Transcript
My president went to China, and all I got was even higher gas prices.
Hi, Paul Krugman here. Recording a video today rather than one of my usual posts,.I just feel like I’ve been too immersed in charts and wanted to do something shorter, simpler, whatever.
It’s Friday. The summit between Trump and Xi Jinping has wrapped up. Hard to say what exactly was accomplished, but at least Trump is saying that China is going to buy more US oil. That’s the headline on at least some of the financial sources that I look at. And in fact, crude oil prices in the United States have risen at least a little bit in response to that announcement.
The odd thing is that Trump seems to think that China buying more US oil is a good thing, which it is probably not from the point of view of the United States and definitely not for him. So let’s walk through what all of this means.
Background: The United States, which used to import a large part of its oil, is now a net exporter of oil. That’s what shale oil did. Since about 2020, we’ve been selling more oil to the rest of the world than we buy.
Now that’s a net number. It’s actually a fairly complicated picture because there are different kinds of oil and the geography of oil creates some complications. So we have the upper Midwest importing oil from Canada, Texas exporting oil to Europe and it’s a bit of a mix of of where the oil is produced and where it goes so that there are actually quite large gross flows underneath that net transaction.
But, okay, that’s not all that relevant here. What is relevant, you might think, is that the United States overall produces more oil than it consumes. And you might think, in fact, some people still seem to imagine, that this insulates the United States, that when the Strait of Hormuz is closed and global oil prices skyrocket, well, America, which is actually selling more oil than it buys, should be a net winner, which arguably is true for the economy as a whole, although as I’ll say in a minute, even that’s not entirely clear.
But it’s definitely not true for most of the U.S. public. Most of us have little or no stake in the oil industry, but we buy gasoline and diesel and we buy products whose price ultimately includes the cost of gasoline and diesel. So higher oil prices hurt most Americans.
And it’s the global situation that has led to higher prices in the United States. If you look at net exports of oil and petroleum products before the Iran war started the United States was exporting about 2.9 million barrels a day on net of oil. Now we’re exporting about 5.8 million barrels a day.
That’s a response to the very high prices that buyers in Europe and Asia are willing to pay for oil now that the Strait of Hormuz is closed. That’s how markets work.
That’s a significant contributor by the way to easing the impact of Hormuz on the world economy outside the United States. There were something like 20 million barrels a day of oil being shipped through the strait. Some of that is being routed around through pipelines across Arabia to the Red Sea. But a significant part of it, something like 15% of that shortfall is being made up by increased exports from the United States.
We still have a looming crunch because a significant amount of oil demand is being met by drawing down inventories and we’re kind of getting to crunch point there but that’s a whole other issue.
Now the downside for the United States is that more oil shipped abroad, unless we have a large increase in US production— which is not happening and won’t happen any time quickly — that means more oil being shipped abroad means less oil for the US market so prices have risen.
And so here we have the United States which is self-sufficient and more than self-sufficient in oil, we’re nonetheless seeing gasoline prices $1.50 or $1.60 a gallon higher than they were before the war started and diesel prices up even more than that.
So this is not a great thing for, this is a bad thing for most Americans and having the Chinese buy some more oil — hard to know what if anything is going to come of this — but having the Chinese buy even more US oil is going to enhance the negative effect. It’s going to drive gas prices even higher.
Now there are beneficiaries. Basically, oil producing companies are getting a windfall. They’re getting a much higher price for their product. West Texas Intermediate, the benchmark price of the United States, was around $65 a barrel before the war started. It’s around $102 as I record this. So that’s a pretty big benefit in terms of profits for a select group of oil companies.
Who benefits from that? Because in the end, corporations are not people, they are ultimately owned by people. Well, okay, people who own stock in oil companies are the ultimate beneficiaries of these higher profits. So who are those people? We don’t know exactly. If you look at it, it turns out that oil industry stuff is largely owned by institutional investors who in turn have other investors and it’s a more than a little bit not transparent exactly who the beneficiaries are here.
But in general what we know about US stocks is two things: A significant fraction are owned by foreigners. There’s a little bit of dispute on this, but I’ve seen estimates that run as high as 40% of U.S. equities being foreign owned. If that’s the case then of these excess profits something like 40 cents on the dollar might be going to foreigners.
Not totally sure about that number but what we do know is that among U.S. investors, among the U.S. public, stocks are basically held by a small fraction of the population, about half by the richest 1%, another 37%, according to the latest numbers I’ve seen, by the next 9%. So 10% of the US population, and this by the way includes mutual funds, it includes pension, it includes your TIAA — sorry TIAA, that’s only what academics have — it includes your 401ks. So US stocks are overwhelmingly held by a small fraction of the population. The great bulk of the U.S. population has very little stake in the stock market. For all the talk about it, it really is not something that’s terribly relevant to most people.
On the other hand, almost everybody has to fill up their tanks and even if you don’t, even if you are carless in New York City, which is not very many people but anyway, even so, the price of almost everything you buy is affected by the price of fuel. And it’s affected by the price of fertilizer, which also is very much petroleum related.
So, on balance, certainly 80, 85% or more of the US public is a net loser from higher oil prices and hence a net loser from increased US sales of oil abroad.
Okay, you can think of a couple of ways that you might be able to change that conclusion. It would be more beneficial to the US public at large if oil companies paid a lot of taxes on their profits. Well, I can stop right there. Obviously the oil industry has historically been famous for not paying very much in taxes.
It could be a good thing for the American public if wealthy investors who have capital gains as a result of this surge in oil prices pay a lot more in taxes. But again we can stop right there. The U.S. system in general gives people who derive their standard of living, their wealth, their income from capital gains a much, much lower burden than ordinary people. I mean, the income tax system is progressive. The income tax rate on — my favorite line from the movie Wall Street, $400,000 a year working Wall Street stiffs — they pay quite high personal tax rates, especially of course if they live in New York City. But the people who are getting their money from stocks and from gains in stock prices pay much lower tax rates. So this is not going to be a significant source of revenue and therefore it’s not going to ease the burden of paying for government on the rest of us.
So very hard to see how you can treat increased Chinese purchases of oil as a win for America. It’s a win for people who benefit from higher oil prices, but that’s a small group of people, and it’s a loss for people who are hurt by higher oil prices, which is almost everybody.
Why we should think of this as a positive outcome, well, obviously, I’m tired of pointing out things that Trump doesn’t understand, but what you would think is a little peculiar is that this is bad politically. I mean the price of gasoline has become a real flashpoint in the US political debate.
You could argue that it’s looming larger than the actual share of gasoline in people’s budgets can justify. But in this case: historically, presidents have had very little impact on the price of gasoline. It’s always been a kind of a standing complaint among political observers that this price that presidents really don’t control should play such a large role in politics.
Except this time around the price of gasoline is higher because Donald Trump decided to start a war. End of story. So in this case to the extent that it’s a negative — and the approval of Trump on prices in general and gas prices in particular is incredibly negative — you would think that he would know that getting China to buy more US oil is not something that you want to do now. It’s certainly not an achievement that you want to trumpet, but here we are.
In the end I I actually don’t think this is going to happen. I think that the Chinese will in practice do what they’ve done on previous trade agreements, which is just say that they’re going to do stuff and not do it and it’ll all get kind of lost in the shuffle.
But to the extent it happens, this is not a gain. If this was the major consequence of the summit, the United States scored another own goal.
On that note, have a great day.
