Politics of Oil Prices

March 13, 2012

by Chidem Kurdas

Oil from North Dakota is selling at a record discount, according to a March 1st news item in the local paper, the Bismarck Tribune.   By contrast, here in New York gasoline prices are near record highs. Between North Dakota and New York are thousands of miles but more crucially standing between us is a gigantic entity, the federal government.

With North Dakota’s Bakken and Three Forks shale formations producing at a rip roaring rate, the issue is getting the oil to refineries and from refineries to population centers. The Bismarck Tribune article quotes the State Mineral Resources Director, who said: “prices for North Dakota sweet crude generally mirrored West Texas Intermediate prices last year but began widening in January when President Barack Obama temporarily halted the $7 billion Canada-to-Texas Keystone XL pipeline, which would have carried 100,000 barrels of crude daily from North Dakota and Montana.”

Presidential obstruction of Keystone XL is one factor. The producers are getting around the lack of pipeline by transporting some of the crude to Louisiana via rail. But that doesn’t much help northeasters like me. There’s this federal law called the Jones Act, which was in the news in 2010 after the BP oil rig disaster in the Gulf of Mexico

A protectionist regulation passed in 1920, the Jones Act requires that goods transported by water between US ports be carried in US-owned, US-manned and US–flagged ships. It prevented the use of specialized foreign vessels to clean up the 2010 oil spill, the Obama administration having refused to exempt the vessels from the act.  The US merchant marine, the industry protected by the law, is unionized. Unions, of course, have a close relationship with Mr. Obama, as pointed out in 2010— blog of Mark Perry, professor at U of Michigan-Flint & visiting scholar at the AEI.  Also, at the time the Heritage Foundation argued that the Jones Act prices US companies out of global markets and thereby impedes the creation of jobs in America.

The union and industry remain protected. The Jones Act’s restriction on shipping makes getting refinery products from the Gulf of Mexico to the northeast very expensive. This is a classic case of political rent extraction. Relatively small, highly organized groups – the union and American carriers – get a concentrated benefit from the restrictive regulation. The cost is imposed on many millions in the densely populated northeast, who have to pay more not just for gasoline but almost everything. The cost is also imposed on people in places like North Dakota, whose access to the big market in the northeast is in effect hindered by the restriction on transportation.

When I buy a loaf of bread in NYC, it is more expensive because all the inputs cost more than would be the case if cheaper shipping were allowed for oil products. But this extra cost is concealed in the price of bread and invisible to consumers, who in any event are widely dispersed and not politically well organized.

Political rent extraction rewards the politically protected by gouging large numbers who are unprotected. In return for the protection, a politician like Mr. Obama get votes and donations. It’s a system that works—-except for most of the population, who pays for it.

19 Responses to “Politics of Oil Prices”

  1. rjs Says:

    the pipeline wouldnt help northeastern prices; rather, landlocked WTI oil would raise to the world price, & central states, now paying 50c/gal less, would pay same as the rest of us…


  2. [...] Chidem Kurdas (“Politics of Oil Prices“) blames rising oil prices on regulations on the seaborne transportation industry.  Evan [...]

  3. Robert R. Hinson Says:

    If you read this, oil prices are caused by politics. We the people need to have our reps in washington look at & change old acts, laws, & edicts that hamper the American public from economic progress no matter who is in power. We the people should control government. Is everyone doing their part to make sure, each day, our heritage is being brought forth & taught to our young? Stop sitting back & do something, call, write, E mail, Twitter, & Facebook. What ever it takes to take our country back.

  4. rjs Says:

    there isnt anything a politician can do to change oil prices by more than a percent or two, and then only after years…

  5. Peter Says:

    I think it was Peter Foster of Canada’s National Post who pointed out that much of the planned route of the Keystone XL pipeline was to be seized by eminent domain from private landowners. Although I dislike Obama’s election year pandering to wealthy environmentalist donors, I dislike stealing from the private sector even more.

  6. chidemkurdas Says:

    Peter–
    I grant you, there may be eminent domain issues with Keystone XL. But that should be presented as such. The delay so far is being argued on environmental grounds.

  7. chidemkurdas Says:

    rjs–
    While the price is determined by the forces of supply and demand, restrictive regulations can have a significant impact, for instance by reducing the supply.

  8. rjs Says:

    if the president could command the supply of saudi arabia, then he might be able to make a dent in the price; but as oil is fungible & prices are set in a world market, an incremental increase in US production wouldnt make a difference…

    transcanada is in the process of submitting a revised route which will circumvent the permeable nebraska sandhills, & thus the ogallala aquifer which supplies water to 8 central states, after which the pipeline will be approved…it makes more sense than shipping the oil via warren buffett’s railroads…

    as oil will only become more expensive in the future, we should i save our own untapped domestic supply as a strategic reserve. and import as much from other parts of the world as they’re willing to part with in exchange for our fiat currency..

  9. chidemkurdas Says:

    rjs–
    The point of the post is not US production in the aggregate but rather the issue of getting it from one place to the other. There is a bottleneck in transportation in part because of the Jones Act. That causes large spreads between prices.

  10. chidemkurdas Says:

    I should have mentioned that though the Jones Act goes back to 1920, there were attempts on and off to rescind it. Congressional allies of the union and shippers successfully derailed these attempts.

  11. Allan Walstad Says:

    Prices are set in a world market modulo transportation costs. Can anyone enlighten me on how significant they are?

  12. chidemkurdas Says:

    Transportation prices, of course, vary. There’s the transportation from the source of the crude to the refinery and from the refinery to the products markets.


  13. The primary driver of oil price increases is increased world demand, not Barack Obama. I am surprised to see Republican Party talking points here, since usually we get serious economic analysis.

    I also don’t understand defending Keystone XL; the environmental concerns are not independent of the eminent domain issues. But since you raise the issue, what size of reduction in the price of a gallon of gas for residents of New York City is sufficient to justify confiscating a western rancher’s land and poison westerners’ water supplies?

  14. chidemkurdas Says:

    Charles N. Steele–
    I’m all for the rights of property owners. This is not a matter of Westerners vs. Easterner. The costs of the restriction are also imposed on North Dakota producers. Easing the transportation bottleneck would open a larger market for the product, allowing the producers to get better prices.

  15. chidemkurdas Says:

    To add to above: If there is a case against Keystone XL on the grounds of people’s land having to be confiscated, then all else being equal I would not favor building the pipeline. But I have not noticed such a case.


  16. [...] previous post about government restrictions on oil and gasoline transportation drew comments saying prices are set [...]

  17. Steve W from Ford Says:

    “there isnt anything a politician can do to change oil prices by more than a percent or two, and then only after years…”

    rjs-this is the same old tired case the left has made for decades and it is specious. “It won’t help now, only years from now”. Well this is an argument for paralysis. How many very useful projects spring into existence immediately? If congress designates land to be purchased and turned into a National park does it happen immediately? If it takes “years” to accomplish your argument would have to be that there is no use doing it since it won’t help “now”.
    I’d ask you to ruminate on how much oil the US would be producing if there had been no restrictions on drilling locations for the last 40 years. Certainly much more than today even though it might take more than a few years to bring any individual project to fruition.
    There is also the not insignificant point that more production in the USA , while not guaranteeing lower world prices, certainly guarantees more high paying domestic jobs and more national income. What part of that do you not like?

  18. rjs Says:

    steven, my point is that with just 2% of the world’s known reserves, all the domestic drilling you do still wont put a dent in the world price…

    “our” oil from alaska is going to japan & china as it is…

  19. rjs Says:

    NB: the Associated Press recently conducted a “statistical analysis of 36 years of monthly, inflation-adjusted gasoline prices and U.S. domestic oil production.” The result: “No statistical correlation between how much oil comes out of U.S. wells and the price at the pump.”

    http://www.washingtonpost.com/politics/fact-check-does-more-us-drilling-ease-gas-pump-pain-math-history-show-that-hasnt-happened/2012/03/21/gIQACPQ3QS_story.html


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