Biden's oil nightmare
If you think the highest overall inflation rate in 40 years of 7% is bad, get ready for a real shock coming to a pump near you. Oil prices are surging so much that, ironically, even the "Green New Deal" president is begging global and domestic producers alike to ramp up production and pump, pump, pump! And despite his releasing millions of barrels of crude from the strategic oil reserve and pleading with oil-rich nations to increase their output, prices continue to climb.
In early December, oil was trading at $65 per barrel. Today, it's over $90, which is more than a 50% increase in a little over a couple of months. This past week, the average price of gasoline in the United States hit a seven-year high at the pump, but there's still much more to come. And while the U.S. Energy Information Administration these past few weeks predicted that prices will now decline continuously well into 2023, oil traders are pricing for $100 per barrel and higher in the next several months.
The go-to scapegoat for every problem the administration faces seems to be COVID, and it's not at all different with this self-imposed oil crisis. Yes, demand for petroleum did drop at the peak of the virus — and by peak, think a year ago, when weekly deaths were much higher but fewer people had COVID. This brief pause in demand held oil prices down, but not for long and not enough to cause producers to shutter production. No, the reduction in domestic pumping has nothing to do with virology and everything to do with politics.
Imagine being the CEO of an oil company listening to the past year of antagonism from the Biden crowd — canceling the Keystone XL pipeline, suspending new drilling leases on federal land, and pledging to reduce U.S. carbon emission by 50% in the next seven years. Would you commit millions — nay, billions of dollars to drilling and developing oil fields? Nope! And that's why domestic production is down 1.2 million barrels per day over the past twelve months — not COVID.
Meanwhile, in the "for thee but not for me" world we live in, the administration hammers the domestic oil industry but begs OPEC nations to increase oil production. And while OPEC+ has committed to a 400,000 BPD increase, fulfilling that commitment is problematic. Only the Saudis have that level of excess capacity and, currently, they aren't particularly keen to help us out. Russian oil infrastructure is decaying and can't ramp up appreciatively, while political upheavals are interrupting production with big producers like Nigeria and Kazakhstan.
While the administration's hapless energy secretary, Jennifer Granholm, laughed off a question in November about increasing U.S. production with a glib and erroneous response that OPEC and the global market set production, she now is imploring the domestic industry to "get your rig count up!" Why the sudden turnaround? Simple. People vote with their pocketbooks. A recent CNBC/Change Research poll shows that two-thirds of all voters disapprove of the Biden administration's efforts to "help their wallets." Personal finances are the biggest concern on people's minds — far outpacing racial tensions, policing, and even COVID. Gasoline is a large portion of a typical family's budget, consuming as much as 20% in low-income households.
From the current high of about $4.50 a gallon in California to a low of $3.00 in Texas, everyone will soon be paying more at the pump. West Coast folks will be spending well over $5.00 a gallon in the coming months — probably $6.00 — and even low-price Texas will see $4.00 per gallon or more. This isn't a guess or a prediction; it's a solid forecast based on the prices of futures contracts in the oil market.
Yes, if Russia suddenly fixed its ancient infrastructure, Saudi Arabia cranked open the valves, and U.S. oil producers instantly were able and willing to crack open the fracking, prices would drop. But we might as well believe in the tooth fairy while we're at it.
Kevin Cochrane is an economist who teaches economics and business at Colorado Mesa University. He previously taught at the University of California and was a senior national banking executive.