Cooling oil consumption to ease price pressures
Paul E Williams, Executive Director; Yakov Feygin, Berggruen Institute; Chirag Lala, UMass Amherst; Mitch Green, Fellow
Topline
The Russian invasion of Ukraine has led to reduced global oil supply and increased global oil prices, which feed directly into higher gasoline prices for US consumers. It is unlikely that oil supply will be able to increase enough in the near term to match domestic demand.
Many proposals from local, state and federal leaders have focused on subsidizing oil consumption with gas cards, gas rebates, or tax credits for vehicle owners. While these proposals may appear beneficial for politicians in the near term, they do not address the underlying issues.
Instead, local, state and federal leaders should implement a set of programs, policies and incentives that cool domestic oil consumption by shifting demand to alternatives and using resources more efficiently.
Summary
The Russian invasion of Ukraine has created a situation where it may be difficult in the near term for domestic supply of petroleum products to match domestic demand. This has led to record high gasoline prices. The use of strategic petroleum reserves has proved insufficient to bring supply up to the level of demand. But the other side, the demand for petroleum products, has not been directly addressed.
The vast majority of petroleum products consumed in the United States are used for transportation. Even a modest reduction in vehicle miles traveled over the near term could have a significant stabilizing effect. While robust programs would be difficult to implement quickly, simple incentive structures could curb domestic petroleum demand in the near term:
Fare holiday to get people on buses, trains and micro-mobility as quickly as possible
Compress timelines for transit infrastructure investments to grow ridership base
Incentives for firms to allow and encourage employees to work from home
Encourage carpooling with incentives and a bully pulpit campaign
Consider a national speed limit reduction
With effective design and implementation, such policies could curb vehicle miles traveled for some commuters, reducing aggregate oil demand and supplementing the stabilizing impact of the release of SPR on oil markets. For the same reason that it is useful to release additional petroleum supply into the market, it is also useful to shift domestic demand for petroleum products to more resource efficient alternatives.
