On June 13, the price of gasoline reached a historic high of $5 per gallon.
There followed an avalanche of accusations across the political spectrum. Democrats, including President Joe Biden, blamed oil companies for gouging consumers in order to boost their own profits. Republicans countered that the high prices were due to Biden’s mismanagement and energy policies that discourage domestic oil production.
In truth, neither side has accurately framed the current energy crisis. A complex array of economic, political, and geopolitical factors have converged to cause the national energy dilemma, which is unlikely to improve in the near future.
In Summer 2021, the price of gasoline nationwide was $3. A year later, it spiked to $5. What happened? To answer that question, it’s necessary to turn the clocks back to 2019, just before the COVID-19 pandemic.
Then came COVID-19. In early 2020, demand for oil collapsed as the global economy went into lockdown. The price of oil fell to a historic low of -$30 in April. While oil producers in OPEC cut production, private oil companies cut costs and shed unprofitable assets. Some of those assets included aging refineries in the U.S. and Europe.
As the global economy came back online in 2021, OPEC and private U.S. companies brought new oil onto the market very 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. Companies neglected investing in more capacity and instead offered dividends and buybacks 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 aggression. Millions of barrels of Russian crude suddenly went without a buyer. Global oil prices spiked to $130 per 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.
As gas prices spiked to $5, both sides of the American political spectrum point fingers. Democrats have been highly critical of private oil companies, arguing that the current high prices are the result of price gouging and corporate greed. Some have suggested creative economic policies to reduce U.S. exposure to the volatile global oil market, including windfall profit taxes and bans on oil and gasoline exports.
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. Some Democrat proposals such as an export ban on refined products would do little to mitigate crude oil prices, which are set on a global market, and would be counterproductive to lowering the price of refined goods like gasoline, since they would discourage further investment in domestic infrastructure.
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. In his first year in office, Biden suspended new oil and gas leases on federal lands and canceled the Keystone XL pipeline, which would have carried crude oil from Canada to refineries in the Gulf Coast. “Unshackling” the industry would allow the U.S. to achieve “energy independence,” and avoid price shocks, they contend.
Republican attacks on Biden are unwarranted. While it is true the President has undertaken several measures to limit the expansion of domestic oil production on federal land, such measures have not had an appreciable impact on oil output, which is set to exceed its historic high of 12.5m barrels per day in 2023. Oil executives have cited capital discipline, high costs, and scarce labor for holding back additional investment in new production. Claims that the U.S. could be energy independence obscure the fact that the price of oil is set by a global market, one that the U.S. cannot influence unilaterally. It is doubtful the U.S. could become self-sufficient in oil and gas, no matter how much it produces.
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, the administration proposed suspending the federal gasoline tax. In July, President Biden will visit Saudi Arabia, where he is expected to push Crown Prince Mohammed bin Salman to increase Saudi oil production in order to bring down world oil prices.
Republican rhetoric aside, there is little the U.S. can do to bring down oil or gasoline prices in the short term. There are material constraints to boosting domestic oil production, and even with more output the U.S. cannot lower crude oil prices on its own. 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.
Rather than boosting production or encouraging greater demand, the President could take positive steps to rein in demand and encourage conservation, short of triggering a recession. Improving energy efficiency, subsidizing public transportation, campaigns to promote energy conservation, or other fairly simple measures could all have an appreciable 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.
The current shock was years in the making and stems from a variety of economic, political, and geopolitical factors, most of which lie outside U.S. control. Unless demand for gasoline falls, prices are likely to remain high throughout the summer—and beyond.
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