On Wednesday, amid a fresh surge in gas prices, the Biden administration announced that it had asked the FTC to investigate whether oil and gas companies were doing anything illegal to manipulate prices. Republicans have countered that it’s a cheap political stunt and blamed President Joe Biden’s energy policies.
But the truth, experts say, is not as easy as either side makes it out to be. In fact, the biggest driver may not be oil companies or politicians. Instead, the price surge is largely driven by the whims of international producers and U.S. investors.
The cost of gas has risen 50% compared to last year, according to AAA data. That same data shows the average price of a gallon in the U.S. is $3.41, though a gallon is even more pricy in some states. California leads the way, with gas costing $4.70 per gallon on average.
“Big Oil is fueling climate change and siphoning money away from struggling families with high gas prices, all while spending huge sums lobbying climate deniers and preventing us from shifting gears to cheaper and cleaner alternatives,” Democratic Sen. Ed Markey tweeted Wednesday.
Meanwhile, the American Petroleum Institute, the oil and gas industry’s largest lobbying arm, blamed the administration for “cancel[ing] important infrastructure projects” (i.e. the Keystone XL pipeline) in a statement issued Wednesday.
When I asked Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis, to explain what exactly drives the cost of gas at the pump on any given day, he laughed. “It’s both a simple question and a complicated one,” he said. “The simple explanation is it’s the cost of the oil, plus the cost of refining it, plus the cost of getting it to the refinery from the gas station, plus the cost of running a gas station, plus taxes. The thing is, every one of those things is complicated.”
There are many variables that go into determining how much each of those steps costs. But the price of crude oil is often what gets the most attention, thanks to how much they can change at the drop of a hat. Crude oil prices comprise the bulk of what comes after the dollar sign at the pump, and even a little bit of oversupply or a little less oil on the market can have a drastic shift on global prices.
“Oil prices are fundamentally the thing that are most volatile in that equation,” said Williams-Derry. “When you look at gas prices, you should be looking first and foremost at the price of oil.”
And contrary to the image that fossil fuel supporters like to project, oil and gas supply doesn’t move in a perfectly free market. Internationally, oil production is largely under the control of a literal cartel: the Organization of the Petroleum Exporting Countries, or OPEC. That coalition of 13 oil-producing giants, including Saudi Arabia, United Arab Emirates, Venezuela, and Iran, has an outsize influence on production and prices globally. As of 2018, OPEC members controlled 79.4% of the world’s proven oil reserves.
“A lot of oil prices have to do with decisions by major producers, notably OPEC, whether to use their spare capacity,” Williams-Derry said.
Domestically, investors in American gas companies—which have seen a growing share of the world’s production over the past decade with the shale boom—have a lot of input on the moves producers in Texas and elsewhere in the country make.
Both OPEC and American companies just went through a major upheaval. The coronavirus pandemic drove oil demand so low that the price of a barrel of oil briefly hit negative dollars, down from highs around $100 a barrel before the pandemic. That volatility had some big ramifications as parts of the world try to get back to normal. OPEC ordered producers to significantly cut production when prices were bottoming out; even as prices are rising now, they’re sticking to their disciplined regimen, like a fitness fanatic faithfully following a no-carb diet.
In the U.S., investors are pretty spooked by both the covid-19 pandemic as well as the fact that the fracking boom produced too much oil, oversupplying the market and making prices fall. Lower prices mean less money to line their pockets. Williams-Derry said that during the shale boom, American oil companies were spending more on drilling than they were earning on the price of oil. As a result, U.S. investors, Williams-Derry said, “are now punishing anybody who produces.”
That lower supply and the now-rising demand have conspired to drive crude oil prices higher than they were last year. In this context, it’s easy to see that API and their supporters’ claims about the administration’s actions ring false. “Anybody who blames a politician for high prices is ignoring basic market dynamics,” Williams-Derry said. “Blaming someone who is in office today for a problem that started last year, that doesn’t make much sense.”
The flip side is also true. Here at Earther, we’re all for holding oil companies accountable for misdeeds (of which there are many). But it’s unlikely that any FTC investigation will uncover anything that producers haven’t already been doing for decades, out in the open. When it comes to oil as a global commodity, contrary to what API claims, more oil on the market isn’t necessarily what producers want. Oil producers’ interests don’t always align with what’s best at the pump. Which itself is a pretty good argument for untethering the economy from fossil fuels.
DISCUSSION
I have worked in the oil industry for years, the ideas that a politician has any power, or that collusion occurs between oil companies are equally laughable. Oil prices are high, because when the cratered in 2020, multiple companies were wiped out and went bankrupt, no one drilled anything for about a year, and the existing wells declined. No one noticed or cared, because since everyone was stuck at the house, driving was limited. The few oil companies that remained used up all of their available credit to stay afloat. As vaccines became available and people starting driving and flying more, and prices rebounded, many of those companies who were scared by their recent experience hedged their oil at a price half of what it is now. For those that hedged at low prices, they do not have the money to drill more wells, they can barely make loan payments. And they cannot take out new loans on their assets, as banks were all impacted by the wave of bankruptcies, and are not excited about granting new loans. The compounding effect is that we have a bunch of old wells that are declining, did not drill many new wells for a year and a half, and do not have access to capital (because oil is hedged at $40, or banks won’t give out loans) to drill significantly more wells. Eventually this will loosen, but even then, most of the time it will take you four months to a year from the time a well started drilling, to the point where it is selling oil, so even if oil companies were inclined to rapidly increase drilling, it would be six months before anyone noticed. In the meantime, I recommend quit driving or flying, oil production only exists because consumers demand it, if you want a villain for climate change it is not Exxon, it is every person with an SUV, or Truck, who don’t carpool, casual flying etc.