Remember the outrage when a handful of US oil refineries were shut down in 2020?
If not, that’s because there was no outrage. Oil and gasoline prices have been gloriously low and the COVID-19 pandemic has dominated the news. Hardly anyone noticed.
Energy investors certainly did, however, as 2020 was one of the worst years in energy producer history. Exxon Mobil posted its first loss in its history, a whopping $22 billion write-down. The top five U.S. oil refiners — Marathon Petroleum, Valero Energy, Exxon Mobil, Phillips 66 and Chevron — collectively lost $43 billion as COVID shutdowns led to an epic slump in oil prices and energy demand around the world.
This data on expected global demand for oil versus actual demand shows how badly the oil industry has collapsed in 2020:
Source: International Energy Agency
Many Americans today blame President Biden for rising gasoline and household energy prices for speaking out on fossil fuels as part of his push for a green energy transition. But economics, not politics, explains most of the current price hike, and the energy devastation of 2020 is now setting the stage for painfully high prices.
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Biden himself appears to lack a solid understanding of the economic fundamentals that are now driving prices. On June 15, he sent harshly worded letters to seven major oil refiners – the top five plus BP and Shell – complaining about the record profits they are now making, on top of a tripling in profit margins in recent months.
“Your companies and others have an opportunity to take immediate action to increase the supply of gasoline, diesel and other refined products,” Biden wrote. “Your companies need to work with my administration to propose concrete, short-term solutions to deal with the crisis.”
Exxon issued a terse statement in response to Biden’s request, saying it continued to make modest investments in refining capacity. It also said Biden could relax some regulations in an emergency, which would make it easier to move fuels in the refining process. Exxon also promoted “clear and consistent policy” on energy resources, a nod to permitting, leasing and regulatory policies that change from president to president and discourage investors who don’t want to get caught up in a drastic change in policy.
The story goes on
It’s possible the energy industry and government will find ways to temporarily boost production and slash gas prices without upsetting shareholders who are claiming some profit after a series of devastating losses. But both sides also dance around each other.
Biden is basically urging energy companies to restart refineries seen as money losers in the depths of 2020, and also urging those companies to invest in more capacity with no guarantees that prices will stay as high as that they get a return on that investment. In fact, Biden is implicitly asking energy producers to increase capacity at the expense of their own profitability, as more capacity would lower prices. If the government could guarantee that prices would stay above a certain level, which guarantees profits, the industry could produce more. But guaranteeing high prices wouldn’t solve Biden’s problem with voters — and likely make it worse.
The American Petroleum Institute sees an opportunity to roll back Biden’s push for green energy. On June 14, the industry group sent the White House a 10-point list of actions it says would ease the current crisis. At least half of them would turn Biden’s green energy goals on their head and put Biden at war with the progressive wing of his party. Right now, there’s little overlap between what Biden is asking for and what the industry is offering. And Biden is generally opposed to executive actions that might bypass negotiations but fail in court.
In his letter to the seven refiners, Biden correctly noted that global refining capacity has fallen by 3 million barrels per day since 2020, down about 4%. In the United States, refining capacity has fallen by about 1 million barrels per day, or about 6%. With global demand for oil and oil products almost back to pre-pandemic levels, this marginal refining shortage is enough to create shortages and push up prices.
It is also undeniable that the Russian invasion of Ukraine triggered what may be the most serious global energy crisis since the 1970s. Sanctions against Russia are likely to remove about 2 million barrels a day of oil from markets, about 2% of the total. Many Americans think that US “energy independence” means that the United States is not at all dependent on foreign oil, but that is not true and has never been true. Almost every country in the world has to accept oil prices, which are determined by supply and demand in the world market.
And while Biden has overused the phrase “Putin’s price hike,” he’s right. From Biden’s first day in office to February 23, 2022, gas prices rose from $2.45 a gallon to about $3.60 a gallon. That’s a gain of $1.15 over a 13-month period. Since the Russian invasion of Ukraine on February 24, prices have risen to around $5.10, a gain of $1.50 over a four-month period. The rising prices are due to actual reductions in oil supply and fears that an unfavorable turn in the war could result in a much more acute supply problem. Nothing else has happened in the last four months that could explain these dramatic price increases.
An end to Russia’s war against Ukraine would be the quickest way to lower energy prices – and energy producers certainly know that one day the war will end and eat into profits. But prices could fall if the war between Russia and Ukraine drags on. The US Energy Information Administration expects US refineries to be near full capacity for the remainder of 2022, with gasoline and diesel prices falling over the summer and fall. In the latest EIA forecast, gas prices are expected to fall back below $4 in 2023.
U.S. President Joe Biden delivers a speech aboard the Battleship USS Iowa Museum in Port of Los Angeles on June 10, 2022 in Los Angeles, California. (Photo by Mario Tama/Getty Images)
Biden still has an egregious political problem, because since his 2020 stint as presidential candidate he has called for a definitive end to fossil fuel use and the adoption of renewable energy that falls short of meeting the nation’s current needs. Voters associate his rhetorical hostility towards the energy industry with the high prices we now have. To a lesser extent, it’s also probably true that Biden’s bias towards green energy is a signal to fossil fuel investors that their future returns are likely to be limited, so don’t overinvest and get your money out quick.
But the actual capacity reductions that are driving prices higher now happened in 2020, when Donald Trump was president. Trump has been an advocate of fossil fuels and the kind of deregulation that the industry is now demanding from Biden. But the US energy industry struggled with profitability during Trump’s administration, in part because overinvestment and overproduction kept prices — and profits — low.
Biden will never convince voters that $5 gas is Trump’s fault. And in fact, economic forces have always driven oil and gas prices. But we only pay attention if they exceed the family budget.
Rick Newman is the author of four books including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.
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