Testifying before the Senate Commitee on Energy and Natural Resources, CGEP Director Jason Bordoff discussed the factors that have affected oil prices over the last several years. Among the most consequential factors, he explained, are the shale revolution, major geopolitical supply disruptions such as in Venezuela, the supply agreement between Organization of Petroleum Exporting Countries (OPEC) and several non-OPEC countries, strong oil demand, and recent U.S. policy shifts on trade and sanctions on Iran.
In his testimony, Bordoff also offered three observations about the policy implications of recent oil price movements:
First, because policymakers cannot predict oil prices and because few policy responses impact oil prices in the near-term, energy policy choices should not be based on today’s oil prices. He discusses why the use of the Strategic Petroleum Reserve (SPR), although it may reduce prices in the near-term, is not justified at present.
Second, increased U.S. oil supply does not insulate drivers from higher pump prices, which are largely determined by oil prices set in a globally integrated market. Although shale oil is more responsive to price changes than conventional supply, it cannot serve as a swing supplier to stabilize oil markets in the way true spare capacity (largely held by Saudi Arabia) can.
Third, the most effective policies to protect consumers from inescapable oil price spikes are those that reduce the oil intensity of the economy through increased efficiency and alternatives. Reducing oil import dependence, whether through increased supply or reduced consumption, helps mitigate the macroeconomic harm from oil price shocks, even if consumers still see oil price increases at the pump.