Oil Price Politics Implication

March 24, 2012

by Chidem Kurdas

My previous post about government restrictions on oil and gasoline transportation drew comments saying prices are set in a world  market and the effect of United States policy is negligible. Numerous economic and geopolitical forces influence the price of oil, no question. That does not change the fact that the Jones Act restraint on shipping redistributes income from consumers and some producers to politically favored groups—-my main point.

Global supply of  and demand for oil are subject to various short- and long-term effects. China’s economic resurgence has caused a permanent expansion in global demand. Growth in emerging markets demand is permanent and baked into prices, according to Michael Zenker, managing director of commodities research at Barclays. In the intermediate time horizon, the slowdown in China puts downward pressure on prices. Meanwhile, fears of supply disruptions cause temporary volatility—oil futures fluctuate in response to the showdown with Iran. Ditto political gestures. Thus futures dropped earlier this week when Saudi Arabian officials reassured jittery markets that they will work to stabilize prices.  Then there are seasonal patterns that come and go every year, like increased demand from summer vacationers.

Those are threads in a broad tapestry. Within that picture, the Jones Act shipping restriction works to make oil products more expensive in certain parts of the United States than otherwise would be the case. Through the ups and downs of the global market, some price premium due to the restriction remains.

If oil were cheap, this might not be noticeable. In large part because of the growth of Asian demand, oil is no longer cheap and gasoline prices are noticeably high. But another long-term development will help mitigate the upward price trend, namely growing production from the apparently immense potential in American shale formations, though subject to concerns about the environmental impact of fracking.  North Dakota is producing so much oil that it has to be sold at a discount.

This is why the Jones Act is particularly damaging now—there is a lot of domestically produced oil but the transportation of the refined products to Eastern markets is costly because the law does not allow non-US tankers. Democrats have blocked attempts to repeal it.

Yes, eventually domestic shipping capacity should expand and ease the transportation bottleneck. The fundamental issue is that as long they can intervene in any market, politicians will find ways to manipulate the market so as to benefit their clients at the expense of other people. Those clients in turn pay back the politicians one way or another.

That markets move around for many reasons, that gasoline prices may go down one week and then up again the next week for unrelated causes, does not change the core political game.  Mercantilist policies like the Jones Act are just one manifestation of politics as taking—in the words of Professor James Buchanan, who proposed a politics by principle to replace politics as taking (Buchanan and Roger Congleton, Politics by Principle, Not Interest.)

4 Responses to “Oil Price Politics Implication”

  1. Chris Says:

    Mr. Kurdas,

    I agree that the Jones Act increases the cost of gasoline. I calculate the magnitude to be about $0.02/gal. Is this about the size of the impact that you’re talking about?

    Most of the price of gasoline is determined by the crude price. The Jones Act impacts on crude oil are small since crude is mostly transported via international flag vessels. Alaska crude is transported on Jones Act tankers but the delivered price of Alaska crude has to compete against imports on international tonnage.

    Here’s how I calculate my $0.02/gal transportation cost. We can quibble about the details but I think the numbers are reasonably accurate and any variation won’t change the answer very much.

    Typical gasoline tanker size = 360,000 bbls

    Difference between international tanker and Jones Act tanker charterhire rate = $30,000/day (covers the higher Jones Act costs for U.S. construction and U.S. crews – assume other costs like fuel, port charges are equal)

    Typical round trip voyage from U.S. Gulf of Mexico to U.S. East Coast = 12 days

    Total Cost Difference = $30k x 12 days = $360k = $1.00/bbl

    $1.00/bbl / 42 bbls/gal = $0.024/gal

  2. chidemkurdas Says:

    Chris–
    Leaving aside the details of your calculation, it is a given that the cost per gallon gasoline is small. Indeed, this is the essence of the political redistribution game: to impose a small cost on a very large number of people. Those people can be made to pay extra year after year because each person’s incentive to protest is small–corresponding to their personal cost. But millions of people are affected and the amount redistributed is the total cost imposed by the Act, not the per gallon.

    That total extra cost per year to consumers in the Northeast, I’d guess, is somewhere between $1.5 billion to well over $2 billion, depending on level of gasoline use and other factors. That does not include the cost to consumers elsewhere in the US.


  3. [...] about high gas prices—which in part reflect high transportation costs due to legal restrictions, as we pointed out here.  His response was politics as usual. However, the President was not content with repeating the [...]

  4. Larry Angleton Says:

    Politics is a messy stuff. I really hate politics and everything related to it but hey, sometimes you can also get something out of it. ;.:.,

    Warmest wishes
    http://www.healthmedicinelab.com“>


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