Oil Prices?

Did you know that it is President Joe Biden’s fault that prices, particularly gasoline prices, are so high?  I did not either.  But “many people are saying.”  I do not believe this to be the case.

In April 2020, the global pandemic was upon us, lockdowns began, people were laid off or sent home in order to contain what was then, and still is, a deadly virus, and the US demand for gasoline dropped significantly.  At that time, a barrel of West Texas Intermediate (WTI) oil cost $37.63 and the unemployment rate in the United States spiked at 14.8%.

Fast forward to today, the US unemployment rate is 3.8%, the lowest in decades.  The economy grew last quarter at a 7.9% annual rate, the highest in decades.  Remember those facts.

A barrel of WTI currently costs $104.12 (down from $123.70 just two weeks ago).  That is about a 277% increase from April 2020.  World oil demand in April 2020 was 82.6 million barrels.  In January of 2022, world oil demand was  99.6 million barrels per day.  (Sources: Y Charts, Al Jazeera, World oil report).  That is about a 20% increase in demand.  Oh, yes, and Russia invaded Ukraine and the US and EU started to boycott Russian oil.

Now, Russia is the second biggest supplier of oil in the world.  The US is first, and Saudi Arabia second (although this does change a bit year to year).  The US imports about 50% of its oil for refining in the US, 61% of that from Canada, 10% from Mexico, 6% from Saudi Arabia, and 3% from Russia.  The US also exports 50% of its oil production because our refineries are set up to take the tougher grades produced in US, Canada, Venezuela, and yes, Russia.

Contrary to what you might hear in the media, the Keystone pipeline is up and running.  The Keystone pipeline moves oil from the  Western Canadian Sedimentary Basin in Alberta to refineries in Illinois and Texas, and also to oil tank farms and an oil pipeline distribution center in Cushing, Oklahoma (Wikipedia).  What isn’t up and running is the proposed Keystone XL extension which would have connected the Phase I-pipeline terminals in Hardisty, Alberta, and Steele City, Nebraska, by a shorter route and a larger-diameter pipe (Source: Wikipedia).  This extension would have added 400,000 to 600,000 barrels of day to the US production of 12,000,000 barrels a day.  So, the output of that unbuilt extension would’ve represented a mere 4% of US production and  just 2% of US consumption.  Not really a game changer.

Putting it all together: Biden took office.  His administration stopped the Keystone XL extension, which wouldn’t have been completed until at least 202x anyway.  The country continued to recover from the pandemic with an ever-increasing speed resulting in explosive growth with help from administration-led stimulus spending and more support for COVID prevention.  In the US, the average price of a gallon gasoline rose from $1.96 in April 2020 to $2.59 in February 2021 (+32%), to $3.60 in February of 2022 (+39%).

Then Russia invaded Ukraine.  Due to global market reaction to the Russian invasion and the subsequent US announcement that we would stop buying the 3% of the US imports of oil, the average US price of a gallon of gasoline went from $3.48 to $4.32, per AAA (slightly different numbers from above due to diverse sources).  I just paid $5.06 a gallon for premium 93 octane at Mobil.

While blaming President Joe Biden has been primarily a partisan Republican effort, it is not exclusively one – a number of Democrats seem to be similarly confused as they too are blaming President Biden for these price increases.   All those critics can blow that nonsense out of their collective asses.  The non-partisan conclusion is that rapid, world-wide economic growth and pandemic-related supply chain distortions, a rapidly tightening US labor market, and wholesale speculation and uncertainty have caused gas price to rise from 2021 to 2022 world-wide.  The Russian attack on Ukraine put 12% of the world oil supply at some risk and that caused oil traders to push the price oil and gas higher.  With scarcity, due to constrained supply, prices rise if demand stays level, let along demonstrate explosive growth.

Inflation is not, and specifically gas prices are not President Biden’s fault.  This inflation is a national problem brought about by internal and external forces, mostly beyond anyone’s control.  This is the price of globalization of the supply chain and rapid recovery from the pandemic.  Biden is, of course, President and thus responsible for everything that happens, but one cannot reasonably conclude that he, over his first year in office, caused this.  I would wager to say something quite different.  The United States is much better off, economically, today than we were a year ago.  That seems like a damn good deal for the country.  President Biden is also responsible for that.

Postscript:  As I was finalizing this rant, Pulitzer Prize finalist Nick Anderson created a cartoon that sums it up perfectly.  A picture is worth 1,000 words (in this case 1,130).  Check it out.

Inflation by Nick Anderson (click on the link, then click on title to enlarge)