The White House, OPEC and the Need for Domestic Oil Production
Posted August 16, 2021
Some observations follow on the Biden administration’s continued call for OPEC to increase its crude oil production – even as it curbs or discourages U.S. production – plus the president’s recent announcement that he wants the Federal Trade Commission (FTC) to investigate summer gasoline prices.
We’ll take the FTC first. Chair Lina Khan has been asked to look into any potential illegal conduct or anti-competitive practices that may have occurred during the summer driving season.
The U.S. Energy Information Administration (EIA) reported the national average for gasoline reached $3.172 per gallon Aug. 9, the highest point since October 2014. “[T]here have been divergences between oil prices and the cost of gasoline at the pump,” wrote National Economic Council Director Brian Deese. “While many factors can affect gas prices, the president wants to ensure that consumers are not paying more for gas because of anti-competitive or other illegal practices.”
Numerous federal and state agencies have investigated the causes of price spikes for decades and consistently have found that the markets and other factors are responsible for price fluctuations. If the White House truly believes “anti-competitive or other illegal practices” have elevated gasoline prices, it’s strange that it would look to a cartel of oil-exporting countries to help solve the problem.
In fact, the administration is floating a false premise on what’s happened this summer with gasoline prices. This is seen in a comparison of what it costs refiners to acquire crude oil to make into gasoline and the price that gasoline is sold at retail. Calculating the ratio of retail gasoline prices to crude oil acquisition costs, as shown in the following table, look specifically at data for June 2021 compared to the same month in the previous two years as well as 5-year and 10-year averages for June. The key stat is column at the far right of the chart:
In June 2021, the ratio between retail gasoline prices and crude oil acquisition costs was lower than it was in June of 2019 or 2020. This is also the case for the 5-year and 10-year historical ranges. In other words, early indications for the 2021 summer driving season suggest it has been remarkably normal.
Again, June 2021 represented the lowest June ratio in three years and was consistent with the salient fact that recent crude oil costs have exceeded those of the past two years. For June, EIA estimated that crude oil represented 55% of the cost to make gasoline, up from 52% in May.
These official data points for the 2021 summer driving season suggest the Biden administration’s call for an FTC investigation into gasoline prices is just a distraction from the fundamental market shift that is taking place and the misguided government decisions that are exacerbating the situation. Demand has returned along with the economy, and supply has not kept pace. Further impacting the imbalance is the administration’s decision to continue restricting access to America’s energy reserves, which works directly against its desire for greater supply.
While there are other contributing factors, the rise of crude oil prices reflects the fact that domestic crude oil supplies in June were more than 1.6 million barrels per day lower than they were in November 2019, before the 2020 COVID-19 recession. By contrast, U.S. petroleum demand has returned to similar levels recorded in 2019, thus resulting in pressure for higher oil imports and higher oil prices.
To put it in perspective, when the U.S. was producing more than 12.0 million barrels per day in June 2019 and OPEC competed for global market share, domestic U.S. (West Texas Intermediate) crude oil prices were $9.56 per barrel less than international (Brent) crude oil prices.
In June 2021, U.S. crude oil production fell to 11.2 million barrels per day (and the Biden administration has now appealed to OPEC to raise production) and domestic U.S. (West Texas Intermediate) crude oil prices were $1.78 per barrel less than international (Brent) crude oil prices.
Let’s be clear. In June 2019, U.S. consumers generally purchased fuels based on domestic crude oil that was significantly less expensive than international levels, thanks largely to having abundant domestic crude oil production.
That’s changed now, and domestic production is lower partly due to the aftereffects of the 2020 COVID-19 recession. Today U.S. producers face financial limitations and workforce shortages – as well as questions about the industry’s future, fostered by the administration.
The 2020 COVID-19 recession forced companies to take on extraordinary debt just to survive. And most laid off substantial numbers of workers to get by. The aftermath of being in survival mode is that much of the sector remains capital and/or people-limited. If companies want to expand beyond their current activity level, most will have to re-hire – and hiring is not easy right now.
They also have to be able to commit to growth. For example, you don’t contract for a drilling rig for one month. You sign a contract for the next year or two. So, what’s the risk tolerance with everything the world has gone through and legitimate questions about COVID variants, price inflation, and future growth and uncertainties?
Restrictive domestic energy policies compound the challenges.
We’ve come through a period of unprecedented market dislocation, where the industry has been remarkably resilient. But it’s hard to get people to make long-term investments in natural gas and oil when the administration is signaling that it wants to move away from fossil fuels.
If we restrict energy in the United States – as the administration threatens to do by pausing new oil and natural gas leasing on federal lands and waters – that has a detrimental impact on the consumer and doesn’t recognize the fact that oil and gas will supply needed energy for decades to come. If we take pipelines out of service that are vital to producing areas and increase the diversity of supply, that can have a real cost today, and signals it could be hard to supply the needed energy to consumers in the future. And if we tell everyone that fossil fuels have no place in the energy mix and focus on a single technology, that assuredly affects investments and company commitments to invest in their U.S. business.
The Obama administration knew we needed an all-of-the-above energy strategy, and we still do today. There’s little doubt that the Biden Administration is acting purposefully to shift consumers away from fossil fuels, but it doesn’t have a plan to ensure consumers can afford it. Pleading with OPEC to come to the rescue this summer doesn’t make sense, not even to OPEC. It’s an import-more-oil strategy that could seriously harm U.S. energy security and push American jobs overseas. An editorial in the Wall Street Journal put it this way:
Someone should ask Mr. Biden, on his next stop for ice cream, why the President thinks oil produced by foreign dictators in Russia, Iran or Saudi Arabia is more desirable than oil drilled by American entrepreneurs.
The U.S. energy revolution has been a once-in-many-generations structural change, based on world-leading technologies. Let’s recognize and embrace the need for responsible U.S. development and its essentiality to an energy transition that’s compatible with U.S. economic, energy security and national interests.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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