On June 13, gasoline prices hit an all-time high of $5 per gallon.
What followed was an avalanche of accusations across the political spectrum. Democrats, including President Joe Biden, have accused oil companies of defrauding 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 precisely defined the current energy crisis. A complex array of economic, political and geopolitical factors have converged to cause the national energy dilemma, which is not expected to improve in the near future.
In the summer of 2021, the nationwide gas price was $3. A year later, it jumped to $5. What happened? To answer this question, you have to go back in time to 2019, just before the COVID-19 pandemic.
The world was awash in oil, thanks to the shale boom in the United States which had doubled domestic production from 5 million barrels per day in 2008 to 12.3 million barrels per day in 2019.
Then came COVID-19. At the start of 2020, demand for oil collapsed as the global economy stalled. The price of oil fell to an all-time low of -$30 in April. While OPEC oil producers cut production, private oil companies cut costs and dumped unprofitable assets. Some of these assets included aging refineries in the United States and Europe.
As the global economy came back online in 2021, OPEC and private US companies very slowly introduced new oil to the market. They had good reason to be wary: the price had crashed twice in a decade, COVID still hadn’t fully subsided, and future demand looked uncertain due to growing worries about climate change. The companies neglected to invest in more capacity and instead offered dividends and buyouts to shareholders.
Russia’s invasion of Ukraine in February 2022 threw the fragile global oil supply situation into total chaos. The world’s second-largest oil exporter, Russia, has faced sanctions from the United States, Canada and the EU for its aggression. Millions of barrels of Russian crude suddenly found themselves without a buyer. World oil prices soared to $130 a barrel.
At the same time, the companies’ decision to close several oil refineries during the COVID crisis has left the United States with a refining capacity shortfall. While oil prices were high, the price of gasoline and diesel – in short supply due to a lack of working refineries – was even higher.
As gas prices soared to $5, both sides of the US political spectrum are pointing fingers. Democrats have been highly critical of private oil companies, arguing that the current high prices are the result of rising prices and corporate greed. Some have suggested creative economic policies to reduce US exposure to global oil market volatility, including windfall taxes and oil and gasoline export bans.
While the Democrats’ attacks rightly point to the huge profits that oil companies have reaped from the current price spike, these windfalls are the product of oil market volatility and stem from forces beyond the corporations. Some Democratic proposals, such as an export ban on refined products, would do little to mitigate crude oil prices, which are set in a global market, and would be counterproductive to lowering the price of refined products. such as petrol, as they would discourage further investment in the internal market. Infrastructure.
Republicans, on the other hand, have framed high prices due to Biden’s energy policies, which they say have reduced oil production in the United States. 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 on the Gulf Coast. “Unleashing” the industry would allow the United States to achieve “energy independence” and avoid price shocks, they argue.
Republican attacks on Biden are unwarranted. While it is true that the President has taken several measures to limit the expansion of domestic oil production on federal lands, these measures have not had an appreciable impact on oil production, which is expected to exceed its peak. 12.5 million barrels per day in 2023. Oil executives cited capital discipline, high costs and labor scarcity to curb additional investment in new production. Claims that the United States could be energy independent obscure the fact that the price of oil is set by a global market, a market that the United States cannot influence unilaterally. It is unlikely that the United States can become self-sufficient in oil and gas, no matter how much it produces.
President Biden‘s response has been a combination of measures, from releasing oil from the Strategic Petroleum Reserve to using federal energy to encourage more renewable energy investment to reduce oil demand. . On June 24, the administration proposed suspending the federal gas 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 to bring down global oil prices.
Republican rhetoric aside, there is little the United States can do to lower oil or gasoline prices in the short term. There are material constraints to increasing domestic oil production, and even with increased production, the United States cannot lower crude oil prices on its own. Similarly, President Biden’s gas tax exemption is unlikely to bring prices down much or for very long and may even contribute to the problem by encouraging greater gas consumption at a time when the he supply and demand are extremely tight.
Rather than boosting production or encouraging increased demand, the president could take positive steps to curb demand and encourage conservation, without triggering a recession. Improving energy efficiency, subsidizing public transport, campaigns to promote energy conservation or other fairly simple measures could all have a significant impact. Other political measures, such as suspending the Jones Act – a century-old condition that prevents domestic energy from traveling by sea to US ports – or taking control of private refining capacity in order to increase the production of Gasoline for the domestic market would help mitigate high prices without increasing demand.
The current shock has lasted for years and stems from various economic, political and geopolitical factors, most of which are beyond the control of the United States. Unless gasoline demand drops, prices are expected to remain high through the summer and beyond.
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