Economic Illiteracy At the Top (Still)

It looks like the Biden administration has found a way to cut oil prices: Come up with a new Covid-19 variant.  More seriously, President Biden said, in addition to just about begging OPEC+ for more production (it’s not a good look for a U.S. president to be publicly asking Saudi Arabia and Russia for, in effect, political help¹), and this gets to the point of this post, that the problem of high oil prices was “because oil supply has not kept up with demand as the global economy emerges from the pandemic.”² 

Except that is wrong.  It’s not that supply is lower than demand.  Supply and demand will always meet³; it’s just that some people may not like where they meet.  Supply might not be high enough for supply and demand to meet at a price people want to pay, but that doesn’t mean they won’t meet.

But when President Biden said (as many of his predecessors have) that demand is higher than supply, it’s not just economic illiteracy.  It may also be, which would be a bigger problem, a hidden call for government to do something to make supply and demand meet at a price people like.  But government can’t do that.  If government starts to fiddle around with the supply and/or price of something, like oil or gasoline, in order to get the price to where people want, the result is not going to be pretty.

People who are old enough will remember when the government tried to do that in the 1970s after the oil price shocks.  To say it did not go well would be an understatement.  Shortages; gas lines; it was not good.  The only way we got out of it was for the new Reagan administration to get rid of the government rules.  Which they did.  And the lines went away, the shortages went away, and, after not too long, prices went down.   It was amazing, except it wasn’t.  It was the market working, instead of government bureaucrats dictating.  Unfortunately, that was so long ago, the lesson was been forgotten by too many people.⁴  Which means they might believe President Biden when he talks that gibberish.  It’s too bad.
-----------
¹ The Biden administration should not be complaining about what’s happening.  They may not like it politically, but it is the logical result of their policies: cancelling pipelines, reducing drilling on federal lands, demonizing energy companies who aren’t green enough.  Those policies will result in less oil and gas being produced, which will raise prices.

    Also, the power of OPEC+ over prices is at least partly the result of Biden administration policies.  Barack Obama took credit for the shale oil and gas boom in the 2010s.  It was more what he didn’t do that what he did, but he took credit for it.  During the Trump administration, US shale production meant we were the country which had the most impact on prices.  Because of Biden administration policies (see the prior paragraph), that is no longer true.  Thus, the begging.
² Derek Brower and James Politi, “Biden’s bid to tame oil prices with 50m barrels from reserves falls flat,” Financial Times, November 24, 2021.
³ Unless government policies effectively prohibit it.
⁴ President Biden was in the Senate back then, but he has never been the quickest learner in the class.