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3 Things Everyone Should Know About the Price of Oil & Gas & the Myth of Energy Independence

There are a lot of misconceptions about the price of oil and for decades Republican politicians have tried to score points by blaming Democrats for spikes in gas prices. Their argument is that regulations meant to conserve wildlife and the natural environment push up prices. Today they argue that Democrats are too worried about the climate. 30 years ago they claimed liberals were too concerned about reducing smog and protecting wildlife in environmentally sensitive areas.

It's probably true that environmental regulations do add a few cents to the price of gas, but here's a fun fact; even after the recent price increases, the United States has the lowest gas prices of any developed nation, less than half of Norway and $1.00 less per liter than the UK, Germany, and Sweden. Gas has always been relatively cheap in America because we have low gas taxes. Those taxes no longer pay the cost of road and bridge maintenance and don't even start to cover the health and environmental damage caused by burning fossil fuels.

Still, gas prices have always been a potent political issue and today Americans want to know who or what is to blame for rising fuel prices. Here are some of the key points to understand.

1. Who or what determines the price of oil and gas? Like most commodities, the price of crude oil is determined by the global supply and demand. In the US, after oil is refined into gas there can be regional price differences at the pump based on transportation expenses and state and local taxes, but the price of crude oil is by far the biggest factor in gas prices.

2. What caused the surge in the price of crude oil over the year? Today's higher crude oil prices resulted from the pandemic, and the situation was exacerbated by the Russian invasion of Ukraine.

When the pandemic first hit the US in March 2020, demand for gasoline plummeted as Americans started working from home and dramatically reduced their vacation travel. The typical driver cut their driving in half, according to the AAA. That sharp decline in demand caused gas prices to sink below $2.00 in the Spring of 2020. In response, the Organization of the Petroleum Exporting Countries [OPEC] and other oil-producing nations slashed production, in order to stabilize falling prices.

Reuters: "Like much else during the pandemic, what was happening in fuel markets was unprecedented. Demand had fallen so sharply as people stopped travelling, the oil industry simply couldn't cut production fast enough to match it. ... There was so much oil there was nowhere to put it, and in mid-April 2020 the price of a barrel of West Texas crude went below $0 as sellers had to pay get rid of it."

However, as the global economy recovered from the pandemic, OPEC and other producers were slow to increase the global supply. OPEC didn't start increasing production until July 2021 and by then the price of oil was surging. This year US oil producers also began increasing production to take advantage of rising prices, but it's going to take months for that oil to hit the market. And while producers were ramping up, Vladimir Putin invaded Ukraine, and Western nations responded by sanctioning Russian energy exports. That further reduced the flow of oil globally and spooked the oil futures market.

The confluence of events caused oil and gas prices to set records in February and March, and they will remain elevated throughout the Spring and Summer.

3. The myth of energy independence. Many people seem to believe that if we were "energy independent," we could just hoard the energy that we produce, set our own prices and not take part in the sometimes chaotic global energy market. Republican politicians spend a great deal of time perpetuating this myth, and it's usually followed by a condemnation of environmental policies like the "green new deal" legislation that several Democrats favored during the 2020 presidential primaries. Such arguments are pure political theater with no basis in fact.

First, nothing even resembling the "green new deal" is actually contemplated in Washington and the Biden administration never embraced it. The President's Build Back Better plan contains some important initiatives to fight climate change, but aimed at helping Americans transition to renewable energy sources.

Second, we can't just hoard our own energy and stay out of the global energy market. US energy producers like Exxon are private companies, free to sell their oil to the highest bidder on the open market and much of it goes overseas. US companies also buy different types of oil [light vs. heavy] from overseas to refine and sell in the United States.

Third, the US is "energy independent," if by that you mean that we produce more than we use. Energy production increased dramatically during the Bush and Obama administrations and finally overtook consumption in 2019.

US Energy Information Administration: "Since 2005, total annual energy imports have decreased and total energy exports have increased. The United States became a net total energy exporter in 2019 for the first time since 1952 and maintained that position in 2020 even though both total energy production and consumption were lower in 2020 than in 2019."

If you single out petroleum-based products alone, we still import a bit more than we export in some years, but not by much, and not in 2021 when we actually exported more than we imported.

US Energy Information Administration: "In 2021, the United States imported about 8.47 million barrels per day (b/d) of petroleum from 73 countries. Petroleum includes crude oil, hydrocarbon gas liquids (HGLs), refined petroleum products such as gasoline and diesel fuel, and biofuels. Crude oil imports of about 6.11 million b/d accounted for about 72% of U.S. total gross petroleum imports in 2021, and non-crude oil petroleum accounted for about 28% of U.S. total gross petroleum imports."
"In 2021, the United States exported about 8.63 million b/d of petroleum to 176 countries and 4 U.S. territories. Crude oil exports of about 2.98 million b/d accounted for 35% of total U.S. gross petroleum exports in 2021. The resulting total net petroleum imports (imports minus exports) were about -0.16 million b/d in 2021, which means that the United States was a net petroleum exporter of 0.16 million b/d in 2021.

So, yes, the US is energy independent in that American corporations produce a significant share of the world's energy, and more than we use, but that doesn't change the fact that prices are determined by global supply and demand. And, for now, companies can charge more for their energy products because demand is outstripping supply. The good news is that increases in demand always lead to supply increases and we can expect prices to decrease in the coming months unless OPEC reduces production or there is another shock to the global market like Putin's invasion of Ukraine.

#economics #research

By: Don Lam & Curated Content

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