President Joe Biden can’t set the price of gasoline. Neither can the U.S. companies that sell it.
Crude oil — the unrefined petroleum that’s used to make gasoline — is traded globally, causing regional disruptions to ripple through distant markets. That’s why U.S. gas prices started ticking up as soon as a major oil producer threatened war in Eastern Europe. And why the violence that followed catapulted prices to record highs.
“At the end of the day, the only thing that matters, when it comes to changes in prices at the pump, is the price of crude oil,” said Mark Finley, a fellow at Rice University’s Baker Institute for Public Policy.
The price of oil had already been on the rise for months before the world learned of Russia’s plans. When there’s too much oil available, prices fall; when there’s too little, prices increase. After tanking along with demand early in the pandemic, international production didn’t recover even close to as quickly as demand. As the imbalance dragged on, prices, and tensions, kept climbing.
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“It was like a bad recipe, just getting worse,” said Trey Cowan, an oil and gas analyst at the Institute for Energy Economics and Financial Analysis. “And then you put the Russian invasion of Ukraine on top of it.”
How did we get here?
On average, the price of regular gasoline in the U.S. has swelled by 85 cents over the last month, passing $4 per gallon nationally on Monday and in Wyoming on Friday.
Mounting oil prices are largely an effect of the added risk priced into contracts, not actual impacts to supply. But last week, news that the U.S. would stop accepting Russian crude oil, which accounts for about 8% of domestic imports, briefly pushed global and U.S. benchmark prices per barrel of crude well above $120. The prices settled Friday to about $110 per barrel — still the highest they’ve been in a decade.
Gasoline’s rapid price spike quickly gave rise in the U.S. to partisan finger-pointing.
“The idea that America should be producing more energy doesn’t appear to have crossed the president’s mind,” Sen. John Barrasso said Thursday. “Rising energy costs are punishing American families, especially those on low and fixed incomes. President Biden wants us to believe that his policies are not to blame.”
The oil industry says prices will go down if Biden relaxes his climate policies and expedites new development. Many of the industry’s opponents say oil companies are intentionally suppressing production, taking advantage of the high prices and then trying to blame it on Biden.
Economists, meanwhile, say both sides are mostly pointing the wrong way. The constitutional checks on presidential power and the antitrust laws that prohibit collusion among companies limit the ability of the U.S. to shape oil prices at all.
As Rob Godby, an economics professor at the University of Wyoming, put it, U.S. oil companies have a lot of impact in the market, but don’t have a lot of control over the market. While U.S. production does affect global prices, those prices depend much more on the decisions made by international oil cartel OPEC Plus, which counts Russia and Saudi Arabia — the only two countries that rival U.S. oil output — among its members.
Oil prices crashed into the negatives early in the pandemic because people stopped driving — and because of a short-lived price war between Russia and Saudi Arabia. OPEC Plus ended up significantly curtailing total oil production to stabilize prices.
When demand came roaring back, OPEC Plus decided not to ramp all the way back up. So oil prices went up instead.
Unlike the leaders of Russia and Saudi Arabia, U.S. presidents can try to negotiate with other oil-producing countries — a strategy that’s had mixed results — but can’t order U.S. companies to boost production in order to reduce prices. Those decisions are made individually.
Biden has twice released the equivalent of a couple days’ domestic oil consumption from the strategic petroleum reserve to temporarily ease costs. Keeping them down for longer will require sustained new production entering the market. That growth hasn’t happened yet.
What’s slowing production?
Since oil prices recovered from their sojourn below zero, U.S. companies have drilled just enough new wells to offset the natural decline of existing ones. They held production steady in the face of a monthslong price increase that, in a pre-pandemic world, almost certainly would’ve sent many companies scrambling to accelerate development.
“The first thing to think about markets is they reflect supply and demand,” said Frank Macchiarola, senior vice president of politics, economics and regulatory affairs for the American Petroleum Institute, the largest U.S. oil and gas trade group. “They also are forward-looking.”
Even as gasoline prices reach record levels (not counting inflation), companies are hesitant to invest in new wells. Pretty much everyone — Biden, industry, economists, environmental groups — agrees that a number of factors are holding back new drilling, even if they don’t align on the specifics.
COVID-19, and the threat of new lockdowns, is still a worry. So are the economy-wide supply chain and labor shortages, which can slow development, raise costs and make workers harder to find.
That risk premium embedded in today’s sky-high prices also gives companies pause: Will these prices last long enough for investments in new wells to pay off? Investors in many publicly traded companies want to see profit, not growth. Small companies could be betting their existence on expansion.
Large, privately owned companies, typically the earliest movers on new market opportunities, are just now beginning to speed up drilling.
And then there’s climate change. Consumers are getting more concerned. Renewables are getting cheaper. Some local and state governments are restricting development of new fossil fuel infrastructure, while Biden brought a suite of lofty climate goals with him to the presidency — though his policies have been less stringent than environmental groups had hoped.
Biden canceled the Keystone XL oil sands pipeline during his first week in office. His administration has yet to hold a federal onshore oil and gas lease sale, and appears to be considering raising the royalty rate on new leases, from 12.5% to 18.75%, when it does.
The Biden administration also approved one-third more drilling permits in its first year than the Trump administration, including 843 permits in Wyoming, according to an analysis by the Center for Biological Diversity.
Environmental groups hope the heightened focus on energy independence will prompt Biden to expedite the transition to clean energy, in effect reducing demand for oil, rather than locking in a supply increase for years to come.
“What Biden can and must do is speed renewable energy development and electric vehicle adoption on a wartime footing, and use his executive power to otherwise accelerate all the good things that are going to get America off oil and actually protect people — not only from the price spikes and the fact that that fossil fuel revenues are fueling Russia’s invasion in the Ukraine, but also from the climate emergency,” said Kassie Siegel, director of the Center for Biological Diversity’s Climate Law Institute.
Members of the oil industry have called on the administration to reauthorize Keystone, immediately resume leasing, commit to keeping the current royalty rate and expedite permitting for new fossil fuel infrastructure. But they’ve backed off claims promulgated by many Republican lawmakers that Biden’s policies have stonewalled new drilling.
“I think public policies advanced by the new administration have been a factor,” Macchiarola said. “I don’t think they’re by any means the primary factor.”
Where are we headed?
Some analysts, including Cowan, from the Institute for Energy Economics and Financial Analysis, aren’t convinced oil companies need Biden to make those policy concessions. He thinks the U.S. oil industry is trying to take advantage of the situation it’s been presented with.
“If I’m the oil industry,” Cowan said of its thinking, “if I can get policies made that help me push this transition out further, then I’m better off.”
In the long run, the cancellation of Keystone, delayed leasing and a modest increase in the royalty rate (if it happens) are expected to have marginal effects on oil companies. Not enough, though, to stop them from drilling new wells if oil prices stay as high as expected.
Oil “is a pretty big market, both in terms of volume traded and money involved, and with a really big market, little changes here and there kind of get lost in the noise,” said Chuck Mason, an economics professor at the University of Wyoming.
The U.S. Energy Information Administration forecasts an increase in crude oil production in 2022, followed by record-high production in 2023.
Most of Biden’s current energy policies don’t have a direct impact on nearer-term production. They have, however, already left some companies nervous about drilling in new wells on federal leases.
“They’re going to look at, you know, if we invest heavily into new production, on the eve of a time when people in this administration are saying that we should be shutting down all development on federal lands — that gives companies pause,” said Ryan McConnaughey, communications director for the Petroleum Association of Wyoming.
Economists are pretty sure the uncertainty about long-term prospects on federal lands won’t stop Wyoming’s high proportion of federal leases from keeping up with national trends. Industry is less confident.
Right now, it’s too early to tell.
Historically, when drilling first picked up in the U.S., it didn’t happen in Wyoming. It happened in places like Western Texas, where the companies are bigger, permitting can be quicker and new wells are often easier to access.
Wyoming’s rig count, an indicator of industry activity, went up by one this week. In Texas, the rig count jumped from 308 to 320 — that state’s biggest single-week increase since the pandemic began.