By Robert Robb
Arizona Republic, Jun. 24, 2022
President Joe Biden’s letter last week to oil company executives was disturbing in several ways.
There was the political scapegoating of oil companies for the high price of gasoline, deflecting from an honest discussion and understanding of gas prices and inflation in general.
There was the political intimidation of private businesses, enlisting them to relieve a political problem for Biden and his party rather than making sound business decisions based upon market conditions.
But perhaps most disturbing of all was the obtuseness the letter exhibited about the role price signals play in a market economy.
There’s no mystery why oil refinery capacity shrunk
According to Biden, the oil companies are inappropriately charging too much for refined gasoline. His evidence is that retail gas prices have increased faster than crude oil prices and refinery profits have sharply increased.
During the COVID-19 pandemic, people got out and about considerably less. Demand for gasoline slackened. Refinery capacity shrunk, not just in the United States but globally.
Additionally, public policy, particularly from the Biden administration, disfavors fossil fuel energy. Most relevant to this discussion are the incentives and ambitious targets for electric vehicles to replace gasoline-powered ones. So, there’s not a favorable investment climate to expand refining capacity.
In the letter, Biden “requests” that the oil companies explain reductions they made in refining capacity since 2020. A presidential “request” is actually a demand and an accusation. Regardless, there’s no mystery to it.
People are now out and about more. Demand for gasoline has increased.
The war in Ukraine and the resulting sanctions imposed on Russian oil have increased the price of crude oil.
The price of gas is set by supply and demand
Crude oil is obviously an important input into the production of gasoline. But gas is not priced on a cost-plus basis. In this country, it is a freely traded commodity. Its price is set through the forces of supply and demand.
The price of crude influences the supply curve. But so do other things, such as general inflation.
Moreover, the price of something reflects not only current but anticipated future scarcity.
Price signals are how markets balance supply and demand in a constant iterative process.
A high price is a signal for consumers to use less and producers to produce more. In the case of gasoline, it would take time and capital to increase refining capacity. And given the unfavorable public policy environment, the capital would be hard to come by.
If oil companies artificially suppressed the retail price of gasoline to achieve a politically acceptable level of profit, there would be an imbalance between supply and demand. Rather than high prices, the result could be actual shortages.
In his letter, Biden described high gas prices as a “crisis.” High gas prices are an irritant to all and a hardship for many. But it is a crisis for very few. And it is certainly not a crisis for the nation as a whole.
In fact, higher prices for fossil fuels can easily be argued to be good for the country as a whole, indeed the entire globe, since they provide an inducement to move away from fossil fuels and accelerate the transition to sources producing fewer greenhouse gases.
Instead, high gas prices are a political crisis for Biden and Democratic prospects in the mid-term elections. Hence the political scapegoating of the oil companies.
We’ll pay higher prices, one way or another
The country badly needs an honest discussion about what a transition to less carbon-intensive energy sources entails. Higher prices for fossil fuels are part of it, one way or another.
I’m among those who have advocated accelerating the transition through the imposition of a carbon tax, although I would go slower with it than most who favor this approach.