A Crude Story About Gas Pain
I get suspicious whenever a pundit or politician claims there is an easy explanation, or a quick fix for the rising price of gasoline. It is too easy for people with an agenda to exploit our collective pain at the pump. To get a sense of the bigger picture, I spent part of the weekend looking at several sources: oil industry reports, a nonpartisan government agency, commodities trader bulletins, and independent analysts –– some with agendas, others, without.
Crude oil prices account for around 45 to 50% of the cost of gas at the pump. Refining costs and profits currently account for 25%. The costs of distribution and promotion ranges between 10 and 14%. The rest, up to 22%, is from federal and state taxes.
Supply and Demand. Retail gas prices fluctuate as traders bid on crude oil, and their bids are informed by the level of current and future supply relative to current and expected future demand. Increasing demand for petroleum products in the U.S. and the rest of the world places pressure on global supplies.
Natural and human-made disasters impact oil prices when they are dramatic enough. The pandemic, a few recent natural disasters, and Putin’s invasion of Ukraine have been more than dramatic enough.
The suppliers. OPEC produces about 40% of the world’s crude oil and has a lot of control over supply. Russia produces around 14%. Measured by barrels per day, the United States has become the third top producer in recent years.
Fluctuating demand. In early 2020, the pandemic led to a precipitous drop in demand. There was a supply glut, so prices plummeted. By April, OPEC and Russia reduced output to boost prices. Traders anticipated a steady increase in demand and kept lowering the bids. Prices started to rebound in July. By October 2021, the price of crude was the highest it had been since 2014. Prices held there for months but now Putin’s war is driving prices up again, as traders are nervous about supply.
What can the President do about the price of gas?
Some argue the Administration should open more federal land for drilling. More than 2,100 drilling permits have been approved since Biden took office. Thousands of approved areas are still inactive (it’s up to energy companies to make the next move). Activating 2,500 new drilling sites won’t have a short-term impact on prices. If every drillable area starts to be tapped, it will be years before we see an impact on global supply. And BTW, if this happens, we’ll miss our carbon reduction targets.
The President can also instruct DOE to release more oil from the Strategic Petroleum Reserves. And this is happening: the U.S. and 30 other countries have agreed to release 60 million barrels from their reserves. So far, traders are still driving up bids on oil futures. Still, this announcement should help provide more supply stability in the coming months.
It’s not a long-term solution. There are several restrictions on how much can be released from the Reserves before supplies have to be replenished. The Energy Policy and Conservation Act of 1975 governs the Reserves and sets a maximum removal rate. As a member of the International Energy Agency, the U.S. must stock an amount of petroleum equivalent to at least 90 days of U.S. imports. Another set of constraints are set by Congressional legislation mandating sales of oil to offset deficits.
What about the Keystone XL Pipeline? Wouldn’t it have boosted domestic production enough to lower gas prices? A Keystone pipeline already exists, and it brings 700,000 barrels of oil each day to Texas refineries. The proposal, which has been rejected by the EPA, would provide two extensions, including a shortcut from Alberta through Nebraska, bypassing a bottleneck, so that the output could go up to 830,000 barrels per day. Getting to that output would take a few years. Meanwhile, the bypass would go through fragile ecosystems and native lands (with opposition from Native Nations). Tar sand extraction is dirty, leakages along the pipelines are common. Tar sand crude requires more refining, the cost of which gets passed onto consumers.
It’s not so simple, after all.
