Noah Berger/AP Photo
A driver fills up at a Shell station in San Francisco where gas was $5.85 per gallon on November 22, 2021.
President Biden recently released 50 million barrels of oil from America’s Strategic Petroleum Reserve. While this was the largest use of the reserve in history, it did not have a discernible effect on prices at the pump. The reason is simple: 50 million barrels fails to meet even three days of American oil demand, and all of the released oil was sour crude that requires expensive refining. Even Biden understood the action to be largely symbolic. “I don’t see anything that’s going to happen [before 2022] that’s going to significantly reduce gas prices,” he told CNN’s Anderson Cooper.
The Biden administration has unsuccessfully pursued several tracks to boost American oil production and lower gas prices. Despite his campaign promise to ban new oil and gas drilling on public lands, Biden has approved over 3,000 new permits. He is on pace to give more new drilling permits in a single year than any president since George W. Bush. Additionally, using the Federal Reserve’s Main Street Lending Program, Biden has continued to provide oil companies with massive financing through low-interest loans and bond buyback arrangements.
Still, American oil production has continued to lag behind pre-pandemic levels, leading Biden to suggest that American oil giants ExxonMobil and Chevron might be engaging in possible “illegal conduct” to take advantage of high prices. He has urged Federal Trade Commission Chair Lina Khan to investigate why oil companies are reaping massive profits while consumers pay higher prices for gas.
Central to the president’s suspicion is the divergence between the price of unfinished gasoline and the price at the pump. While the price of unfinished gasoline was down 5 percent last month, gas prices rose 3 percent. Bharat Ramamurti, deputy director of the National Economic Council, has estimated that gas prices would be 25 cents lower if the difference between refined gas and gas pump prices corresponded to ahistorical pre-pandemic averages.
In part, this price differential is driven by the common tendency in gas markets for wholesale prices to fall faster than retail prices. Corporate decision-making can produce this result, but so can consumers. Since many drivers are not typically aware of the going market price for gas, they tend to stop at the first available gas station, regardless of price, inadvertently driving down competition between gas stations.
As supply chain issues in the United States clear up, crude prices continue to rapidly fall, and electric vehicles and alternative energy sources gain greater public acceptance, the harder it will be for American oil companies to justify high prices.
But both the oil industry and its critics recognize that insufficient supply is the biggest factor driving up prices. Daily crude oil production is still more than a million barrels behind its pre-pandemic peak and is growing slowly. The oil industry insists that it is doing everything in its power to resume production. In a statement, Frank Macchiarola, a senior vice president at the American Petroleum Institute, the oil and gas industry’s trade organization, claimed the “fundamental market shift … and the ill-advised government decisions” produced the low production numbers.
Global oil demand fell precipitously during the first year of the pandemic, and oil firms suffered huge losses as prices collapsed; the industry cites fears of similar negative demand shocks as they abandon new extraction projects. API also cites a number of new regulations that affect future oil projects. These include limits on methane emissions, Interior Department oversight of new federal land leasing decisions, and a deferment on leasing decisions in the West. There is also lingering acrimony over Biden’s canceling of the Keystone XL pipeline, an industry pet project that remained only 8 percent complete after years of planning.
Oil executives claim that they are hamstrung by this federal overreach. But most of the federal lands leased by oil and gas interests are held solely for speculative purposes and sit untapped. The Center for American Progress has estimated that oil companies “could continue to begin new drilling operations on unused leases at the current rate for at least the next 10 years without access to any new leases.” Currently, the oil industry has drilling permits for 26 million acres of federal lands and tons of extraction and refining equipment.
As their costs fall, oil companies are not putting those assets to work. But lower production does generate larger profits. Chevron and ExxonMobil posted record-breaking third-quarter numbers this year: $6.1 billion and $6.8 billion, respectively. Instead of reinvesting those profits into production, the companies opted to repurchase their own stock and pay lucrative dividends to shareholders.
While American auto manufacturers have embraced the clean-energy transition, oil industry executives are using their resources to launch an offensive against those energy provisions in Biden’s Build Back Better plan, spending millions lobbying to shore up a climate change–threatened industry to protect their investments in oil extraction, refining, and distribution.
The U.S. Energy Information Administration predicts that gasoline prices could continue to fall. New COVID lockdowns in Europe and OPEC’s higher production targets could also send gas prices tumbling. And as supply chain issues in the United States clear up, crude prices continue to rapidly fall, and electric vehicles and alternative energy sources gain greater public acceptance, the harder it will be for American oil companies to justify high prices. Ultimately, an accelerated energy transition means American consumers will be freed from price volatility and the whims of a declining industry.
