Whose Fault Are High Gas Prices?
Many Americans are baffled that the economy has become inflationary and may be heading for a recession. The price of gasoline is especially troublesome.
President Biden blames the baffling backward bounce of the economy on the COVID pandemic. As with much political commentary, there is an element of truth in his observation. However, the pandemic didn't cause inflation; the government's response to the pandemic did. In 1986, President Reagan said, "The nine most terrifying words in the English language are: I'm from the government and I'm here to help." Reagan's remarks are more relevant today than the day he delivered them.
President Trump locked down the economy from March 13 until May 1 to combat the pandemic. Governors of many states extended lockdowns indefinitely. Businesses were idled, schools closed, and lives suspended while credulous Americans huddled in their houses hoping to avoid the virus. In retrospect, John Hopkins University has provided analysis confirming the suspicions of many that the lockdowns provided little public health benefit. Regardless of intention, the lockdown had detrimental effects on the economy.
The market that may be exerting the most inflationary pressure on the economy is energy. Oil is a commodity that is produced, bought, and sold in markets globally. Production and refining of oil are intimately connected. Oil is pumped from wells into small tanks on production locations and moved by trucks to large tank farms, where it is stored. From these storage facilities, it is moved via pipeline to refineries, where it is held in tanks until it is refined. On April 20, 2020, all the tanks and pipes were full. Futures for West Texas Intermediate were valued at $-37.63/barrel. This had never happened before. Oil has always had value. For a short time in April of 2020, oil producers had no market and nowhere to store their product.
Consumers require reliable energy sources. If the delivery of oil is unreliable, consumers will find a different means of powering their cars and other transportation choices. The prime directive for oil producers is to assure the availability of the 100 million barrels of oil consumed each day. Once the oil industry has satisfied its prime directive, it may work within the parameters of the market for its benefit and profit.
Timing markets is not a science. It is more difficult for an oil producer to time drilling operations to maximize profits than it is for an investor to time the stock market. When there is a surplus of oil, prices go down. When supplies tighten, prices rise. Producers use these signals to time drilling activities. When prices go up, drilling rigs move into oil fields. When prices go down, rigs are idled, creating the famous boom/bust cycles the industry is known for.
If we reflect on negative oil prices in April 2020, we understand why all the oil rigs came to a full stop. Producers also made another move they rarely make: they closed the valves on many of their wells. If you have no market or storage, you have no choice.
If you're wondering why producers don't just turn the valves back on and allow oil to flow freely back into the market, they have. Wells deplete, and production declines. New wells must be drilled to increase production levels to assure supply. As prices have risen, rigs have moved back to the field. It's likely the market will balance, and prices will decline as supply increases. This won't happen in the short term. In the meantime, prices will continue to rise.
The last couple of presidential campaigns have sent mixed signals to the oil industry. In November 2018, former president Obama said, "Suddenly, America is the largest oil producer, that was me people ... say thank you." Not to be outdone, President Trump said in January 2020, "We are now the number one producer of oil and natural gas anywhere in the world. We are independent, and we do not need Middle East oil." Conversely, President Biden said in the 2020 campaign that "we are going to get rid of fossil fuels." When elected, to prove his point, he issued an executive order to kill the Keystone Pipeline. When inflation reared its ugly head, he asked the Kingdom of Saudi Arabia to increase production to reduce prices. He released oil from the Strategic Petroleum Reserve to stem price increases and blamed the industry for price-gouging.
Presidents had little to do with making America independent of foreign oil imports. The improvement of fracking technology made large volumes of oil and gas that were formerly unrecoverable economically producible. The impetus for making these resources available was free-enterprise capitalism, not presidents or government. Market forces unleash creativity that leads to technological advancement in the pursuit of profit. Politicians are quick to take credit for results they have nothing to do with and even quicker to blame an industry for the high prices resultant from government policies.
Words from an American president can send markets up or down. President Biden and his party plan to eliminate fossil fuels as an energy choice. He canceled pipelines, restricted drilling on government lands and waters, and tightened regulations on oil and gas producers. This plan will only increase prices. The goal of the environmental movement and factions within the Democratic Party is to make oil prices so high that oil will not be viable as an energy choice. If you would like to pay $15–20/gallon for gasoline, elect Democrats.
Many of the problems the oil industry encountered during the pandemic occurred in most market segments. Government and media spokesmen focus on transportation when they discuss the supply chain. Transportation is an important link in the supply chain, but only a link. The supply chain consists of all products and services required to move materials into a business, manufacture a product, and move finished goods to market. Ships full of goods sitting in a port waiting to be offloaded while trucks bustle around the port are visible symbols of the supply chain but are the tip of the iceberg. Lack of trucks and drivers and overwhelmed port facilities are no more the reason for the supply chain problems than lack of tanks for storage of oil in April of 2020.
There is now bipartisan agreement to fund the electronics industry to produce chips in the U.S. to avert shortages caused by a bipartisan agreement to lock down the economy. This is folly. To grind the supply chain to a halt was problematic. Restarting it has proven difficult and expensive. The problems were caused by governments' pandemic policies, and the consumer is now on the hook to pick up the inflated tab.
When the government interferes with markets, prices go up. Regulation is needed to balance the people's interests with the self-interest of businesses. Some regulations are good for workers, some good for the environment, some protect investors and consumers, but the inevitable effect is higher prices.
The lockdown of the economy upset the supply/demand balance. The result was chaos, higher prices, and economic upheaval. Politicians may blame a pandemic, capitalism, greed, racism, or any number of bogeymen. The blame lies solely with the politicians who used the government to lock down the economy.
Will Rogers once prophetically quipped, "Thank goodness we're not getting all the government we're paying for." His witticism is more truth than humor today.
Image via Picryl.