This Oil Deal Sounds Huge. Until You Do the Math | Diving In

Justin Wolfers (0:00)

Last week's G7 announcement that the president's been trumpeting so proudly, it's tiny, to the point of being largely irrelevant. 100 million barrels sounds like a solution right up until you ask, compared to what?

The G7 just announced that it'll release 100 million barrels of oil and fuel products from its emergency stockpiles. And Donald Trump says he won a major concession from Europe. This is supposed to take down diesel prices and help the American consumer. Hey, here's what actually happened. The G7, that's seven of the world's biggest economies, they agreed to do something they'd already agreed to do, and that's in return for the United States agreeing not to do something it should never have contemplated doing. It's only slightly too cynical to say that the main thing the G7 achieved was that political leaders agreed that political leaders should be seen to solve the oil crisis that political leaders caused. Actually doing anything new? Probably a step too far. Okay, that's a big claim. So we're going to dig in to this announcement and the agreement and into the economics of the oil market, trying to make sense of it all. Hey, I'm Justin Wolfers. I'm an economics professor, and this is Platypus Economics. I'm here to help you understand what these big economic announcements really mean for you and your life. Okay, let's begin. We're going to explore four big claims, and let's do it together. The first claim, this is mine. This is an old agreement. The main news here is that the G7 now says that countries should finally deliver on the agreement they made months ago. Look, the headline writes itself, world leaders agree to do the thing they previously agreed to do.

As far as I can tell, there is no new 100 million barrel commitment. What's new is a deadline, and perhaps more important, a headline. Second, we're going to take that 100 million barrel number seriously for a moment. Though I'm not sure we should. But even if we pretend there's 100 million new barrels of oil coming to market, it won't get anywhere near solving our problems. Third, the G7 announced a commitment without commitments. No named country promises, no named diesel quantities, no public delivery schedule.

Let's make sense of that. And fourth, we can ask the folks with actual money on the line, the people trading diesel futures all day, every day. Their verdict, it turns out, follows mine. They, like me, look at this whole darn thing. And they reckon there's no there, there. Okay, let's start with a bit of recent history to understand where we're at. On February 28th, the United States invaded Iran. Shipping through the Strait of Hormuz quickly became hazardous, and the world energy market was thrown into chaos, as you've probably noticed if you've tried to fill your tank. Enter the International Energy Agency. What is it? The IEA is basically a club of the world's advanced economies, and it's where they get together to coordinate a response when the world gets hit by an energy shock. So, back in March, these countries got together and they agreed to make 400 million barrels of oil available from their collective emergency stockpiles. A few days later, the IEA published the country by country plans and actually added up to 426 million barrels. By one view, that program that was announced in March was large. It was large relative to the agency's history. It was the biggest ever emergency release the IEA has ever committed to. Whether it was large relative to the problems that the war has caused, that's something we're going to get into in just a little bit. Okay. This is where our president Donald Trump enters the story. Diesel prices kept rising. That hurt farmers in harvest season. It hurts truckers. It hurts construction firms. Anyone who runs a big diesel engine. Oh, and by the way, there's midterm elections coming up. So Trump hatched a plan. Or he sort of did. He said he was going to ban exports of diesel from the United States. By the way, this comes after he already banned diesel exports from countries we hated, like Russia and Iran. So yeah, America gets the same treatment as our enemies. I'll leave you to make sense of that. Now, Trump raised this idea a couple of weeks ago. A week later, he said he was still thinking about it. And then a few days ago, he said, he was never really serious about it at all. So who really knows what he was thinking or if this was a plan? I just want to be clear that this export plan was a bad idea. It would have led American refineries to cut back on producing both diesel and gasoline. That would have made the global fuel shortage worse. We've talked about this before on Platypus Economics. Now, fast forward to last week, diesel prices are still painfully high. The war is still disrupting global oil flows. And so G7 leaders met by video to discuss the energy crisis into President Trump, and what he describes as his deal. He says, Europe should release diesel and oil from its storage and in return America will drop its export ban.