No article of mine has generated more views and more reader feedback than my Forbes piece in March of this year: Who Is To Blame For Rising Gasoline Prices? At present, there are nearly 900,000 views, and I continue to get reader feedback over this article on a weekly basis.
The feedback is invariably from men who are angry that Joe Biden is in the White House and it is along the lines of “I bet you feel stupid now” or “Even an idiot can see that Biden is the one who drove up gasoline prices.”
Let’s address the obvious fact first. Gasoline prices are indeed higher this year. In fact, the average retail gasoline price is now $1.02/gallon higher than it was a year ago. The price is higher than at any time since 2014. I think the magnitude of the change, more than anything, has convinced people that Biden must be responsible for this.
Initially, I would engage the hostile feedback. I have this perhaps naïve belief that if people merely understand what I am actually saying they will come around to my point of view. And invariably that would happen. After a couple of exchanges, they would say “OK, I agree with what you are saying.” I engaged half a dozen readers, and in every case they backed away from their initial angry reaction.
But it’s not a productive use of my time to convince readers one by one that they are operating under misconceptions. I ultimately decided to write this article to address some of the most common misconceptions.
The gist of the article is that there are few actions a president can take to impact gasoline prices in the short term. Those few actions historically have been 1). Release oil from the Strategic Petroleum Reserve; 2). Increase gasoline taxes; or 3). Engage in a war in the Middle East.
President Biden did none of those, but he did take actions that were hostile to the oil and gas industry, thus driving the belief that this drove up gasoline prices.
President Biden’s Energy Policies
First, immediately upon assuming office, President Biden cancelled the Keystone XL pipeline permit. The project had been rejected by President Obama in late 2015, fast-tracked by President Trump in 2017, and now once more rejected by President Biden in 2021.
Then, Biden suspended new oil and gas leasing and drilling permits for federal land and water.
Those actions, readers were quick to point out, were clearly were behind the rise in gasoline prices. I was willfully blind not to see that, I was told.
Look, I am not defending President Biden’s energy policies. I had already been critical of Biden’s energy decisions. In January I had written The Inherent Risks In President Biden’s Energy Plan, which criticized moves like the Keystone XL cancellation. So I fully understand how these decisions can impact oil and gasoline prices in the longer term — but not in mere months.
For those who insisted that Biden’s actions had quickly driven up gasoline prices, I asked them to explain. They would respond that these moves could eventually restrict oil supplies. True, but not for years. Keystone XL might have impacted oil supplies a decade from now. The oil markets don’t react in real time to events like this.
The drilling permits potentially have a shorter term impact, but even then companies have stockpiled years of permits in anticipation of such a move (as explained here).
If a hurricane is brewing in the Gulf of Mexico, oil prices will react. If meteorologists forecast 50% more hurricanes in the Gulf of Mexico over the next decade, oil prices won’t react. If a country bans internal combustion engines 15 years from now, oil prices won’t react today.
If Keystone XL would reduce oil supplies in the future, why wouldn’t it impact oil prices today? Primarily because we don’t know the oil supply/demand picture at the time Keystone XL would have been completed. The oil markets react to moves by OPEC that quickly impact oil supplies, not to actions that may impact oil supplies in the long run — at a time we don’t know what oil demand will be.
The Oil/Gas Price Correlation
Let’s look at the past 20 years of gasoline prices versus the price of West Texas Intermediate crude oil.
This graphic shows a high degree of correlation between the price of oil and the average retail price of gasoline. How high is this correlation? According to my Excel analysis, it’s a whopping 96.8% over the past 20 years. In other words, changes in gasoline prices are almost exclusively correlated with underlying changes in oil prices.
Exceptions can occur if there are short term refinery outages (which would tend to decrease oil prices and increase gasoline prices) and seasonal changes in gasoline (which can independently impact gasoline prices) but the bottom line is “If you want to understand what’s happening with gasoline prices, look to oil prices.”
So, What’s the Explanation?
Note when oil and gasoline prices began to rise. That rise started in May 2020. Between the first week of May 2020 and the last week of December 2020, oil prices had tripled. Was President Trump to blame for this?
No, the reason oil and gasoline prices rose is that the economy started to open back up from the Covid-19 shutdowns. Those shutdowns had negatively impacted a couple of million barrels of U.S. oil supplies, and those supplies were slow to bounce back once the economy opened back up. That’s why we have soaring oil and gasoline prices.
Keep in mind that the entire world has experienced this. Do people honestly believe that cancellation of the Keystone XL pipeline drove up gasoline prices in Tokyo? Further, this price rise has taken place across most commodities. We have seen soaring lumber prices, base metals prices, cotton, oats, sugar — all primarily associated with the Covid-19 impacts on the economy.
The Oil Industry has Thrived This Year
One major irony is that if you are a supporter of the U.S. oil industry, you should cheer higher oil prices. Low oil prices in recent years drove many producers out of business. Indeed, under President Trump, the share prices of oil producers languished. Again, I am not blaming him for this. It’s a function of the macro factors that influenced oil prices.
This year, oil prices have risen, and so have the share prices of oil producers. For example, ConocoPhillips, the world’s largest independent publicly traded pure oil and gas company, has risen 64% year-to-date. Other oil companies have experienced similar gains. Should they thank Biden? No, because he isn’t the reason oil prices rose.
But, I will reiterate something I pointed out earlier this year. Either Biden is driving up gasoline prices, which helps the U.S. oil industry, or Biden’s policies have nothing to do with higher gasoline prices, and thus his policies are doing nothing to help the U.S. oil industry.
It is in fact the latter. Despite the sharp rise in the price of gasoline this year, Biden deserves neither the credit nor the blame — although in the longer term his policies are likely to lead to higher future gasoline prices.