Both Republicans and Democrats Are Wrong on Gas Prices

Prices for gasoline hit a new high on June 13th, at $5 per gallon.

Then came a torrent of allegations from all sides. Democrats including President Joe Biden blamed the oil industry for extorting consumers to increase their profits. Republicans countered that the high prices were due to Biden’s mismanagement and energy policies that discourage domestic oil production.

The truth is that neither party has correctly framed the energy crisis. An intricate array of political, geopolitical and economic factors has converged to create the current national energy problem, which will not improve anytime soon.

Gasoline prices in the United States were $3.21 per gallon as of Summer 2021. One year later it soared to $5. How did this happen? To answer that question, it’s necessary to turn the clocks back to 2019, just before the COVID-19 pandemic.

Due to the U.S. shale boom, oil production in America increased by more than 50% from five million barrels per hour in 2008 to 12.3million barrels daily in 2019.

COVID-19 was then created. As the global economy entered lockdown, early 2020 saw oil demand plummet. Oil prices fell to an all-time low of $30 in April, a record. Private oil companies reduced costs and disposed of unprofitable assets, while OPEC oil producers cut their production. These assets include aging refineries across Europe and the U.S.

The global economy was re-established in 2021 by OPEC and U.S. private companies. However, new oil was introduced to the market slowly. They had good reasons to be wary: the price had collapsed twice in a decade, COVID still wasn’t totally gone, and future demand looked uncertain due to growing concerns over climate change. Instead of investing in additional capacity, corporations offered buybacks and dividends to shareholders.

Russia’s invasion of Ukraine in February 2022 threw a fragile global oil supply situation into utter chaos. The world’s second largest oil exporter, Russia, faced sanctions from the U.S., Canada, and the E.U. Over its aggressive behavior. Millions upon millions of barrels Russian crude oil went unclaimed without any buyer. The global oil price spiked up to $130 a barrel.

At the same time, the companies’ decision to shut down several oil refineries during the COVID slump left the U.S. with a deficit in refining capacity. While oil prices were high, the price of gasoline and diesel—in short supply for lack of operating refineries—was even higher.

Each side of the American political spectrum points fingers as gasoline prices rose to $5. Democrats were harshly critical of the private oil companies. They claim that high current prices are due to price gouging or corporate greed. Many have offered creative economic solutions to lessen the U.S. dependence on volatile international oil markets. These include windfall profit taxes, bans and restrictions on exports of oil and gasoline.

While attacks from Democrats rightly point out the huge profits oil companies have earned from the current spike in prices, such windfalls are a product of oil’s volatile market and stem from forces outside the companies’ control. Although some Democrat plans, like an export ban on refined products, might help to reduce crude oil prices (which are determined on a worldwide market), they will not be effective in lowering gasoline prices.

Republicans, on the other hand, have framed high prices as a result of Biden’s energy policies, which they contend have cut into US oil production. Biden canceled Keystone XL and new oil and natural gas leases on federal lands in his first year of office. The Keystone XL would have brought crude oil from Canada into the Gulf Coast. “Unshackling” the industry would allow the U.S. to achieve “energy independence,” and avoid price shocks, they contend.

Republican criticisms against Biden have no basis. Although the President took several steps to reduce the growth of oil production in the US on federal land, these measures did not have an impact on the oil output which will exceed the historic peak of 12.5m barrels per hour by 2023. For preventing further investment in new production, oil executives have blamed capital discipline, high prices, and a shortage of labor. The claim that the U.S. can be energy independent ignores the fact that oil prices are set by the global market. This is something that the U.S. cannot control unilaterally. It’s unlikely that the U.S. will be self-sufficient in oil, regardless of how much production it has.

President Biden’s response has been a mix of measures, from releasing oil from the Strategic Petroleum Reserve, to using federal power to encourage more investment in renewable energy to bring down demand for oil. On June 24, President Biden proposed suspending federal gasoline tax. The President Biden is scheduled to visit Saudi Arabia in July to urge Crown Prince Mohammed bin Salman, the Saudi King, to boost Saudi oil production and lower world oil prices.

The U.S. has limited ability to lower oil and gasoline prices, despite the rhetoric from the Republican Party. The U.S. can’t increase domestic oil production without significant constraints. And even if it produces more crude oil, its output will not be enough to lower oil prices. Similarly, President Biden’s gas tax holiday is unlikely to lower prices very much or for very long and may even contribute to the problem by encouraging more gasoline consumption at a time when supply and demand are extremely tight.

The President should not increase production or encourage greater demand. Instead, he could make positive changes to reduce demand and encourage conservation. Efforts to improve energy efficiency and support public transport, as well as campaigns that promote conservation of energy, could have a significant impact. Other policy measures, such as suspending the Jones Act—a century-old condition that restricts domestic energy from traveling by sea to U.S. ports—or taking control of private refining capacity in order to boost gasoline output for the domestic market would help alleviate high prices without adding to demand.

This shock has been years in the making. It is a result of a number of political, economic and geopolitical forces, many of which are beyond U.S. control. Unless demand for gasoline falls, prices are likely to remain high throughout the summer—and beyond.

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