The political rhetoric on both sides is more entertaining than enlightening.
Being an energy economist is not as glamorous as it seems. As with any expertise, it is necessary thousands of hours to perfect our skills. Much of that time is spent repeating, “Gasoline prices have gone up because world oil prices have gone up”. It’s not too late to have fun, but you better start training now. No need to tweak the reverse phrase, “gasoline prices are down because world oil prices are down”. You will not be asked about gasoline prices during these times.
Another skill you need to hone is responding diplomatically to people who insist that gas prices only go up, never go down. Then you have to practice adjusting to inflation and learn the difference between producing oil and refining it into gasoline and diesel. The grind is seemingly endless.
I put all my training to work over the past few months as politicians and the media obsessed with “doing something” about high gas prices.
Confusion to our left
On the left, leaders express outrage that oil companies are making so much money and not sharing it with consumers lowering gas prices. Like it was a trick. Apple will lower the price of its iPhone because it earns too much money? Facebook is going to, uh, only sell half of your personal information, because its profits have too many zeros?
Some suggest that the oil market needs more competition, and they are right. The world’s biggest oil seller, Saudi Arabia, is supporting prices by limiting production. We respond by looking away from their human rights abuses and government-sponsored killings, so that we can ask these “friends” to fill the supply gap resulting from the sanction (finally) of the Russia. Seems like we’re just digging a hole deeper to fill another.
Instead, some politicians are calling out US oil producers. the companies explain that prices are set in a global oil market, in which they are each small players, so they can’t do much about the price of oil. (Another sentence that we sing during our training as energy economists: “It’s a global oil market”). Just like homeowners in a booming housing market, their huge profits are because of lucknot the actions they took.
That’s what executives say out of one side of their mouths. The other side says things like produce less oil in California increases gasoline prices in California. (If it’s not obvious why this doesn’t make sense, please go back to the top of this article and start over.)
Some Democrats are proposing a windfall tax to capture a share of Big Oil’s lucky gross profits and use them to help families hit by high energy costs and inflation. The idea makes most energy economists uneasy because windfall profits are notoriously difficult to define. The oil industry says targeting new taxes based on an industry’s profits risks undermining investment incentives.
At first it seems reasonable, but then we remember the spring of 2020. That’s when industry executives said that low prices indicated that the market was dysfunctional and needed government help, ranging from Texas’ demand to coordinate production cuts between companies (known as collusion), to Trump’s pressure on other countries to cut production (also known as collusion), upon receipt of billions of dollars in government subsidies. The fundamentals of capitalism did not seem so compelling to oil industry executives at the time. Maybe the middle ground is for the oil companies to pay back those subsidies, and then we can talk about their sporadic belief in limited government.
Confusion on the right
From right-wing politicians comes the political response “drill, baby, drill”. If we just open up more land for oil production, gas will be cheap again. The true part of this statement is that increasing overall oil production in the United States would drive down oil prices somewhat, as has happened in the last decade since the fracking revolution.
But U.S. crude production is still more than a million barrels a day lower than pre-pandemic levels, and that’s thanks to strong incentives to drill from $100 a barrel of oil. . The slow return of post-pandemic production is due to lack of equipment and manpower, no restrictions on government rental. Moreover, the leases being auctioned today would not start producing oil for years. Making more land available for oil production is the opposite of good policy: it would do nothing in the short term and increase supply in the long term, when we really need to reduce fossil fuel consumption.
A typical California mystery
If there isn’t much we can do about the oil market, perhaps we should look downstream to the refining, distribution and retailing of gasoline. Outside of California, however, it is difficult to focus on these sectors. Downstream margins rise and fall – higher when crude prices fall and retail prices lag, lower when crude rises and retail prices rise less rapidly – but it’s hard to see a major trend in the average difference between the retail prices of gasoline and crude oil.
The story is different, however, here in the Golden State. There are a lot of issues to talk about downstream, but there still aren’t many people in Sacramento who want to talk about them. the mystery supplement for gasoline which began in 2015 – the unexplained difference between retail gasoline prices in California and the rest of the country, after adjusting for taxes and environmental charges – kicks into 2022 with a bang. 2021, when California drivers saw an estimated $4 billion disappear down this mysterious drain, most of which almost certainly goes into downstream companies.
It’s frustrating when simple economic analysis takes precedence over political rhetoric and ideology. But from the day you receive your energy economist hat, your job is to shed light on energy markets, whether they work well or badly. Also, it’s better to chant “gasoline prices have gone up because world oil prices have gone up”.
Find me @BorensteinS mostly tweeting energy news/research/blogs.
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Suggested citation: Borenstein, Severin. “What’s wrong with gasoline prices?” Energy Institute Blog, UC Berkeley, May 2, 2022, https://energyathaas.wordpress.com/2022/05/02/whats-the-matter-with-gasoline-prices/