The truth about gas prices and oil production

In a moment of national unity against Russia’s attack on Ukraine, Democrats and Republicans are fighting passionately against soaring gas prices. Prices have already risen sharply since Biden became president – and he has acknowledged that his ban on Russian oil and gas exports could send them even higher.

Determining the root causes of inflation is subject to interpretation. Biden was quick to claim that was primarily the result of Russian President Vladimir Putin’s invasion of Ukraine, calling the latest inflation report “Putin’s price hike.” But some economists, including former Treasury Secretary Lawrence Summers and former Obama Treasury official Steven Rattner, have also made a credible argument that the $1.9 trillion coronavirus relief package passed by Congress helped trigger the current price hike across the board.

A separate debate is taking place on U.S. oil production and whether Biden administration policies played a role. Proponents on all sides, as is often the case, distort the facts, obscuring the complicated truth about oil production, gas prices and the role of renewables. Here is a guide on this problem.

Gasoline prices soared overnight. How is it possible?

The war — and efforts by the United States and its allies to stem purchases of Russian energy products — have sent the price of crude oil skyrocketing. Many gas stations only have two or three days of product in stock, and therefore price gasoline at the price it will cost to fill those tanks underground. This is an economic term known as “replacement cost”.

Every $10 increase in the price of crude oil adds about 24 cents to the cost of every gallon of gasoline and is quickly reflected in what you pay at the pump. This is not an example of price gouging. Still, gasoline prices are approaching — or could exceed — previous inflation-adjusted highs reached in 1918, 1981 and 2008.

Is the United States increasing its oil production or is it slowing it down?

The oil industry in the United States is run by private companies, not by the US government. It is also a cyclical business and oil prices have been low for some time and drilling is also low.

During the early stages of the coronavirus pandemic, when oil prices fell sharply, to around $23 a barrel, production plummeted as it was no longer as profitable. Now, with crude oil above $100 a barrel, there is more incentive to increase US production, even if it is still below the peak reached in 2020 before the pandemic hit.

In February 2020, US oil production reached 13.1 million barrels per day. Two years later, in February of this year, production was around 11% lower, or 11.6 million barrels per day.

Gasoline prices have risen steadily in the United States since April 2020, when the weekly price fell to $1.77 per gallon. It had already risen to $2.38 a gallon when Biden took office.

There is little evidence that Biden’s policies have had a direct impact on oil production. However, the US government can have the effect of shaping market perceptions which, at the margin, can affect prices.

As soon as he took office, Biden terminated the Keystone XL pipeline and signaled hostility to the fossil fuel industry with a major push for clean energy, including a pledge to reduce greenhouse gas emissions. greenhouse effect in the United States to at least 50% of 2005 levels by 2030.

Keystone XL would still not have been built by now, even if Biden had allowed it to go ahead – and even if he was in place, the price impact would be measured in pennies. Moreover, even without Keystone XL, imports from Canada have increased by approximately 50% over the past decade. But Biden’s actions early in his tenure, some experts say, sent “yellow light” signals to the market that the cost of oil drilling could rise and so caution was warranted.

The reverse may also be true. The Trump administration’s opposite “green light” approach – few regulations and no restrictions – has led some oil drillers to invest in unprofitable wells.

Biden also issued an executive order that suspended new oil and gas leases on government land, but within months a federal judge blocked it. After his freshman year, Biden had edged out Donald Trump in issuing drilling permits on public lands.

Just because a company has received a drilling permit does not mean that it has no obligation to do so. An important measurement is what is called a DUC a drilled but uncompleted oil or gas well. In other words, the production equipment has not been installed and therefore the well cannot yet produce hydrocarbons. The number of UCRs peaked at 6,340 in June 2020 and by February had dropped to 4,372, according to the EIA.

Can the United States really change oil prices by encouraging more drilling and allowing pipelines?

Not really. The United States in 2020 was the world’s largest oil producer and also the largest consumer – but it is only one player in a global oil market. (“Oilincludes crude oil, all other petroleum liquids, and biofuels.) Much of what happens in the market is beyond government control.

In 2021, the United States slipped to third place in oil production, behind Russia and Saudi Arabia. This is mainly because the big shale companies had pledged to Wall Street to continue to limit production and return more cash to shareholders – “an effort to win back investors who have fled the industry after years poor returns,” according to the Wall Street Journal. Scott Sheffield, managing director of Pioneer Natural Resources, told investors in February, “$100 oil, $150 oil, we’re not going to change our growth rate.”

US oil producers increased their production by more than 50% between 2016 and 2020, so it is certainly possible that the United States will again become the largest oil producer in the world. But investors are demanding that companies not overspend on new investments this time around.

If the United States is one of the main producers of oil, why do we still have to import oil?

The United States actually exports more oil than it imports. In 2021, according to the Energy Information Administration, the United States imported about 8.47 million barrels of oil per day, compared to exports of 8.63 million barrels per day. Crude represents approximately 35% of these exports. One of the main reasons is that foreign countries use more diesel than the United States and the United States uses more gasoline.

The shale oil boom in the United States has certainly reduced reliance on foreign oil imports, but not all crude oils are the same. Gulf Coast refiners, for example, have been optimized for Venezuelan crude, which has a high sulfur content. When the Trump administration imposed sanctions on Venezuelan oil, refiners started importing Russian petroleum products because they are roughly similar. Now that Russia has been sanctioned, refiners will likely have to adapt to a cleaner type of crude.

In other words, the United States cannot be an island in the global energy market. But it is safer as a net oil exporter.

Would funding more renewable energy help make the United States energy independent?

Not in the short term. Renewable energies replace natural gas or coal. You still need oil to drive cars and trucks and fly planes. At this point, the EV market is not growing fast enough to make much of a difference in the current standoff with Russia. But long-term investments over time could start to make a difference.

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