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Economy in Brief

Does Encouraging OPEC to Cut Production Help Keep America Great?
by Paul L. Kasriel  April 13, 2020

On April 12, 2020, OPEC, Russia, the U.S. and some other oil-producing nations reached an agreement to cut the global production of crude petroleum, which, according to Reuters, reduce the global crude supply by 20%. Immediately after this announcement by OPEC Plus was made, you know who immediately tweeted: "The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!"

In the 12 months ended March 2020, oil and gas drilling nonfarm payrolls averaged 153,300 per month. That represents 0.1% of monthly nonfarm payrolls excluding census workers. Oil and gas drilling in the U.S. represented 1.7% of U.S. real GDP in 2019. So, oil and gas drilling is a relatively small portion of the U.S. economy both in terms of employment and real output. Of course, crude oil and its refined products play a large role in the economy. Therefore, a reduction in the supply of and/or an increase in the price of crude oil would have a relatively larger negative impact on employment and real output in nonoil-production sectors.

From 1972 through 2019, the lowest annual average number of oil and gas drilling nonfarm payroll jobs was 120,300 in 2003. Let's say that OPEC et. al. do NOT cut production by now, but rather continue to produce at the current rate. Then let's assume that U.S. oil and gas drilling jobs FALL from their current level of 153,300 back down to their 2003 average level of 120,300 or FALL by 33,000. The average weekly earnings of all employees engaged in mining and logging in the U.S. are $1,581, which works out to $82,212 per year. So, if OPEC Plus maintained its current output of crude oil and this resulted in a loss of 33,000 U.S. oil and gas drilling jobs, this would represent a total wage-bill loss of $2.713 billion in round numbers.

Now, let's assume that U.S. imports of crude oil increase because of the lost U.S. output from these 33,000 laid off oil and gas drilling workers. In 2019, the U.S. imported 2.374 billion barrels of crude oil, the lowest since 1992. Given that demand has fallen in 2020 due to the coronavirus, let's assume that we import the same amount in 2020. How large a tariff would we have to impose on imported crude to make those assumed 33,000 laid off oil and gas drillers whole? About $1.14 per barrel. If U.S. imports of crude oil were to rise because of the shutdown of domestic drilling operations, the tariff per barrel of oil could be even less than $1.14 per barrel to make 33,000 unemployed oil and gas drilling workers whole.

If the goal is to Keep America Great, it is beyond me why the president of the United States would want to suppress the production of oil by OPEC and Russia, a POSITIVE supply shock, whilst the U.S. is experiencing a massive NEGATIVE supply shock from the coronavirus. Impose the $1.14 per barrel tariff and use the proceeds of the tariff to compensate the 33,000 oil and gas drilling workers during their unemployment. Would not this make more sense than sponsoring a plan to punish the vastly larger nonoil part of the economy by a reduction in the supply of crude oil? A few weeks ago President Trump suggested that the federal government should purchase cheap oil in the open market and use it to fill the Federal Strategic Petroleum Reserve. (I wonder if the states would be allowed to use any of this federal oil stockpile if they needed it?) Making unemployed oil and gas drilling workers whole through a small tariff and purchasing oil in the open market to fill the SPR make more sense to me than encouraging OPEC Plus to cut production.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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