This week, President Joe Biden called on Congress to punish oil companies with higher taxes on their high-price generated profits. Consumers are understandably unhappy with these prices. In turn, loud political persuasion tends to carry the day one week before highly contested midterm elections. Biden would nonetheless be wise to give energy markets more patience and perhaps even a pat on the back.
Just a few months ago, Western leaders — horrified when Vladimir Putin cut off the flow of natural gas to Europe in the wake of his escalated Ukraine invasion — called for massive political action to cushion the serious harm that winter would bring. When Putin closed the valves in September, natural gas prices rose six-fold from the year before. There is little doubt that high heating costs are plaguing hard-pressed Europeans. Still, it is equally clear that the market process and those high prices are beginning to deliver massive improvements. Europe has seen all of its liquified natural gas (LNG) storage locations filled, with fuel-filled tankers stacked at ports waiting to unload. Markets work, and not just in the sense that higher-priced LNG is still much preferred to chopped wood in an open fireplace or no heat at all. The news fortifies the notion that higher prices are a solution to higher prices. Suppliers worldwide responded to profit opportunities, and now the sudden glut is, as one report put it, “sending prices lower and easing fears of winter fuel shortage and rationing.”
But strangely enough, Biden is not celebrating. When politics works, he cheers, but when markets work, he continues berating oil and gas companies for sending high price signals. Biden was not reluctant to call on Qatar to produce more LNG or to chastise the Saudis for raising petroleum prices. Somehow it seemed necessary to frown and fuss at 7-Elevens for selling high-priced gasoline when those retailers were simply caught at a supply-chain intersection where scarcity was dictating higher prices. His latest call to Congress to punish the oil companies is like becoming angry with a thermostat for making the heat turn on. Still, it may play well on Main Street.
But like it or not, we tend to get strong and quick supply responses when high prices signal the opportunity for profits. At the margin, those who need heat or any other scarce commodity the most may outbid others. Adjustments are also required. After all, Qatar must redeploy resources from doing something else when LNG production is accelerated, and that cannot generally be done without incurring costs.
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Yet in a matter of just a few months, Russia’s decision to leave its Western European energy customers out in the cold has transformed the energy world. Suddenly it seems that nuclear energy has become more attractive, production from large but unexploited Dutch gas fields is increasing, and even the U.S. federal government is accelerating the process for issuing permits to explore and produce energy on federal lands.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, a dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.
