OPINION

What Is Behind the Spike in Gas Prices?

Biden’s policies may not have had an impact on oil prices in the short run, but prospects look bleak for consumers in the long run.

The price of oil in the United States has soared by 70% since the November election—the largest post-election gain since oil futures first began trading. As a result, the price of gasoline—which is made from crude oil—increased by 27%, from $2.25 per gallon at the beginning of the year to $2.85 per gallon this week. A barrel of crude oil is currently worth around $60, and Goldman Sachs forecasts that U.S. oil prices will average around $72 a barrel in the third quarter, with some analysts predicting that they could rise to $100 in the next 6-12 months.

[A]fter a five-month-long slump, the American economy is roaring back to life.

This dramatic growth may appear all the more surprising in light of the fact that not so long ago, the pandemic and the oil price war between Russia and Saudia Arabia caused the price of U.S. crude oil to reach negative $37 a barrel, threatening to bankrupt oil-producing nations and American shale companies.

The complexity of social events makes a precise determination of the chain of causation difficult. While the Biden administration’s policies—both foreign and domestic—have played a role in the recent surge of oil prices, there are many other factors that are most likely behind this phenomenon.

Oceanic oil platform.

Oceanic oil platform.

WHAT HAS CAUSED THE OIL PRICES TO SOAR?

First, it is normal for gasoline prices to rise as winter retreats due to seasonal changes, according to Robert Rapier, a chemical engineer in the energy industry, because “by summer, gasoline blends cost more to produce and demand is higher.”

With domestic demand and output straining supplies, an increase in the global supply of oil would relieve upward pressure on prices.

Second, after a five-month-long slump, the American economy is roaring back to life. COVID-19 cases are plateauing, thanks to the rollout of vaccines, and the economy is reopening. What’s more, the government and the Federal Reserve are pumping trillions of dollars into the economy, in the form of direct cash payments to Americans, subsidized loans to businesses, increased government spending, and lower taxes, providing an additional demand boost. The rebound in economic activity is driving up demand for oil from ordinary consumers, transporters, and producers of goods and services. As a result, investors expect that fuel consumption will rise, which further pushes up the price of oil.

“Higher oil prices are a reflection of optimism about economic growth as the world begins the process of vaccinations to move past the pandemic,” Jason Bordoff, energy policy expert, told CNN Business last month.

Lastly, the winter storm that beset large swaths of the United States into subfreezing temperatures in February knocked out 40% of the U.S. oil output, reducing oil production by more than 4 million barrels a day nationwide. Wells froze up and gas lines were clogged with ice, not to mention the rolling electricity blackouts. Oil producers and refineries were forced to shut down, leading refinery utilization to fall from 83% at the beginning of February to 56% by the end of the month, shredding millions of barrels from global production.

With domestic demand and output straining supplies, an increase in the global supply of oil would relieve upward pressure on prices. However, President Biden—most likely in order to retain some leverage in negotiations—has so far refrained from rejoining the Iran nuclear deal, and has not yet lifted sanctions against the oil sectors of Iran and Venezuela, which would have otherwise brought down oil prices by returning millions of embargoed barrels to the global market.

Arguably the most significant determinant of global oil prices, however, is the OPEC+ oil cartel, an international organization of oil-producing countries that coordinate their policies to manipulate global oil prices. At their recent meeting, OPEC and Russia agreed to extend most of the oil output cuts, in spite of a rebound in global demand and rising prices, which sent oil prices higher—a decision that shocked many analysts, who expected that the cartel would raise production.

“There was [a] surprise two weeks ago when Saudi Arabia took a more hawkish view at the OPEC meeting and oil prices surged after that surprise decision,” the Schork Group principal Stephen Schork told Fox Business.

Although it’s not clear why OPEC decided not to increase oil production, some suspect it’s because the Biden administration has so far adopted a more hawkish stance towards Saudi Arabia than its predecessor, releasing a U.S. intelligence report which holds Saudi Crown prince Prince Mohammad bin Salman responsible for the killing of journalist Jamal Khashoggi and ending America’s support for Saudi Arabia-led war in Yemen. The Trump administration, by contrast, prioritized maintaining a good relationship with Riyadh, and its demands regarding oil prices were heeded by Saudi Arabia. Because of Biden’s alienation of Saudi Arabia, the country’s oil policy will likely pay less attention to Washington’s interests.

Oil refinery.

Oil refinery.

THE CONSEQUENCES OF BIDEN’S POLICIES

Despite what many are asserting, in the short run, President Biden’s decisions to halt the construction of the Keystone XL pipeline and order a 60-day moratorium on new oil and gas leases on public lands are unlikely to have a considerable short-term impact on oil prices. These policies do not interfere with the operation of existing infrastructure, which means that extraction and transportation of oil remain unchanged.

“[I]t sends a clear message to the market that capital in this area will not be welcomed and will not be well treated.”

However, as Stephen Shorck told Fox Business, “While this does not impact prices in the near term, it sends a clear message to the market that capital in this area will not be welcomed and will not be well treated.” President Biden’s freezing of new oil and gas leases on federal land, if it becomes permanent, could lead to the reduction in American oil production in the long run as the permits begin to run out, thereby pushing up oil prices and leading to higher gasoline prices for American consumers.

The continuation of Biden’s policies, and the administration’s determination to move toward a carbon-free future—which seems likely—point to a regulatory shift that could eventually depress U.S. fossil fuel production. As Goldman Sachs analysts write, “such actions point to both higher production and financing costs for shale producers in coming years as well as lower recoverable resources.” The administration’s focus on fighting climate change will likely decrease the fossil fuel industry’s appeal to investors, draining money from the sector, while the premature transition to renewable energy sources could lead to an increase in energy prices, as it happened in Germany.

While Biden’s policies may not have had a considerable impact on oil prices in the short run, they will likely have negative effects for consumers in the long run. Instead of making it costlier to extract and produce fossil fuels, we should invest and encourage alternative sources of energy so as to introduce greater competition into the energy market—which, by lowering prices, will ultimately benefit ordinary Americans while transitioning to cleaner sources of energy. It is important to tackle the consequences of climate change—but this should be done in a way that does not negatively impact energy prices for consumers.

Written By:

Sukhayl Niyazov is a freelance writer covering politics, economics, and A.I. His work has been featured in Global Policy, Areo Magazine, Towards Data Science, and Data Driven Investor. Read his Medium blog @sukhaylniyazov or find him on Twitter @Sukhayl_Niyazov.