Oil is the blood of a modern economy. Without oil, a strange geological phenomena in itself, industrial society may never have reached the heights of human progress seen today. Being intrinsic to everyday life, oil and petroleum products are always coupled with controversy — environmental impacts, overdependence and most currently, gas prices.
As is well known, gas prices have been surging. There are generally three common happenings to explain the current price movement: Government policy, the conflict in Ukraine and price gouging, which will all be examined.
U.S. President Joe Biden stated during a press conference that “it’s simply not true that my administration or policies are holding back domestic energy production. That’s simply not true.” It turns out Biden is correct in claiming that his policy is not significantly impacting domestic energy.
The Keystone XL pipeline cancellation is often a primary criticism of Biden’s energy policy. Even if the pipeline were to be completed by now, it would have negligible effects in oil security and pricing. There is merit in stating that Biden’s hostility towards oil infrastructure may signal higher risks to producers, but it is difficult to quantify the significance of Biden’s signaling.
Equally merited, former President Donald Trump’s positive signaling could have promoted over drilling and unfruitful overinvestments in oil production. It is worth noting as well that the Biden administration has outpaced Trump in terms of drilling permits on public land, showing he may not be as hostile to gas as perceived. Ultimately, turning to public policy to explain gas price hikes has no convincing arguments.
The U.S. does not rely heavily on Russian oil, which only makes less than 2% of imports. While a majority of imports are from Canada, the conflict in Ukraine still does impact domestic markets. Oil, being an internationally traded commodity, will globally influence prices. Europe relies heavily on Russian energy, which will lead to rippling effects on prices abroad.
The biggest issue with gas, however, is consumer dependency. Gas is very inelastic, which means when the price of gas rises you are not as likely to change how you buy gas. “I never check gas prices” is a common expression that reflects this behavior.
Research from the National Bureau of Economic Research indicates that consumers are generally making up for the more expensive gas by paying more out of their pocket. As well, in upward price shifts, prices often move upwards faster than recovering to lower prices. Ultimately, consumers are hurting a considerable amount when prices soar.
Crude oil prices peaked shortly after the conflict in Ukraine began, but have generally been falling since. President Biden tweeted claiming that oil and gas companies are padding their pockets as the price of crude oil has fallen while gas prices have remained unchanged. At the time the president tweeted, crude oil had fallen from $120 to $95 per barrel, but has since risen to $110 per barrel. Though Biden’s tweet is empirically correct, it does not tell the full story as he only demonstrates the difference between crude oil and retail gas.
According to a Twitter thread by an MIT professor, wholesale gasoline has in fact followed crude oil trends, as opposed to retail gas. Wholesale gas is the gas sold from refineries by oil companies to retail gas brands for the reselling of gas at gasoline stations. These retail brands, as it turns out, are the ones driving up prices, not necessarily gas producers.
Biden’s tweet is not entirely accurate, as gas prices move more closely with Brent crude oil, an international benchmark for gas pricing, rather than the domestic benchmark cited by Biden.
Big Oil may be temporarily exempt from censure, as the blame begins to shift to gas retailers. Currently, oil companies seek to flatten production and stabilize the industry. With the uncertainty of oil production coming out of a recession, oil companies are desiring stability in order to ensure support from investors rather than to increase oil production, which would help to drive down prices.
This evokes the question: Why should oil production rely on the confidence of investors? As a critical commodity in daily life, oil has shown that market forces cannot be entirely reliable when American citizens depend heavily on gas. Oil refineries are not built often, and oil production is being held back as gas retailers enjoy the benefits of increased prices, while oil companies look for financial balance.
It is true in the post COVID-19 world, demand is outpacing production, with production still recovering. However, it is not convincing that a simple supply-demand argument fully justifies the current price movements.
This is all without mentioning the environmental impacts of gas consumption and the evident need for renewable energy and energy alternatives that underlie the entire gas-oil conversation. With each gas price hike, the ideas of the nationalization of gas and oil are reconsidered, as it is clear the gas and oil industry needs guidance and the public needs protection. Though public policy on gas and oil rarely sees support, an introspective citizen should investigate the benefits of government involvement in gas and oil.