Skip Navigation

War, Policy, and High Gas Prices

April 12, 2022

A credible commitment not to ban fossil fuels may soon be necessary to significantly increase production.

          Russia’s invasion of Ukraine sent already rising oil prices even higher.  Record gas prices are fueling the highest inflation rate in forty years.  President Biden blames high gas prices on Mr. Putin, but administration policies are hampering U.S. oil production.

          Markets are forward-looking and incorporate new information almost instantaneously.  Anticipated events will affect commodity and stock prices before they occur.  Experts’ surprise at the full-scale invasion suggests that this likely explains the price rise from $90 to $120 per barrel over the next two weeks.  But the increase from $40 in October 2020 to $90 in February seems hard to blame on Mr. Putin.

          The Institute for Energy Research (IER) maintains a scorecard on Biden energy policies.  Mr. Biden cancelled the Keystone XL pipeline on Inauguration Day.  The XL segment was not going to be completed until 2023, so White House Press Secretary Jen Psaki is correct that this is not reducing oil supplies today.  But by foreshadowing administration policies, it could easily have driven up prices.

          The Biden administration has stopped development in the Arctic National Wildlife Refuge and the Alaska National Petroleum Reserve and halted new leases on Federal lands and waters.  A court ruling blocking a large Gulf of Mexico lease has not been appealed.

          Ms. Psaki repeatedly cites 9,000 unused Federal leases as demonstrating industry culpability for high prices.  As IER explains, oil production involves two steps: leases and drilling permits.  Companies first sign leases for exploration and then apply for drilling permits where oil is found.  A near doubling of the permit approval time under President Biden has produced a backlog of 4,000 applications.

          President Biden has reversed President Trump’s reforms of the National Environmental Protection Act and the Clean Water Act.  The policy process previously allowed environmental groups to endlessly litigate required environmental reviews, tying up production and pipelines for years.  Wise policy should balance environmental costs and economic benefits and proceed when we decide that the benefits outweigh the costs.  Prior to the Trump reforms, environmental groups nearly possessed veto power.

          Mr. Biden is simply, in IER’s view, delivering on his 2020 election pledge: “No ability for the oil industry to continue to drill period.  It ends.”  And now the President is asking Iran, Venezuela, and Saudi Arabia to pump more oil.  Everyone, it seems, except America.

          Anyone believing that climate change poses an existential threat to humanity must advocate such policies.  Meeting the new goal of limiting temperature rise to 1.5 degrees Celsius will require an end to the use of fossil fuels within ten or twenty years, not the distant future.

          Prices and quantities are related.  At a sufficiently high price, the quantity consumers are willing and able to purchase (the textbook definition of demand) will be zero.  Banning gasoline pushes the quantity to zero but can also be interpreted as driving the price to infinity.  High and rising gas prices are not a flaw of fighting global warming, they are the plan.

          The only glitch is perhaps that the Ukraine invasion gave us 2023’s price of gas in March 2022, resulting in more pain sooner than intended.  California Governor Gavin Newsome, who wants to ban the sale of gas-powered cars by 2030, now generously proposes rebates to Californians as relief from $6 a gallon gas.

          We may be approaching a point of no return for domestic oil and natural gas production.  Developing oil and gas involves enormous capital investment in wells, storage, transportation (pipelines or railroads), and refining or processing.  These investments require years of use to recoup.

           I do not support ending fossil fuel use to fight global warming, and you may wish to discount my investment insight.  But how can drilling oil or natural gas wells to be used for only twenty (or perhaps now fifteen or ten) years be profitable?  A four-year reprieve from a Republican president may soon be irrelevant.  A credible commitment not to ban fossil fuels may soon be necessary to significantly increase production.

 

Photo by 3d U.S. Infantry Regiment "The Old Guard", Public Domain Mark 1.0.

Article Tags
Economy
Author
Daniel Sutter is Affiliated Senior Scholar at the Mercatus Center and Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University.
dsutter@troy.edu

Related News & Opinion View All News