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Who’s to Blame for the Pain at the Pump? It’s Complicated

Stock MarketsNov 30, 2021 03:00PM ET
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© Reuters. Who’s to Blame for the Pain at the Pump? It’s Complicated

(Bloomberg) -- President Joe Biden didn’t mince words as he blamed the oil industry for gasoline prices running at a seven-year high.

“Gas supply companies are paying less and making a lot more,” he said in televised remarks from the White House last week. “That’s unacceptable.”

Within minutes, the oil industry and its congressional backers pointed fingers right back at the Biden administration, blaming it for policies to reduce the nation’s reliance on fossil fuels and the president’s decision to block construction of an oil pipeline from Canada. 

The reality of who’s to blame for high prices -- and what could be done to lower them -- is more complicated. Here’s a closer look:

Claim: The oil companies can just open the taps

Yes, they could, but really they don’t want to.

The U.S. oil industry is still producing less crude than it did before the pandemic curtailed travel and cratered demand for fuel. Even as demand returns, oil companies are keeping production flat while using profits to reward shareholders.

“Oil production is lagging behind as the economy roars back to life after the shutdown,” Energy Secretary Jennifer Granholm said recently during a White House briefing.

This year, explorers boosted output 4.5% and are expected to keep up the same pace next year. Total U.S. oil production remains 12% below pre-pandemic highs of 13.1 million barrels a day, with no sign of surpassing that in the next couple of years.

That follows a blistering four-year run that saw U.S. oil producers boost output by more than 50% between 2016 and 2020. Investors are now demanding greater returns so oil companies are forgoing crude expansion and instead returning cash to shareholders while vowing to keep spending in check. 

Claim: Companies aren’t drilling all the federal tracts they’ve leased

Yes, but energy companies have a long history of renting federal land and waters with the intention to drill when the price is right. 

Granholm has challenged them to take advantage of the leases they hold, noting in January that some 23 million acres of offshore and onshore tracts were leased but not producing. 

But the roughly 48% of leased onshore acreage that was actually churning out crude or gas as of Sept. 30, 2020 -- the most recent data available, cited by Granholm -- represents a nearly two-decade high. It’s not unusual for federal leases to remain idle. Sometimes the tracts don’t contain enough crude to justify the investment and sometimes they are snapped up by speculators on the cheap. 

“Companies are buying an option -- not an obligation” to use the leases, said Kevin Book, managing director of research firm ClearView Energy Partners. “It’s not market manipulative behavior, it’s market-responsive behavior.”

Oil companies, which must pay rental fees to retain leases over their 10-year lifespans, make decisions about using them based on crude price forecasts and the costs of those acquisitions. 

Moreover, drilling all the federal leases today would not yield crude immediately, if at all. 

Claim: The Keystone XL pipeline could have eased the supply crunch

Even if Biden hadn’t yanked its permit, the Keystone XL pipeline wouldn’t have been operational now. But there could have been a long-term impact and some lawmakers -- including Democratic Senator Joe Manchin of West Virginia -- have cited it in blaming the administration.

“If you had built it a decade ago, maybe oil prices are a little cheaper, maybe fuel prices are a little cheaper,” said Benjamin Salisbury, director of research with Height Capital Markets. 

Within hours of his swearing-in, Biden revoked a presidential permit for the controversial pipeline, which would have transported up to 900,000 barrels per day of Canadian crude to U.S. refineries. 

By simply giving oil sands crude in Alberta, Canada, a new avenue to market, the pipeline could have encouraged more production of it, activists said. That would have meant more oil barrels in North America and added to world supplies. 

“It probably would have taken taken a little bit of the edge off of prices, just like a little bit of drilling here in the United States might have helped,” Book said.

Still, the Canadian crude Keystone would have carried is a particularly heavy oil that’s more expensive to produce and refine, said Jay Hakes, who served as administrator of the U.S. government’s Energy Information Administration. That means Keystone XL would not have been “bringing a low-cost product into the mix,” Hakes said, adding he’d be surprised if it made as much as a penny difference in prices at the pump.

Claim: Oil companies are raking in record profits 

The world’s publicly traded independent oil producers will make record profits this year, surpassing the levels reached when crude hit an all-time high near $150 a barrel more than a decade ago, according to Rystad Energy, an energy consultant based in Oslo.

Next year should be even better, particularly for U.S. drillers, with free-cash-flow growth of 15% to almost $66 billion forecast for 2022, according Bloomberg Intelligence.  

Meanwhile, as the world faces higher energy prices for the foreseeable future, oil and natural gas producers are resisting the urge to drill again, according to Chevron Corp (NYSE:CVX).’s top executive. 

“We could afford to invest more,” Chief Executive Officer Mike Wirth said in September in an interview at Bloomberg News headquarters in New York. “The equity market is not sending a signal that says they think we ought to be doing that.”

Oil companies that took a beating when prices plummeted during the pandemic are being more cautious about investments now and in some cases have “finally achieved profitability after so many years of underperforming investor expectations,” Book said. “Private companies are supposed to earn profits for their investors, and the providers of capital are saying ‘we don’t want you to keep drilling wells.’” 

Claim: Gasoline suppliers aren’t passing on savings when oil falls

Biden has asked the Federal Trade Commission to investigate possible illegal conduct in U.S. gasoline markets. The administration alleges consumers should be paying 25 cents less per gallon given what refiners are charging for fuel and what motorists are paying for it. 

While there is always a lag between changes in oil prices and resulting gasoline prices, this year what drivers pay at the pump has been especially sticky. The gap between gasoline futures and retail pump prices widened to $1.20 a gallon earlier this month, the most since 2008, excluding the early part of the pandemic. 

When wholesale prices decline rapidly, it provides a window for retail operators to sell at high prices for a few weeks before lowering prices, said Ernie Barsamian, chief executive officer at the Tank Tiger, a storage broker. Eventually, pump prices will come down, but for now, some refiners and gas stations are enjoying the fatter margins, he said.

Republican members of the commission have asked the Biden administration for evidence to back up its assertion that illegal conduct could be driving high gasoline prices.

“Similar claims have been made in the past and in recent memory the FTC has never found that to be the case,” Commissioner Noah Phillips said in an interview. “He’s not the first president to do this.”

Claim: Biden’s green agenda discourages U.S. oil production

Top House Republicans issued a statement last week blaming surging costs on “the Biden administration’s anti-American energy policies.”

The lawmakers, Cathy McMorris Rodgers of Washington, Fred Upton of Michigan and Steve Scalise of Louisiana, said that under the right policies, the U.S. “could produce more here at home to lower energy costs.”

In reality, most of Biden’s climate policies are yet to be enacted. But just the threat of them has chilled some investment in new oil fields and wells according to Salisbury. 

“There is a plausible argument to make there would be more supply if there was an administration supportive of that supply,” he said.

Oil and gas companies that are already wary of volatile energy demand amid the pandemic, heeding investors’ calls to be cautious and trying to green up their portfolios are also nervously eyeing the political landscape in the nation’s capital. 

Over time, Biden’s climate policies could translate into less volatile energy prices, by divorcing power and fuel demand from finite fossil resources. In the short term, however, that policy pivot can retard spending.

“Uncertainty stalls investment,” and federal land policies could be deterring capital spending on new wells today, suppressing production below what it would be otherwise, Book said. “Knowing there are environmental strictures coming that could strand your investment probably isn’t a favorable environment for investing.”

Claim: Oil and fuel demand is just out-pacing supply

At its core, recent prices for oil -- and the gasoline made from it -- track supply and demand fundamentals. A big up-tick in demand outpaced production. 

“We had very, very low prices as demand decreased,” Deputy Energy Secretary David Turk said in a Nov. 23 Bloomberg Television interview. “And now we’re having demand increase that supply is not keeping up with.”

Gasoline demand has soared in 2021 after last year’s plummet, with the Covid vaccine causing Americans to return to the roads. Gasoline supplied, a measure of demand, is well above seasonal averages. 

But as gasoline consumption has risen to surpass pre-pandemic levels, oil production continues to lag. That’s meant that refineries are paying more for the crude they process into fuel; crude oil made up about 57% of production costs for those facilities last month. Further adding to the pressure on retail fuel prices, several U.S. refineries have been closed over the last two years. 

©2021 Bloomberg L.P.

 

Who’s to Blame for the Pain at the Pump? It’s Complicated
 

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