Gas prices have increased by nearly 75 cents per gallon since the presidential elections were held in November, leading some people to blame President Biden for the rising pain at the pump.
However, the increase in gasoline prices we’ve experienced since November has little to do with the energy policies Biden has enacted so far, and more to do with market-driven supply and demand.
Pandemic punishes American oil producers
In a past life, my work centered on writing and educating the public about oil and gas development from hydraulic fracturing commonly referred to as “fracking.” In fact, my Twitter handle is still @thefrackingguy. I like to think this helps me have a broader perspective of trends in the industry.
Falling demand caused prices to crash. At one point, crude oil prices were negative. This sent a very strong price signal to oil markets, stop pumping crude.
American oil producers responded to these low prices by halting production. The graph below from the U.S. Energy Information Administration shows the number of drilling rigs in operation fell from 663 rigs in March of 2020 to 178 in August. As a result, American crude oil production was 8 percent lower in 2020 than in 2019.
Oil producers in the United States need higher prices than state-owned producers in Saudi Arabia or Russia. Goldman Sachs believes oil prices would need to be between $40-$45 per barrel for oil producers to restart activity, and above $50 per barrel to return to growth mode.
Another factor affecting the willingness of American oil producers to restart production is cash flow. Historically, drillers have been more worried about increasing market share, rather than having disciplined balance sheets. This may reduce the willingness of shale producers to restart oil drilling even with U.S. crude prices around $61 per barrel.
Oil production fell due to low prices, but demand is on the upswing as economies reopen. Oil demand is now back at about 95 percent of the pre-Covid high of just over 100 million barrels a day hit in 2019, according to the International Energy Agency.
More people are returning to work and air travel is rebounding. This is putting upward pressure on prices as oil production has not yet increased to meet this rising demand.
What has Biden done?
Thus far, President Biden has canceled the permits for the Keystone XL pipeline and issued a 60-day moratorium on issuing drilling permits on federal lands. These two issues are bad for long-term oil prices but have limited short-term impacts on prices.
Less than 10 percent of the Keystone XL pipeline had been built when President Biden revoked a key permit for the project, and oil production would resume if Biden allows the 60-day pause on drilling to lapse- but don’t count on it.
HowBiden will be bad for gas prices
There is little question that President Biden is looking for ways to curb American oil and gas production. Delaying the Keystone XL means this crude oil will continue to be transported by railcar, which is more expensive and less safe.
Biden may also seek to revoke permits from pipelines that already in operation, such as the Dakota Access Pipeline, the Line 3 pipeline in Minnesota, and the Line 5 pipeline in Michigan.
If Biden extends the ban on federal drilling (which is likely, in my opinion) it will hammer oil production in New Mexico, Colorado, Wyoming, parts of North Dakota, and offshore drilling.
Because about a quarter of the nation’s oil production comes from federal land, this will hamstring America’s ability to ramp up production and keep oil prices in check, harming all American families in the form of higher energy prices.
The Biden administration’s policies will lead to higher gas prices in the future, but the price increases we’re currently seeing aren’t due to those policies.