Last week Senator Bernie Sanders published a tweet that shows that he really doesn’t understand the oil industry, or how inflation works. Sanders tweeted:
Shock. Shock. Shock. Gas prices are at the highest level in 7 years while Exxon Mobil, Chevron, Shell & BP made nearly $25 billion in profits last quarter – the highest level in over 7 years. The problem is not inflation. The problem is corporate greed, collusion & profiteering.— Bernie Sanders (@SenSanders) February 16, 2022
This has cause and effect backwards. It’s not that profits cause inflation. Instead, inflation can lead to profits. This is not economic rocket science.
Allow me to explain. The oil companies Sanders mentions do not set oil prices. That mechanism is largely in the hands of Russia and OPEC. Those oil companies that Sanders mentions above are at the mercy of the oil markets, which is why in 2020 they lost $76 billion.
In 2020 the Covid-19 pandemic and subsequent stay-at-home orders sent oil demand — and subsequently oil prices — plummeting. That, in turn, resulted in a decline in U.S. oil production in 2020 as some producers cut back, some shut in small wells, and some went bankrupt.
When demand started to recover, oil production couldn’t ramp up as quickly. There were too many dollars chasing too little oil. The result — and a major driver of inflation since then — was skyrocketing oil prices. That, in turn, boosts the profitability of oil companies. Indeed, they benefitted from inflation, but they didn’t cause it.
You see? It wasn’t that the oil companies suddenly decided to be really greedy. Oil prices plunged in 2020 and they lost a lot of money. Oil prices have skyrocketed over the past year, and they made a lot of money. Seriously, if they had control over oil prices do you think they would ever lose money?
Senator Sanders, is this really how you think this works? What were you saying in 2020 when these companies were losing billions?