeded in absorbing the impact of the shock in global oil prices and ensuring access to energy on affordable terms to most Americans. Where the policy did not succeed, however, was in increasing domestic production and making a meaningful impact on oil imports. A second oil shock in 1979 convinced policymakers to do away with controls and helped spawn a militarized commitment to “securing” the oil of the Middle East, the blowback of which we continue to confront today. US power and a free market, many leaders argued, would produce abundant and affordable energy.
Examining the history of oil prices reveals two persistent features. The industry has often been subject to various forms of price-setting, both by government and by firms with market power; and at the same time, the entanglement of market forces with geopolitics has meant that true control over the price of energy remains elusive, absent agreements on a planetary scale. Such coordination now appears necessary to counteract the spiraling volatility endangering access to energy and complicating the energy transition away from fossil fuels. To arrest volatility and avoid the worst effects of climate change, it’s time to get oil back under control.
Out of control
During the early days of the US petroleum industry in the late nineteenth century, growing demand for oil products drove a constant search for new deposits. Oil produced from the ground belonged to whomever obtained it first according to the so-called “rule of capture,” a concept summarized in the closing scene of Paul Thomas Anderson’s 2007 film There Will Be Blood. With production fragmented among many different companies and without a central authority imposing order, the market went through a constant boom-and-bust cycle.