UNITED STATES - MARCH 15: Gas prices are displayed at the Exxon station on Capitol HIll in ... [+] Washington on Monday, March 15, 2021. (Photo By Bill Clark/CQ-Roll Call, Inc via Getty Images)
‘Why are gas prices so high?’ That’s a web search question leading readers to my pages this morning, along with another asking ‘why are gas prices so high in California?’ That second one is just as important as the first, since California is basically serving as the canary in the coal mine for the rest of the country.
Finally, a third web search question high on the list this week is ‘Is America energy independent?’ The answers to all of these questions are all intertwined with one another. Let’s examine why.
First, why are prices at the pump so high in general? There are several factors at play here that all have had an impact since last November:
- The loosening of COVID restrictions globally in recent months has led to a rapid recovery in global demand for crude oil that has exceeded the expectations of all of the “experts” on the subject, leading to a tightening of global crude markets;
- Strong discipline among the OPEC+ nations related to their agreement to limit exports has also played a major role in tightening the relationship between global supply and demand;
- The U.S. election has also obviously played a big role here. Since last November 3, the average price per gallon of regular gasoline in the U.S. has skyrocketed by 75 cents. The markets clearly see the Biden/Harris administration as one that will work to inhibit U.S. oil production, which will also have the effect of tightening the global market, and traders have responded by driving up the price of crude oil;
- Refinery maintenance and the changeover to summer gasoline blends. This is a factor that I tend to write about every year at this time. Gas prices have continued to rise even as crude prices have dropped over the past week mainly due to the fact that March and April are the time of year in which many U.S. refineries are taken offline for annual maintenance and all refiners are switching from manufacturing a handful of winter blends of gasoline to the dozens of summer blends required by the EPA. This changeover invariably raises the costs of both refining and transportation of gasoline, and that is always worked into gas prices during these months.
To sum up: We’ve seen a confluence of factors since November that have driven up the price for crude oil now combined with the higher costs associated with the annual conversion over to summer blends of gasoline. Since gas prices at the pump tend to follow the price of crude on almost a linear basis, none of this is really surprising.
But what about California?According to AAA, the current average price for regular in the Golden State stands at $3.885 per gallon, while in Texas it is $2.626, about a 47% difference. This differential is almost entirely due to politics around climate change.
California is a state that is rich in underground oil resources, but over the past two decades, the state government of California has pursued a policy agenda designed to inhibit drilling and production within its borders as part of an overall program to try to ratchet down emissions via command-and-control regulations. In more recent years, the state government has implemented emissions regulations that far exceed current federal regulation and implemented mandates requiring a rapid phasing-out of gas-powered cars and replacing them with electric vehicles (EVs).
Calif. Gov. Arnold Schwarzenegger and his wife Maria Shriver look out into the crowd of supporters ... [+] during his victory celebration Tuesday, Nov. 7, 2006 in Beverly Hills, Calif. Schwarzenegger defeated Democrat Phil Angelides to claim a second term, capping a yearlong comeback. (AP Photo/Kevork Djansezian)
These policy choices have very predictably led to higher gasoline costs and higher costs for gasoline powered cars in California. As I detailed in yesterday’s piece, the Biden/Harris administration is now aggressively pursuing the same kinds of policy choices at the national level, with the help of congressional Democrats. Thus, California essentially serves as the proverbial canary in the coal mine for the rest of the country.
Finally, is America energy independent? The clear answer to that is no: The U.S. is not now and has never really been energy independent in modern times. The goal most presidential administrations have pursued has been to enhance the country’s “energy security” by making it less reliant on imports of crude oil from other nations.
However, the policy choices being pursued by President Biden and congressional Democrats will inevitably serve to weaken America’s state of energy security as they are implemented and serve to inhibit U.S. oil production. This is a conscious choice being made as part of the effort to speed up the energy transition.
The Estrella, a crude oil tanker operated by Lundqvist Rederierna AB, left, and Nansen Spirit, a ... [+] crude oil tanker operated by Teekay Corp., transfer oil between them off the coast of Southwold, U.K., on Friday, May 15, 2020. Nine tankers carrying about 5.58 million barrels of North Sea crude that loaded in April are floating off U.K. ports, according to ship-tracking data compiled by Bloomberg. Photographer: Chris Ratcliffe/Bloomberg
The U.S. had arguably achieved its highest level of energy security in half a century across the first three years of the Trump administration, thanks to massive increases in production from shale formations around the country. But the COVID-19 pandemic and the resulting crash in domestic oil production last year did great harm to that dynamic, and the new policies being put into place by the current administration will serve to dampen any potential recovery.
President Biden’s Day 1 executive orders to cancel the cross-border permit for the Keystone XL pipeline and suspend the program for oil and gas leasing on federal lands and waters were just initial shots across the bow. His order to raise the estimate for the “social cost of carbon” by over 700% will inevitably result in regulatory actions that will raise the cost of producing oil in the U.S., as will the coming effort by the Biden EPA to convince the courts to allow it to regulate carbon as a “criteria pollutant,” a topic I’ll address in more detail in the coming days.
All of these actions and more to come will increase the costs of not just oil and gasoline, but all forms of non-renewable energy for consumers, will make the country increasingly reliant on foreign oil imports and thus will render the country less energy secure than before. These outcomes are entirely predictable and are in fact features of the Biden/Harris plan, which is in part designed to make EVs and renewables more competitive by raising the cost of fossil fuels and other more traditional forms of energy. That’s not a value judgement: it’s just reality.
So, gasoline prices are indeed high and destined to go higher, for a variety of reasons. Everyone would be well-advised to plan accordingly.