MORGANTOWN — Gas and diesel prices are climbing daily. Along with the worry and frustration has come a lot of finger pointing
Conservatives point to White House energy policies, saying President Biden is choking off domestic supply as part of his push for electric vehicles and green power. Biden and his supporters call it “Putin’s price hike.”
According to three WVU economic experts, both elements of the blame game are playing a part. But they’re only a part; there’s a bigger picture.
“The global market for crude oil is big and complicated and multifaceted,” said John Deskins, director of WVU’s Bureau of Business and Economic Research. “Any world leader has limited ability to affect all those factors.”
Along the same line, Heather Stephens, WVU associate professor of resource economics and management, said, “Oil and gasoline is an international market. A lot of what happens to prices are not things we can control necessarily here. There is always going to be these external pressures.”
This report will look at the various factors: Biden, Putin, supply and demand, refinery capacity and the rise and fall of a West Virginia gas tax holiday.
Biden’s role
Biden opponents cite his own actions and statements to point blame at him.
When he took office regular gas was $2.38 a gallon. AAA put the national average at $4.99 on Friday.
He is quoted saying during his campaign, “No more drilling on federal lands. No more drilling, including offshore. No ability for the oil industry to continue to drill. Period.”
Conservative sources recount that he canceled the Keystone Pipeline, put a moratorium on federal oil and gas leasing, announced plans to take 30% of public lands out of production, revoked Alaskan oil leases, and froze 2,000 Wyoming leases granted 2015-20.
Biden said in a press conference last month that when “it comes to the gas prices, we’re going through an incredible transition that is taking place that, God willing, when it’s over, we’ll be stronger and the world will be stronger and less reliant on fossil fuels when this is over.”
A Senate GOP chart shows how gas prices steadily rose after Biden took office, correlating with Biden green policy moves.
Sens. Shelly Moore Capito and Joe Manchin are among those calling on Biden to amp up domestic production, both as a means to eventually bring prices back down and reassert U.S. energy security and independence.
Capito said Thursday in a discussion about fuel prices, “We’re not seeing any moves by this administration that are effectively lowering this or coping with it.” We need to start moving toward policies where we are creating our own energy independence.
Manchin said in a June 2 comment on OPEC+ planning to increase production, “While OPEC+’s decision to speed up the release of oil production it has been willfully holding back is a positive step, I firmly believe the United States should never have to depend on other nations to provide the energy we can produce ourselves. America is blessed with abundant natural resources, and it is past time for us to step up the energy production we, and our allies and friends across the free world, need and rely on.”
Putin’s price hike
That chart shows that the price rise turned from a steady climb to a sharp spike after Putin invaded Ukraine.
Alexander Kurov, Fred T. Tattersall Research Chair in Finance and a professor in the WVU John Chambers College of Business and Economics, commented on this in an email exchange.
“Russia’s war in Ukraine and the sanctions implemented by the U.S. and Europe are certainly a major factor in the high gasoline prices we see at the pump,” he said. “Crude oil prices increased by over 30%, from $90 per barrel before the beginning of the war to about $120 now, and prices of gasoline increased by an even larger percentage – over 40%.
“The U.S. banned imports of Russian oil in early March,” he continued. “The European Union announced a partial ban on imports of Russian oil. Russian oil companies can sell most of their output to other countries, including China and India.
“However, Russia exports most of its oil by tankers. The EU’s package of sanctions includes a ban on insuring Russian oil cargoes. This insurance ban will make it more difficult for the Russians to sell oil even at a discount to willing buyers. Besides, only some countries have oil refineries that can process Russian crudes. Overall, the sanctions will likely have a significant effect on oil supply.”
Supply and demand
AAA said this past week, “gasoline demand grew from 8.98 million barrels per day to 9.2 million as drivers continue to fuel up for the summer driving season, typically a time when gas demand increases. This dynamic between decreased supply and increased demand is contributing to rising prices at the pump. This coupled with increasing crude oil prices means that the price of gas will likely remain elevated for the near future.”
During the pandemic, fuel demand dropped because people stayed home, the WVU experts said. When the worst of it passed and people returned to work and activities, demand surged.
We saw general inflationary pressure caused by supply chain interruptions, Stephens said. “It is kind of complicated, but in some ways it’s not.” Decreased supply with increased demand pushes up prices.
Eventually, when prices get high enough, there will be a supply response, she said, and production will ramp up. Two years ago, March-April 2020, at the height of the pandemic, gasoline futures prices went negative. We saw something similar when the shale gas boom produced a glut and prices plummeted.
Now, she said, there will be hesitancy to ramp up production too quickly and have prices drop again. Oil and gas investors are also wary of doing that. From a business standpoint, they don’t want a repeat of spring 2020.
Kurov said, “Oil is a globally traded commodity. Some other oil exporters like Saudi Arabia have spare oil production capacity and could pump more oil to make up for the lost supply from Russia. On June 2, OPEC+ agreed to increase their oil production significantly in the rest of the summer. This decision did not reduce oil prices, perhaps because it was expected by the market. Joe Biden plans to travel to Saudi Arabia later this month and will probably try to convince the Saudis to pump more oil to stabilize global markets.”
Stephens said the OPEC+ action may in time help curb price increases, if not bring them back down. But another factor is China, which is still in lockdown. If China reopens, that could trigger a big demand spike there that will pressure the international market.
Deskins said with the advent of summer, demand should remain high, until fall arrives and demand again falls off as it typically does. But that’s several months away. And the war Ukraine offers continued uncertainty because Russian oil is affected and no one knows when the conflict will end.
“Overall we just face so much uncertainty in our economy right now, with gas prices and with other things too, like labor force shortages and supply chain contrasts. It’s a time of tremendous uncertainty,” reflected in a volatile stock market with skittish investors, for example.
Refinery capacity
Deskins and Capito both referred to the lack of refinery capacity playing a role in high prices.
Bloomberg did an extensive report on this issue. It said about 5% of the nation’s refining capacity – 1 million barrels per day – has shut down since the start of the pandemic. Globally, another 2.13 barrels closed down.
While profits for U.S. refiners are at record highs, Bloomberg said, they don’t plan to bring new plants online. “Meanwhile, the East Coast is on the brink of a diesel shortage that risks crippling already strained supply chains that have disrupted the flow of everything from grocery staples to construction supplies in the last two years.”
Bloomberg said during the pandemic, some companies closed their least profitable plants. Some were damaged by various disasters and were too expensive to fix. “Even resurrecting idled plants can be prohibitively costly at a time when construction and labor costs in the U.S. are booming.”
The green energy transition also discourages investment. So, by the end of 2023, as much as 1.69 million barrels of US capacity is targeted for closure compared to 2019 levels, Bloomberg said, citing energy consultants Turner, Mason & Co.
Kurov offered some insights on the refinery issue. According to the U.S. Energy Information Administration, the refinery capacity utilization in the U.S. was higher in February and March of 2022 than in February and March 2019, before the demand for fuel was hit by the COVID pandemic.
But U.S. production of crude oil is still below the level just before the pandemic, he said. “A possible reason for this is that many smaller producers, particularly those producing shale oil, have relatively high production costs. Due to low oil prices during the beginning of the pandemic, many of these smaller firms had to stop operations and some went bust. It takes time to resume oil production in such cases.”
Gas tax holiday
Several states have enacted gas tax holidays in response to high fuel prices. Last week, Gov. Jim Justice said a proposed West Virginia tax holiday was “dead on arrival” based on GOP opposition.
Stephens co-authored a piece on the pros and cons of gas tax holidays with Beia Spiller, director of Resources for the Future’s Transportation Program.
“Just getting rid of gas taxes is not going to really make a big difference in terms of people’s ability to afford higher gas prices,” she said, “and it has a lot of other unintended consequences that people don’t think about when they think about providing relief.”
People who have to commute a long way, who have less access to public transportation and are lower income are more affected by high gas prices, she said. But cutting the tax won’t make gas suddenly affordable and won’t help all that much.
On the other hand, she said, cutting the tax benefits those who can afford the higher prices, tax or not. Those people are also the ones who can most afford to buy more fuel-efficeint vehicles, or hybrids or EV’s.
“Cutting the gas tax won’t make gas suddenly affordable,” she said. And it’s not the way to help those most burdened by inflation.
There are several alternatives – all longer-term – to help those struggling, she said. One is income-based tax credits. Those credits could even be more focused, provided to help them switch to more fuel-efficient vehicles.
West Virginia ranks 50th for infrastructure quality, she said, and the fuel taxes pay for the roads. So rather than a tax cut for all, she said, these credits would take just a small portion of the fuel tax and direct the money to those most in need.
And while it’s not appropriate for every section of the state, more public transportation offerings can help those facing hardship.
Stephens noted that higher gas prices make people think about the cost of their driving. If the state does something distortionary – artificially lower the cost of fuel – people won’t respond in the right way by driving less or seeking alternatives.
“We have to get beyond the blame,” she said. Eventually things will settle out; the supply will increase and the prices will fall. “Will it bring them down to a price people truly want? Probably not.”
And the change will not happen soon. “In the long run, transportation will be cheaper than it is today. There are so many supply chain disruptions right now affecting so many things, its easy to focus just on gasoline. But everything’s more expensive.”
Deskins also commented on tax holidays, not that it is possible to increase domestic production but that won’t have an immediate effect on prices.
Eliminating the tax for a time will help reduce gas prices, he said, but not to the level they were a year ago. It will affect the Road Fund and provide only a small fix.
Legislative Democrats have proposed making up any hit to the Road Fund from budget surplus.
Deskins acknowledged that the surplus is there, and usable. But after a one- or two- or three-month holiday, where will prices be, he said. They might still be high.
“It’s just a really tough time right now in so many ways,” he said. Inflation is at a 40-year high. “There’s not an immediate end in sight or a clear end in sight. It’s very uncertain.”
TWEET David Beard @dbeardtdp
EMAIL dbeard@dominionpost.com
