Policy Brief: Towards a lower oil & gas price in the Unites States

Introduction

Oil & gas are major components in the energy sector, playing a crucial role on the global

economy (Kamrin, 2014). Most Americans commute to their destinations, with crossover

vehicles in demand most in the USA car demand as of June 2021 (Statistica, 2021). This in

particular is problematic for consumers because the combination of skyrocketing gas prices

and having larger fuel tanks negatively impact the budget of average income consumers in

the USA.

The Problem of Gas and Oil in the United States

The Russia and Ukraine war has caused a surge in gas prices globally, and as a result of that,

the United States has particularly suffered the consequence of the spike in oil prices. This is

because Russia accounts for 20% of the United States imports of petroleum products, and

since the loss of Russian oil, the impact was largely notable in disruption of the logistics

regarding gas effecting the level of consumption (CNBC, 2022, p.2).

Canada accounts for 51% of gas imports in the US (Environmental Investigation Agency,

2022), nonetheless, the loss of Russia as such a large supplier of gasoline causes the price of

oil to increase, this is because there are limited number of oil suppliers. The oligopoly theory

states that the demand side is competitive, while the supply side is not monopolized nor

competitive (Friedman, 1982). In the context of gasoline, there will always be a demand for

gasoline because it is an inelastic product (Hall, 2022), however, the supply side is

dominated by a small number of suppliers, creating an oligopolistic market. This in turn

means that with the limited number of suppliers, the oil supply gets lower, therefore, the

market price of oil increases.

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Policy Proposal

Policy 1: Encouraging Foreign Direct Investment to Increase Supply

My first policy is to encourage foreign direct investors (FDI) via setting up various

symposiums and workshops to promote investment in direct oil suppliers to expand the

number of suppliers to the US market, this involves international oil investors and

companies based outside the US. This will result in the introduction of more oil companies

hence pushing the average gas price lower.

Policy 2: Improving Technological Innovation to Lower Cost of oil Production

The immigration and national act (INA) in the United States sets the number of immigrant

visas that may be issued to individuals that are seeking permanent resident status (green

card) each year (U.S Citizenship and Immigration Services, 2020). My policy is for the U.S

Citizenship and Immigration Services to designate a specific number of applicants for people

that will work in the petroleum production engineering sector, to improve petroleum

technology. For example, out of 1 million eligible green card applicants, 2000 is designated

for petroleum production engineers. The petroleum production engineers will work to

achieve two aims; firstly, to research and implement technological petroleum innovation,

and secondly work on improving the efficiency and optimisation of the manufacturing

sector, like reducing the time spent on unnecessary tasks, reducing the need for manpower,

and reducing any potential human error. These are interlinked as the technological advances

the workers will provide will ameliorate the manufacturing process.

Economic Reasoning

Policy 1:

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As previously mentioned, the market structure in the US for oil and gas is currently oligopoly,

in other words, it is a market with a small number of suppliers. Implementing policy 1 will

allow for the saturation of the US oil market structure instead of it’s current oligopoly

status.

In economics, the relationship between supply and prices of goods are related to each other.

If there is an increase in supply of goods and services, while demand stays constant, the

price equilibrium price falls down. According to the market theory, as the number of

companies selling oil in the US increases, competition increases. Because, when the product

is homogenous such as this (all petroleum), any hike in price by an entity compared to it’s

competitors, will decrease the demand for that particular firm. Thus, entities choose to

rather stay at the lower pricing range and lock onto their market share, ultimately resulting

in lower prices which is to the gain of the consumers (Social Market Foundation, 2017).

Policy 2:

The supply function of a commodity depends on a couple of factors such as; the price, the

price of other goods, cost of production, technological progress, government policy (taxation

policy) and the objectives of the firm (Rawat, 2021). This policy will concentrate on the

technological factor of the supply function. The improvement of technology through skilled

employees will reduce errors in extraction/manufacturing of petroleum so that suppliers

lower the cost of production, allowing the firms to produce more of the commodity, in this

case petroleum with less costs.Hi

Additionally, the petroleum engineers improve technology so that the need for labor

reduces (because productivity increases), consequently, production per labor increases,

therefore, there will be more output with given level of labor. An example of how this would

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work in the production process is: 1 unit of labor would usually make 1 unit of petroleum,

however, with the improved level of productivity, 1 unit of labor would produce 2 units of

petroleum. Nonetheless, the aim through this policy isn’t to particularly increase the amount

of supply, but rather, hold output constant with a lower cost of production. There will be

fewer skilled workers (replaced by technology), meaning there will be a decrease in number

of working hours, therefore, individual wages will decrease. Since the firm will have

technological advances, they will be able to operate with more efficiency. This is effective in

the long run because when a firm is at a productively efficient state, goods are produced and

sold at the lowest possible average cost. This policy works to maximise productivity through

technology, so the cost of producing the petroleum decreases, thus supply increases,

decreasing its market price. Nevertheless, policy 1 and 2 both assume demand is ceteris

paribus (held constant).

Addressing an Alternative Approach

Alternatively, another possible policy that would decrease oil and gas prices is to impose a

price ceiling to the gas prices in the economy. A price ceiling is put into place to control the

maximum prices that can be charged by suppliers for the commodity. The price is prevented

from rising above a certain level to make the commodity more affordable to the general

public (The Economic Times, 2022). This was implemented in 1973 by President Nixon. The

suppressed prices of oil prevented the development of US oil extraction, although oil prices

decreased, this caused negative reactions as the US oil extractors did not have the incentive

to increase production and improve efficiency anymore (Boyce, 2021). Because of the

reaction oil companies had towards the price ceiling in 1973, this policy would not be

particularly favorable knowing the historic response to this policy.

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Moreover, price ceiling effects include the start of a black market, in which there will be

excess demand when the ceiling falls beneath the true market value, consumers will want

more of the good, but won’t be able to purchase them (Boyce, 2021). It is important to note

that a price ceiling is a short run solution to decrease or prevent the increase of the price of

a good, this makes it an unsustainable policy on the long term relative to policy 1 and 2.

Conclusion

In conclusion, the loss of Russia as an oil supplier caused an increase in oil and gas prices in

the US. In order to lower the gas prices, the first policy proposes encouraging foreign direct

investors to invest in new oil companies to start selling their oil in the US, which will increase

the number of oil suppliers in the country. This shift from a small number of suppliers to

large number of suppliers is the shift from an oligopoly market to a more perfectly

competitive market, in turn increasing competition and causing the price of oil to be lower.

The second policy proposes improving the technological sector in production by the INA

designating a number of immigrant petroleum production engineers to get a permanent

residence status, the petroleum production engineers will advance technology resulting in a

more productive and efficient production process. When productivity increases, less labor is

necessary, also reducing wage costs. When the wage costs and production cost decreases,

supply in the markets increases thereby the selling price of oil also decreases.

In theory, on a macroeconomic level, lower oil prices are not only good for consumers but

could lead to a higher spending on other goods and services and add to the real GDP

(Pettinger, 2020).

References:
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