Saturday, December 10

Some Democrats Are Playing Politics On Oil And Gas Prices


I have just about given up on hearing any honest dialogue about oil and gasoline prices from politicians. They regularly play politics on energy issues with little regard for facts.

The Republicans blame the Democrats for high gasoline prices. They insist that surging prices are a result of President Biden’s policies. I have addressed these claims previously (here, for example).

Democrats, for their part, regularly cast blame upon the oil companies. In the past week, two prominent Democratic House members did just that. First Representative Katie Porter highlighted Shell’s profits, and promised to crack down on price gouging.

Then, Representative Adam Schiff tweeted:

I don’t believe Rep. Porter and Rep. Schiff are ignorant. They may not understand the intricacies of oil and gas pricing. They may not know that this is well beyond the control of oil and gas companies. Or, that surging prices — which oil companies do not control — will indeed lead to surging profits. But they are mixing up cause and effect.

I bet if you asked them “Why are oil and gas prices rising?”, they would at least understand enough not to answer “Because Big Oil is making them rise.”

But, I think both of them are just playing politics. They understand that demonizing oil and gas companies shifts blame, and it is popular with the public to hate the oil companies. The result is that the public thinks of oil companies with the same kind of contempt with which they hold cigarette companies — despite the fact that these companies provide a critical service for most people.

The problem with this kind of thinking is that it leads to bad energy policies. Instead of passing policies that actually address supply and demand, we end up passing punitive policies that are counter-productive.

Regarding Representative Schiff’s tweet, there are multiple reasons that gasoline prices wouldn’t rapidly respond to an underlying change in the price of oil. One is simply that oil doesn’t instantly get converted into gasoline and arrive at the store for sale.

But there’s something else going on here, in case he is interested in digging a bit deeper. As of February, the U.S. was still importing half a million barrels per day of diesel and gasoline from Russia. That has stopped, and this has caused some market disruptions.

U.S. refineries are struggling to keep up with demand. Distillate levels are very low and jet fuel demand has come roaring back. So, refiners are making as much distillate and jet fuel as they can. However, that shifts the product spectrum somewhat from gasoline production, at a time that we are already missing those Russian imports.

Most of the time oil and gasoline prices are tightly correlated, with a slight time lag. Sometimes, however, there can be issues at the refining stage that can cause oil and gasoline to move in opposite directions.

Imagine a situation where U.S. refining capacity is constrained, but gasoline demand is high. In that case, there may be less demand for oil, because it simply can’t be pushed through the refineries. So you could see crude oil stocks start to rise, and prices soften, while at the same time gasoline prices remain high. This is very similar to the situation we have now.

Most of our imports from Russia were finished products. Now that those have been banned, the market is scrambling to adjust to the loss of those products. It is true that this is a slightly more complex answer than “The oil companies are ripping us off”, but it’s an accurate reflection of what is actually happening.



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