Gas Prices Aren't Political
Americans have a lot of misconceptions about how the economy works—which is why I write this newsletter. This is particularly true when it comes to gas prices. Politicians like to promise the world even when it’s out of their reach: and gas prices are out of their reach. I have been hearing, on repeat lately, three popular misconceptions about gas prices that most Americans seem to have accepted as true:
Presidents somehow have control over gas prices.
The United States became energy independent under President Trump.
2a. President Biden ruined this glorious accomplishment.
The Keystone XL Pipeline would have changed the whole world of gas prices.
Each of these are easy mistakes to make, so I’m going to address each one individually. With Russian invading Ukraine gas prices are certain to climb quite a bit—far higher than US drivers are used to paying—so this seems like stuff everyone should learn.
Presidents Somehow Have Control Over Gas Prices
Gasoline is a global market and most companies buying and selling are multinational companies. Because of this most gasoline regulation falls beyond the regulatory purview of the United States. This means a president really doesn't have power to alter this market; the price dynamics are driven by the global supply of oil, and the global demand.
Even though the US is one of the world’s heaviest users of oil and hydrocarbons this use we’re thinking of is at the end user level—gas for a car, natural gas for heat or electricity, petroleum products for cleaning or plastics, etc. There just isn’t much a president can do to lower prices for end users. Lowering prices of gas requires at least one of two things: increasing the global supply of oil, and/or decreasing the global demand for oil. A president has limited ability to increase supply because they cannot force energy production. Companies will produce energy when it is profitable for them, and because much of the energy produced in the US is from fracking, it can be expensive to produce. Frackers often don’t make any profit unless global oil prices are quite high. In fact, the recent high oil prices have been great for US energy producers.
A lot of folks are also under the impression that President Biden has fought hard to cut the global supply by choking out US production. I never quite understand why these political narratives catch on, though I suppose both sides have a desire for this particular narrative—Republicans want to blame him for killing oil and raising prices, Democrats want people to think he’s going green—but Biden allowed more hydrocarbon extraction permits in his first year than Trump did.
A president can also attempt (hard emphasis here) to reduce demand by moving an economy away from hydrocarbon fuels to sustainable or renewable fuels. But, this is a slow process and takes a long time. We’ve been at it since at least 2012, and have really just gotten off the starting line.
When economies started opening back up from the pandemic, demand returned to normal levels, but supply has not. A President really can't control this, even if popular narratives say otherwise. Which leads me to,
The United States Became Energy Independent Under President Trump
The US is not, and has not ever been energy independent.
Energy independence means the US produces all the energy we need, and does not rely on importing energy from other countries. This is not, and has not ever been the case; at least not as far back as data goes.
The United States recently became a net energy exporter, which means we sell more hydrocarbons abroad than we import. This is not the same thing as energy independence because all hydrocarbons are different, and are used for different things. Most of what we sell abroad are natural gas products of one kind or another. Much of the oil, like that used to put gas in cars, still has to be imported.
The United States still imports between 8 and 9 million barrels of oil per day, from dozens of different countries, so our gas prices are heavily exposed to the international market.
I don't normally pause to tell you that you really need to click on a link, but you really need to click on that last link. The table is too big for me to include, but it shows just how much we still import. And if the numbers seem small, that's because they are in thousands, so multiply them by 1,000 to get the real number.
Here is a picture I can fit in the email to show just how much we still import.
Why do we have to import all this oil? Because the stuff we import is used for different things than the stuff we export. Here is our net hydrocarbon trade balance with each country. Notice we are importing a lot from some countries and exporting a lot to others. This is because we are exporting natural gas products, and still importing the oil to make gas that goes into gas tanks.
2a. President Biden ruined this glorious accomplishment
In 2021 the United States continued to be a net exporter (headline incorrectly says independent)—so "Brandon" didn't ruin anything here. That net hydrocarbon trade balance table clearly shows a negative number for “Total All Countries”. Negative imports mean we are still a net energy exporter. Let’s Go Brandon, I guess?
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The Keystone XL Pipeline Would Have Changed the Whole World of Gas Prices
Please note before we start this section, that second graph from above clearly shows that even without the Keystone XL pipeline, the US is increasing it’s imports from Canada, and we import more from them than any other country. Even still, the Keystone XL pipeline wasn’t going to dramatically alter the landscape. It would have increased oil production by about half a million barrels per day. This is not enough to make a huge impact on global supply, particularly when we consider that the US imports 8 to 9 million barrels per day.
In addition to that, people seem to be under the impression that if the pipeline were ever built, it would just be flowing straight into our gas pumps. This isn't true and doesn't make sense. The Canadian government regulates how much oil is produced in Canada, and has been limiting production in the Alberta Tar Sands, where the Keystone pipeline oil would have come from.
The Canadian government is also aiming to limit oil production emissions, which might decrease supply, and that will increase prices. In addition, the Tar Sands would have sold on a global market—they also get exported by water through ports on Canada's western coast. The US would not be the only customer.
So, we would have to compete with the rest of the world for the oil, which means the price would be bid up to the global wholesale price. Because the supply increase would be minimal (only a half million barrels per day) and the Canadian government may regulate cuts in production, the best we could hope for is that the pipeline might lower gas prices by a few percent, not a few dollars per gallon.
Finally, the Keystone oil would also be imported oil, so it may have impacted our net exporter status people seem to be so proud of.
We can think about fracking much the same way. If it is only profitable once prices rise above a certain point, it won’t really ever be used to lower prices. If fracking companies over-frack (thats a word, right?) they flood the market with supply. Suddenly there is too much fracking natural gas around, and nobody has that much demand, so the price falls. Then it isn’t fracking profitable anymore. Even if Biden were keeping his promise to limit leases on new public lands, this doesn’t change these fracking dynamics.
So how do we get back to low gas prices? Well hopefully it’s clear there isn’t really a lot a president can do here. The pandemic shutdown was the cause of the low prices under Trump. Across the world people drove less because thing everything was closed. The result dramatically lowered demand, so prices dropped. I don’t think that’s something we want to go back to. The other option is to increase supply. Since most of our oil used for gasoline is imported, we have to just hope other countries are as willing to allow new drilling as President Biden has been.
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