Politics of Oil Prices

by Chidem Kurdas

Oil from North Dakota is selling at a record discount, according to a March 1^st 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.