The price of a barrel of oil was around $25 when the 21st century began, and had been as low as $10 in 1998. In the 1980s, oil more than once dipped to $8/barrel. Stop and think about those prices for a second, and ask yourself what happened. And in asking yourself what happened, consider that in the 1980s and 1990s there for the most part wasn’t any domestic drilling in the United States. What’s the riddle here?
Oh well, before we get to the riddle it’s useful return to the present and a recent column by David Ignatius of the Washington Post. Writing about Saudi Arabia’s “coldly pragmatic decision to cut oil production,” Ignatius lamented that “The United States doesn’t call the shots in the Persian Gulf or the oil market anymore.” No, that’s not true. But the fact that it’s not true has nothing to do with all the “Drill, Baby Drill” happy talking that comes from members of the right who, like Ignatius, similarly lament that the U.S. “doesn’t call the shots in the Persian Gulf or the oil market anymore.” Left and right are incorrect, but don’t know why they’re incorrect. The U.S. most certainly does call the shots in what is a global oil market. Please read on.
To see why the pessimism of Ignatius and the happy talkers is overdone, one need only travel back in time to the ‘80s and ‘90s when there was so little domestic oil exploration. Why was oil so cheap contrary to the expressed belief of Ignatius and the happy talkers that domestic drilling is what makes oil cheap? The answer is very simple, and it can be found in the currency in which oil is priced: the dollar.
Oil was nominally cheap in the 1990s because President Bill Clinton had a Treasury secretary in Robert Rubin who routinely communicated his belief that “a strong dollar is in the U.S. national interest.” Importantly, this was more than rhetoric to Rubin. Proof of the previous assertion can be found in the historical truth that while at Treasury, no responsible Treasury official from Rubin on down ever whined or complained about the dollar/yen. Treasury, not the Fed, is the dollar’s mouthpiece simply because Treasury speaks for the President.
Which explains even lower oil prices in the 1980s after they’d reached $40/barrel in the late ‘70s. While campaigning for president, Ronald Reagan routinely communicated his desire to reverse the horrid dollar devaluations of the 1970s overseen by presidents Nixon, Ford and Carter. Reagan, like Clinton, got the dollar he wanted. This is important.
It is because unlike the foot, minute, and tablespoon, the dollar has lacked constancy as a measure ever since President Nixon severed the dollar’s link to gold. Since then the dollar has fluctuated, and its fluctuations have largely explained the oil story. When the dollar is ascendant as it was in the ‘80s and ‘90s, oil is cheap. When the dollar is falling as it was in the 1970s, and in the 2000s, oil is expensive. To believe anything else is to believe OPEC was feeling wildly generous in the ‘80s and ‘90s, but curmudgeonly in the ‘70s and 2000s. No, the answer lies in the measure that is the dollar.
Applied to the present, it’s wholly lost on the happy talkers that the surest sign of nominally expensive oil is when there’s a robust domestic drilling industry. As for Ignatius, the U.S. still calls the shots with its oversight of the dollar, but policymakers are oblivious to this basic truth.