By W. David Montgomery
November 29, 2021
Whenever oil prices rise, Democrats in power blame “Big Oil.” Just as I can copy much of this article from what I wrote every other time this happened, we know President Biden reads from a script. In this case it is one that Democrats keep on hand for such occasions. He called for an investigation of “price gouging” just as Obama, Clinton and Democrat committee chairmen did when gasoline price spiked on their watches. That is what politicians do when their own policies caused the problems.
I can recount 6 occasions on which this call has been made, and in every case the Department of Energy and/or the Federal Trade Commission found zero evidence of anti-competitive behavior. Their conclusions in every case have been that gasoline price increases were due to the operation of supply and demand, with prices rising when a constraint on supply appeared during a period of rising demand, and that the magnitude of price increases was consistent with the magnitude of the loss in supply. There has never been a finding that gasoline price increases were caused by any manipulation of oil markets.
Nevertheless, blaming Big Oil plays well as a distraction and political theater. Thus it is worth repeating the old story about how the market works when demand rises and supply is constrained. That explanation needs to be kept fresh in order to educate those who might be taken in by the Administration’s efforts to shift blame, that will surely be picked up by their sycophant reporters and commentators. It is particularly important because the Biden Administration, with the help and support of large financial institutions, is doing its best to hold back the oil industry from solving the problem of high oil prices the way it did just 4 years ago.
The attempted distraction starts with the complaint in the letter sent to the FTC over Biden’s signature: “gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining .” What the author of the letter calls “oil and gas companies’ cost” is the price paid for gasoline sold at wholesale by the refiner or importer, and it continues “in the last month the price of unfinished gasoline is down more than 5 percent while gas prices at the pump are up 3 percent.” True at the time, but today’s data show retail gasoline prices were down a penny since November 1. At the refinery gasoline prices dropped from a very sharp peak at the end of October to a more normal level in November. The price of gasoline at the refinery has varied daily by +/- 10 cents per gallon for the past year, so that comparison of refiner and retail prices for single day or month tells little. All we should read from last month’s data is that both wholesale and retail gasoline prices are high and volatile..
Trumpeting these largely irrelevant price changes is pure political distraction. The movements in retail and refiner prices that Biden and the FTC spotlight are dwarfed by increases in crude oil prices since Biden was elected. Hyping the FTC’s theories that Big Oil is colluding to raise pump prices conceals the fact that since Biden won the election crude oil rose from $36.60 to $76.74 per 42-gallon barrel, or almost exactly $1.00 per gallon. The refinery price rose from 1.08 to 2.33 since last November. “The average U.S. regular retail gasoline price across all formulations (conventional and reformulated) on the Monday before Thanksgiving was $3.40/gal, $1.29/gal (62%) higher than it was the week before Thanksgiving last year.” (We get refiner prices daily but pump prices only weekly).
That is the real news. The refiner price is up $1.16 and the pump price up $1.29. And that fact cannot be blamed on anything but Biden’s policies to choke off domestic production of crude oil, just when the recovery of demand from COVID means the world needs more.
First, an aside about blaming Big Oil for pump prices that rise faster than crude oil. Big Oil makes its money at the refinery, not at retail. The big oil and gas companies have no control over prices at the pump – because they no longer own gas stations. Over the past two decades they have gotten out of the retail business. The Exxon and Chevron signs still attract customers, but the revenues from selling gasoline are collected by the independent businesses who own and operate the outlets. But who cares about details.
To give the details anyway, in 2017 only 5% of stations were owned and operated by the major oil companies. Single store operators accounted for 60% of retail stations. Retail chains like Speedway, Wawa, Sheetz and Royal Farms, along with superstores like Costco and Sam’s, owned 20%. More half-truths to dodge blame.
There probably are reasons for the larger increase in retail prices relative to wholesale. Ethanol prices have risen by 50% more than gasoline prices, and EPA regulations require refiners to blend 10% ethanol into gasoline whether they need to or not. In addition, gasoline is suffering from the same costs of shipping and delivery (remember shortage of truck drivers?) as other commodities.
Guess what, the increase in food prices at grocery stores is also far greater than the price increases for farmers. The price index for unprocessed foods and foodstuffs was down 3.8% in October year over year, but the price index for food at home was up 5.4%. This is an economy-wide response to higher costs of transportation, retail sector wages, and shortages that let retailers increase prices for available goods.
Thus the difference between movements in the retail and wholesale prices of gasoline is a big red herring. The new chair of FTC (who, incidentally, graduated from Yale Law School four years ago) is taking advantage of a one-month blip and reopening the FTC’s 2011 investigation into how gasoline prices go up faster than they go down – of total irrelevance while prices are only rising. She is aiming at “large national chains with multiple stations in a particular area” – sounds a lot like the perpetual whipping boy Big Oil but really means Wawa and Kum & Go. But Big Oil is a much better bogeyman than “Big Box stores”
Aside from the relatively small increase in costs of retail sales and distribution, higher gasoline prices are the direct result of higher crude oil prices, a dollar for crude and a bit more than a dollar for gasoline. That increase in crude oil prices is driven by more demand, with increased travel, return to work, and the end of lockdowns worldwide. U.S. demand has increased, U.S. production has not, and oil imports are rising lockstep with demand.
Even though crude oil prices have doubled since Biden’s election, U.S. production is not responding. Between 2018 and 2019 U.S. crude oil production increased by 1.3 million barrels per day, and the crude oil price was flat at $60 per barrel through those two years. By November 1, 2020 the price of crude had fallen to $36 per barrel and production had fallen back by 1 million barrels per day. Production was exactly the same at the end of October 2021, even though the crude oil price was way above 2019 at $84 per barrel. It does not take a PhD in geophysics to figure that something has changed since 2019, to cause us to produce less oil even though the price is now higher than it was then.
Two things are different. One is obvious, the destructive attack the Biden Administration has made on the oil industry in the United States. Cancelling the Keystone pipeline that would have linked the U.S. to cheap Canadian oil now likely to go to China, stopping the leasing of Federal lands for exploration, threats to eliminate fossil fuels over the next 30 years or less, and a host of regulatory interventions — not least crippling regulations on methane emissions from drilling.
The second is less obvious, but accounts of it appear frequently in the financial press. This obstacle arises from the need of oil and gas producers, particularly the independents who provide a large share of new exploration and development, to replenish the cash they ran through when the pandemic cut demand. They need to raise more cash in order to complete a backlog of wells and pay the higher wages required to hire back their oil field workers because the cash they raised from stock and bond issues during the fracking boom has been used up. They are now finding it more and more difficult to raise money, not because their projects are not profitable, but because lenders and investors who oppose fossil fuels as a matter of ideology are quite willing to starve the industry of funds to achieve their political purposes.
Woke investors are directing investment into costly renewables at the expense of cheaper energy from fossil fuels. Their campaign appears to be to drain funds from oil and gas investment in order to cut supply and raise fossil fuel prices. That will then make their investments in renewables profitable, and their forecasts that the future is in renewables become self-fulfilling. A common ideology ties behavior these big institutions together with the far left and gives them market clout. That is the conspiracy that FTC and Congress should be investigating. Big Finance is not only imposing unAmerican ideologies of racial and sexual identity on employees, it is picking the pockets of consumers, taking over Congress’s authority to tax (through higher fuel prices) and spend (by directing investment into otherwise uneconomic renewables).
So it is not just Biden, but the woke financial institutions that are responsible for the shackles on the U.S. oil industry
We were calling the shots in the world oil market before 2020. Back in 2015, just after the start of the fracking revolution, OPEC tried to drive us from our number one position in world energy by flooding the market and driving down the world oil price. No analyst thought we could continue to increase crude oil production with those low prices, but we did – and we won. OPEC backed off and we enjoyed 4 years of historically low oil prices.
With Biden and woke investors and banks on its side, OPEC now thinks it can increase prices with impunity. Prince Abdulaziz of Saudi Arabia taunts U.S. producers with how they will be unable to increase drilling and production again, as they did from 2018-2019, without being punished by investors. With Biden and the woke financial institutions on his side, he may be correct. That is not good for America.