High gas prices are an indictment of recent energy policy

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Biden and years of anti-energy policies have left the United States with few options to mitigate gas prices

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With the national average gasoline price rising above $5 a gallon, there is little reason to be optimistic that gasoline prices will drop soon.

President Joe Biden, despite his recent remarks, has no good solution at his disposal to temper rising gas prices.

The culprits are many, some economic and others political. Longstanding Democratic policies against the energy industry have crippled US producers, while Western moves to sanction Russia have created an acute supply crisis. And unless the Biden administration reverses its entire energy policy, the US government has little leverage in the current framework to mitigate gas prices.

In March, Washington decided to release 1 million barrels of oil per day from the US Strategic Petroleum Reserve for the next six months. But the tactic didn’t help, with gasoline prices falling from $4 a gallon in March to $5 a gallon in June.

This led to the Biden administration waving the proverbial “white flag.” Transportation Secretary Pete Buttigieg as well as Sen. Elizabeth Warren (D-Mass.) instead blamed energy companies for “price gouging” from consumers at the pump.

The reason for high gasoline prices is supply and demand. But several constraints were self-created. Let’s dive into it.

According to the American Petroleum Institute, 50-60% of the price of gasoline comes from the price of crude oil. This is the main driver of gasoline prices.

Oil prices are set by the market. Anyone can see what spot oil is trading at on any given day. If we ignore long-term contracts locking in a price in advance, oil producers typically sell their oil at or near spot price. Oil producers also have a cost base, so the higher the price of oil, the more money they make. They can also lose money if the market price of oil drops so low that they cannot cover their costs.

The argument that oil producers are “price gouging” is too simplistic. They can theoretically sell their oil below market price, but that’s a misguided move that wouldn’t hurt unless the entire industry – all the oil producers – can be persuaded to make same.

And experts warn that oil prices are likely to rise, not fall. JPMorgan CEO Jamie Dimon said oil prices could hit $175 a barrel later this year. The CEO of commodity trading firm Trafigura, Jeremy Weir, told a conference that “we have a critical situation” regarding the price of oil.

So what can be done to lower the price of oil? Economics 101 suggests that there are two ways to reduce the price of a product. Either the supply must increase or the demand must decrease.

To increase supply, the United States released barrels of oil from the country’s strategic reserves. It has an impact, but not enough to move the market. It also doesn’t solve the underlying problem; at some point, the strategic reserve will run out.

OPEC+, which includes Russia, recently agreed to increase crude oil production in July and August by 648,000 barrels per day, 50% more than previously expected.

It should also bring more oil to market, and the price of oil temporarily fell when the decision was announced. But that won’t be enough to offset the Russian oil ban. Russia is the world’s third largest oil producer behind the United States and Saudi Arabia, accounting for around 10% of global production.

The recent invasion of Ukraine has led much of the Western world to sanction Russian oil. In 2021, 3% of all US crude oil imports and 20% of petroleum products (including fuel oil and crude oil) came from Russia, according to EIA statistics. The OPEC+ supply increase plans to be implemented are still not enough to correct the market imbalance linked to the elimination of Russian oil.

What about domestic producers? The Biden administration, the United Nations, and the anti-fossil fuel bias of banks and lenders over the past few years have limited the oil industry’s access to capital and financing.

The XL pipeline has been cancelled. The UN Net-Zero Banking Alliance has effectively forced global banks to restrict lending to the oil and gas industry. Swiss bank UBS cut lending to the traditional energy sector by 73% between 2016 and 2020, according to analysis by CNBC. And last year Dutch lender ING Group pledged to stop lending to oil and gas companies altogether. These efforts have collectively, over time, made it difficult to increase oil production in the United States.

Lifting these long-standing “sanctions” on the domestic oil industry may finally solve the problem. However, the Biden administration and leftist biases within the banking and business establishment are unlikely to suddenly undo years of political change. Even in the unlikely scenario where such policies are suddenly reversed, it would still take months, if not years, to bring new production online.

The other solution is to decrease demand.

Various factors have increased the demand recently. Employers have forced workers back into the office, fueling demand for gas used in commuting. In many major metropolitan areas, more commuters have avoided public transportation due to COVID and public safety concerns, which has increased the number of cars on the roads and the demand for gasoline. The return of travel, particularly jet travel, has increased demand for jet fuel, which takes up oil refinery capacity that could otherwise be used to refine gasoline for cars.

Besides the price of crude oil, the second largest component of the price of gasoline (at 15-20%) is the cost of refining. Refining costs are not moving much, but the cost of some refining inputs have also increased such as wages (labour) and the cost of ethanol (a corn-based additive whose price has also increased). increase).

Then at 10-20% is the cost of distribution like pipelines and transportation. Transportation costs have also increased due to rising wages and diesel prices (ironically, gas is needed to transport gas to local stations).

And finally, also at 10-20%, there are federal, state and local taxes. Taxes vary by state and municipality. California has the highest gasoline tax while Alaska has the lowest. Some states (like New York) have implemented gas tax holidays to temporarily ease prices at the pump.

What would really stem the demand for oil? An economic recession. A slowdown will force businesses to reduce investment and spending, consumers to reduce travel and shopping, and overall economic activity to slow.

So what would the US government do to fight high gas prices, choosing to undo years of anti-energy industry policy to increase supply, or waiting for a recession to drive down demand?

It’s pretty clear that the choice was the latter.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

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Fan Yu is an expert in finance and economics and has contributed analysis on the Chinese economy since 2015.

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