Why Are Gas Prices So High

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Over the past few months, Democrats have rediscovered one of the oldest ideas in politics: Nobody likes it when prices go up.

Why Are Gas Prices So High

In January, inflation rose faster than in nearly 40 years. But not all prices increase in the same way. Oil plays a big role in the rise. Gasoline and jet fuel prices hit their highest levels since 2014. Rising oil prices alone could account for nearly 30% of the “excess” inflation the US has seen since the start of the pandemic, according to financial journalist Matthew Klein.

Why Are The Gas Prices So High? Here’s An Infographic That Explains What Is Actually Happening With A Tx Behind The Scenes.

Unsurprisingly, this statistic is bad news for the White House. The ups and downs of President Joe Biden’s disapproval rating almost exactly follow the rise and fall of prices at the pump. Gasoline, after all, is an ur-commodity, the only commodity whose prices are advertised on large billboards beside the highway. But these figures underestimate the extent of the misery. When fossil fuels become expensive, their rising costs can spread to the rest of the economy. In recent months, companies have complained that high oil and natural gas prices are increasing the cost of transporting goods (because trucks, ships and planes burn petroleum-derived fuels), packaging ( because plastics use crude oil as a chemical feedstock), and even grow new foods (because fertilizers are made with natural gas). Some of these higher costs are ultimately passed on to consumers in the form of higher prices.

Democrats don’t really know how to handle this situation. In the long term, they agree that investing in zero-carbon energy is the only way to sustainably reduce costs. But in the short term, they are deeply confused about whether fossil fuels have to be expensive to drive the energy transition; or at a lower cost, in order to support an economy strained by inflation. At the United Nations climate conference in November, the United States and 195 other countries pledged to phase out fossil fuel subsidies. Now the White House and key Democratic lawmakers, including self-proclaimed climate champions like Sen. Ron Wyden of Oregon, are considering waiving the federal gas tax.

Part of the confusion stems from the fact that policymakers can’t agree on why oil and gas prices are rising in the first place, and each answer means something different for climate policy. In interviews, experts gave me three hypotheses about the recent increase:

What are they afraid of? Several things. The possibility of a major war in Ukraine, for example. The possibility that Iran will not reach a new nuclear agreement. But mostly, they’re worried about something pretty basic: American and European oil companies have less fuel on hand than before.

Why Gas Is So Expensive In Some U.s. States But Not Others

When the pandemic hit, American and European oil companies bought huge amounts of crude oil. They have since sold those reserves. Instead of sitting on several months of inventory, many companies have a few weeks of inventory.

It’s quite normal. But oil speculators around the world are watching U.S. and European oil stocks very closely. Although these two markets only represent about a third of the world’s oil supply, data from the United States and Europe is much more reliable than data from anywhere else. Thus, the two markets are used as a proxy for the rest of the planet – and with their stocks in decline, investors around the world are getting nervous.

“It’s like toilet paper during a pandemic,” Sarah Emerson, president of oil consultancy Energy Security Analysis, told me. “Everyone wants toilet paper.” They all stored toilet paper for four months. Then…the shelves were full again and no one cared.

The same is happening in oil markets right now, she said. Traders in the United States and Europe are now willing to pay more for oil because they fear they won’t be able to get it when they need it. But there is no deep problem in the market, and rough stocks in China and India are healthier than those in the West.

Why Are Gas Prices Still So High? When Will Gas Prices Go Down?

What this means for climate policy: not much! Until the escalation caused by Russia’s invasion of Ukraine leads to a halt in the flow of oil to Europe, policymakers should sit back, let stocks fill up and wait for things calm down.

Some oil drillers produce as much oil as they can, as fast as they can. For financial or geological reasons, these smaller platforms do not have the capacity to increase or decrease the flow of oil. As long as they make a profit, they pump oil and then resell it. But a few companies or countries can form a cartel and sit on so much oil that they have what is called “spare capacity”, meaning the ability to produce more oil at will at any time. By opening its oil tap wide, this reserve producer can flood the market with so much oil that other drillers struggle or die. Excluding it, oil prices increase.

In other words, in the oil business, “spare capacity” is what gives companies market power and gives them the ability to set prices.

Cut to 2019, when the global oil market looked like never before. The United States has defied expectations to become the world’s largest oil producer, producing 20% ​​of global supplies. OPEC Plus, a cartel made up mostly of Middle Eastern OPEC countries and Russia, held about 40% of the market.

Why Are Oil Prices So High When The U.s. Remains One Of The World’s Largest Producers?

The USA and OPEC more could not do otherwise. In the most important OPEC countries, a few large facilities operated by state monopolies dominated oil production, drawing millions of barrels of oil a day from the vast underground oil oceans. They have historically used “spare capacity”. In the United States, hundreds of private companies were operating thousands of small frac wells from Texas to North Dakota, embodying the “pump all the oil you’ve got” strategy. These fracking companies have flooded the market with cheap oil by releasing hidden reserves locked in deep shale, pushing OPEC nations out of their traditional cartel role. But there were so many of these shale companies that most were losing money.

Then the pandemic hit. People stopped driving and stealing. Oil demand plummeted around the world – and fracking companies went bankrupt. The US shale industry has consolidated, reducing the number of shale companies from hundreds to dozens, Emerson told me.

That’s when OPEC Plus saw its window, Samuel Ory, director of the University of Chicago’s Energy Policy Institute, told me. (Disclosure: I was a paid journalist at the institute.) Early in the recovery, OPEC Plus pumped less oil than the world required, even though it had the capacity to pump more. This spare capacity restored the cartel’s market power – and allowed global oil prices to become “as bearable as possible”, Ori said. Meanwhile, the US shale industry is now so consolidated and so desperate to provide profits to Wall Street that it has not started drilling new wells again. U.S. oil production remains below pre-pandemic levels.

What this means for climate policy: Many Democrats want to blame “corporate greed” for record inflation. This annoys many economists, who point out that greed is a constant in the capitalist economy and that most companies raising prices today are doing so to regain their pre-pandemic profit margins. As Ezra Klein recently asked: Has anything about the pandemic given companies much more power to set prices?

Why Gas Prices Seem To Go Up Faster Than They Go Down

In the oil market, the answer is Well, yes, actually. The question for the climate is whether Democrats think this change is a bad thing. Higher gas prices might be good for the climate, after all, because if oil gets more expensive, fewer people will use it and less carbon pollution will go into the atmosphere. (Think of it as a de facto carbon tax!) Unless, of course, gas prices get so high that voters drive Biden and the Democratic majority out of power – which would be bad for the climate, because only the Democrats want to adopt a serious political climate. Do Democrats think high gas prices are enough of a problem for them to be willing to increase carbon emissions in the medium term?

In fact, this second theory is completely wrong, Robert McNally, president of Rapidan Energy, an energy research company, told me. OPEC Plus countries don’t care about high oil prices; they are concerned about its stability, he said. Every story of the past two years must explain the fact that OPEC plus saved the world oil market. Shortly after the outbreak of the pandemic (and the end of the oil price war that accompanied it), Russia and Saudi Arabia agreed to cut production, allowing world oil prices to reach l ‘balance.

This search for stability also explains why they’re not pumping more oil right now, even though they could, McNally said. In July 2021, OPEC Plus promised to pump 400,000

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