Biden’s Push for Lower Energy Prices Amounts to a ‘Declaration of Bankruptcy’

FP columnist Adam Tooze discusses how fluctuating oil and gas prices are changing the world as we know it.

By , a deputy editor at Foreign Policy.
U.S. President Joe Biden delivers remarks.
U.S. President Joe Biden delivers remarks.
U.S. President Joe Biden delivers remarks on efforts to lower high gas prices in the South Court Auditorium at the Eisenhower Executive Office Building in Washington on June 22. JIM WATSON/AFP via Getty Images

U.S. President Joe Biden’s visit to Saudi Arabia this weekend is just one of several things the U.S. leader is doing to try to bring down energy prices—which have surged since Russia invaded Ukraine this year. His administration has also called for a gas tax holiday and eased restrictions on the import of oil from Venezuela.

But what if the right thing to do—from a climate policy perspective, anyway—is to simply embrace higher energy costs? If people are forced to pay more for oil and gas, won’t they consume less?

That was one of the questions that came up in my recent conversation with Adam Tooze, a professor at Columbia University and Foreign Policy’s economics columnist. Adam and I co-host a podcast called Ones and Tooze, where each week we discuss two data points that explain the world. What follows is an excerpt of our recent conversation, edited for clarity and length.

U.S. President Joe Biden’s visit to Saudi Arabia this weekend is just one of several things the U.S. leader is doing to try to bring down energy prices—which have surged since Russia invaded Ukraine this year. His administration has also called for a gas tax holiday and eased restrictions on the import of oil from Venezuela.

But what if the right thing to do—from a climate policy perspective, anyway—is to simply embrace higher energy costs? If people are forced to pay more for oil and gas, won’t they consume less?

That was one of the questions that came up in my recent conversation with Adam Tooze, a professor at Columbia University and Foreign Policy’s economics columnist. Adam and I co-host a podcast called Ones and Tooze, where each week we discuss two data points that explain the world. What follows is an excerpt of our recent conversation, edited for clarity and length.

If youd like to hear the entire conversation and others Adam and I have conducted over the past year, listen to Ones and Tooze wherever you get your podcasts.

Foreign Policy: Gas and oil prices have gone up in recent months. But should we be keeping those two fossil fuels separate in our minds rather than lumping them together? Are these two very different products with very different functions, very different underlying infrastructure?

Adam Tooze: Yeah, I think thats a really helpful question to start with because when we discuss energy, all the different sources tend to get lumped together. For Europeans, its very confusing. Americans call petrol, gas, and then they call gas, natural gas. But they are completely different beasts. Oil is the worlds biggest global commodity. Its main function is in transport and secondarily as a chemical feedstock. Its very much less commonly used for heating or for electricity generation. So if you think about coal as being the original fossil fuel that drove modern economic development, then oil displaces coal above all in the transport sector. Gas displaces coal too, but it displaces coal precisely in heating and electricity generation—so two very different types of function, really. The difference is crucially to do with the chemical composition. So oil is dense and can be relatively easily transported, so there is effectively one global market for oil. And you can tell this because the price of oil in the United States doesnt fundamentally differ from the price of oil anywhere else in the world. Gas, unlike oil, is not dense, so you cannot effectively ship it. So only a fraction, just under 40 percent, of internationally traded gas goes in the form of liquid gas, which is fungible like oil. More than 60 percent goes through pipelines, and those create point-to-point connections, which you cant easily swap, as the Europeans are discovering with Russia. Once youre brought into a pipeline gas deal, youre sort of stuck with it.

FP: So to turn back to oil, is there more oil out there that can be pumped and sold? Is there spare capacity to increase supply of oil?

AT: If you look at the very long run, there really isnt any reason, from an economic point of view, to fear running out of oil. The problem right now is lacking investment in the fossil fuel and, particularly, the oil sector in recent years. And that means that we do currently face capacity constraints. And the question really is: What has driven that fall in investment? And from an economic point of view, overwhelmingly, the most important explanation is clearly the collapse in oil prices in 2014. The really big producers in the world are not Western oil majors, right? Its Saudi Aramco, its the [Persian] Gulf producers, and from 2014 onwards, as oil prices fall, they had to trade off the fiscal needs of their governments, social welfare spending, other types of investment against investment in their oil industries, and they just ran investment down in their oil industries. And the net effect of that is that even Saudi Aramco, which is the powerhouse of global oil—you know, forget Exxon and all of these Western players, Saudi Aramco is a really big whale—they dont think they can raise output by as much as a million barrels a day before 2027. So were really talking about quite sticky supply. And thats whats driving the nervousness in markets right now.

FP: You mentioned that Germany gets much of its gas from Russia. Russia is threatening to turn off the taps, but this got me wondering about the government’s ability to ration the gas. Is there even the bureaucratic capacity these days to do this kind of wholesale rationing?

AT: Not right now. And theyre scrambling to develop it because I think they can see a big problem coming for the fall and the winter. And theyre going to need that kind of bureaucratic capacity. You need to collect the information. You need to have the communication channels in place. You need to have contingency plans in the plants where youre going to do the shutdowns. And theyre going to focus this on industry because theres obviously a political imperative and a social imperative to maintain households supplied. I mean, it is not easy to do, but its not uncommon if you live in emerging market economies. They do it all the time. Its called load-shedding. Beyond technical capacity, the really big test in Germany in particular is going to be the politics of this because if youre going to do this on a serious scale, youre going to have to cut out large industrial consumers of gas. And that is politically difficult to do. You need people who are on board to help manage this, and that will be apart from the technocratic expertise, but building that political coalition will be crucial.

FP: Got it. To shift to the United States, Im curious what this sort of period of high oil prices has revealed about the Biden administration and specifically its climate policy. Obviously, Biden and his team have been doing everything in their power to lower oil prices, including this trip to Saudi Arabia, a state that previously he was vowing to make a pariah. Do these efforts to lower oil prices contradict all these promises on climate that Biden had been making? Shouldnt high prices of fossil fuels like oil and gas be something that a government with an ambitious climate agenda would actually embrace?

AT: Yeah, I mean, on its face, its a declaration of bankruptcy with regard to climate policy. Yes, obviously, high prices of fossil fuels should be welcomed. You know, not out loud. Youre not going to go out on the street and celebrate because its obviously politically difficult and dangerous in the U.S. to do that. One obviously can sympathize with the fact that theyre in a midterm [election cycle]. And that would make sense if there was much prospect of the Biden administration surviving politically, then being able to actually conduct climate policy so that youd have a short-term trade off for a long-term goal. But as we know, their actual legislative agenda is completely in tatters. Build Back Better is being killed by opposition from within the ranks of the Democratic Party itself, given the roadblock the Republicans put up. And now we have the Supreme Court ruling on the [Environmental Protection Agency] as a regulator, which is the alternative route. So what were actually looking at here is not, as it were, a tactical maneuver so much as the Biden administration falling in with a kind of comprehensive rollback of a climate agenda on every front. Its really disastrous.

Cameron Abadi is a deputy editor at Foreign Policy. Twitter: @CameronAbadi

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