The global spike in commodity prices has resulted in expensive gasoline, which is always a political headache for whichever political party is in power.
The Biden administration is scrambling to figure out some sort of response to high prices, but has very few tools at its disposal. The price jump has led to calls for more oil supply, something the executive branch has little control over. Ultimately, accelerating the energy transition is the only option to meet both climate goals and to lower energy prices in the long run.
High gasoline prices
The factors contributing to soaring energy prices are multiple. On the one hand, a very big portion of the blame can be pinned on the pandemic, which blew a lasting hole in oil supply, but only resulted in a temporary hit to demand. Global oil demand is mostly back to the 100-million-barrel-per-day level seen before the pandemic, but supply is a few million barrels per day short of that. OPEC+ is adding to this dynamic by keeping supply off the market to keep prices aloft.
But there is more to the story than just the pandemic. Global spending on oil and gas plunged following the 2014 bust in oil prices. After hitting a peak in 2014 at $779 billion, capex steadily declined since then, falling to $483 billion in 2019. It then took another hit from the pandemic, falling to $328 billion in 2020. Massive financial losses from U.S. shale – by some calculations the industry collectively burned through $300 billion over roughly ten years – have left little interest from investors, who have increasingly demanded that oil companies spend less on drilling.
The energy transition is in full swing and is only picking up pace. That makes investment in long-term oil and gas projects increasingly risky.
Even with prices roaring back, the trend of declining capex shows no signs of letting up. The energy transition is in full swing and is only picking up pace. That makes investment in long-term oil and gas projects increasingly risky. The cost of capital for a long-cycle oil project is now around 20 percent, while for renewables it is around 3 to 5 percent, according to Bloomberg Green. Investors prefer dividends and share buybacks to spending on new oil supply, for which long-term demand is increasingly suspect.
In other words, the sudden shortfall in energy supplies can be linked to much broader and durable forces. The Biden administration and the Trump administration had very little influence over what people pay at the pump.
But that does not mean that the White House can escape the political price of costly gasoline, which is why the Biden administration is looking around for some solution.
Unfortunately, there are few levers to pull. After pleading with OPEC+ to increase oil production – to no avail – the one obvious move the U.S. government can take is to release oil from the strategic petroleum reserve (SPR). Secretary of Energy Jennifer Granholm confirmed that the Biden administration is considering that option. When asked about that possibility on CNN over the weekend, Sec. Granholm said: “That’s one of the tools that he has, and he’s certainly looking at that,” referring to President Biden.
She also said that the administration would take a close look at new data from the Energy Information Administration, which published a report midweek. However, a less bullish report than expected somewhat took the momentum out of a potential SPR release, although some analysts still see such an outcome.
“In our view, the most likely outcome at this time is a coordinated IEA release, the first such release since 2011; a unilateral US release is perhaps likely to be seen as something of an anti-climax by oil traders,” Standard Chartered wrote in a note.
But other analysts have argued that the impact would be short-term at best. “Any release from the US SPR, although it would likely have a temporary bearish effect on prompt prices, is not a lasting solution for an imbalance between supply and demand,” Louise Dickson, Rystad Energy’s senior oil analyst, said in a statement. “It will also be up to individual refineries whether or not demand signals justify increasing utilization rates, otherwise the high-price environment may relegate any SPR release into commercial storage.”
Dickson added: “If the goal is to ease gasoline prices in the short-term, there is no quick fix, as SPR volumes only include negligible volumes of refined fuels.”
“If the goal is to ease gasoline prices in the short-term, there is no quick fix, as SPR volumes only include negligible volumes of refined fuels.”
Meanwhile, a group of 11 Democratic Senators sent a letter to President Biden, calling on him not only to tap the SPR, but also to consider a ban on crude oil exports in order to keep supply in the country. Such a move would have the potential to lower domestic prices, but would certainly raise the ire of oil producers and potentially face legal challenges. Despite high prices, it is hard to imagine the administration going this far.
The administration woke up to another headache on November 10, when new government data showed that economic inflation picked up pace in October. Of course, higher energy prices are a big part of the rising cost of consumer goods. The new data increases the pressure on the Federal Reserve to tighten monetary policy, which contributed to a decline in oil prices mid-week.
OPEC+ and most other analysts, including the U.S. EIA, see the current state of the market easing in the months ahead. The oil supply balance is expected to flip from deficit to surplus, potentially putting an end to the pandemic-related disruptions that have afflicted the supply chains of many other sectors.
OPEC+ and most other analysts, including the U.S. EIA, see the current state of the market easing in the months ahead.
Even still, the oil industry and its proponents have opportunistically used high gasoline prices and the specter of inflation to warn against climate policy, attempting to link the items. In reality, the shortfall in oil supply is more related to the seven-year decline in upstream capex, itself the result of poor financial returns and investor pressure for capital discipline, as well as the declining prospects for oil in the years ahead.
But the oil industry is correct in that climate policy – real policy commensurate with the scale of the crisis – does pose an existential threat. The Build Back Better Act under consideration in Congress contains $550 billion in spending over ten years that would funnel money into renewable energy and electrification.
That would speed things up. Automakers accounting for nearly a third of the global car market have now committed to 100 percent zero emissions vehicles by 2035. Big federal spending to accelerate that shift will shave off huge chunks of oil demand. Given the scale of the climate crisis, near-term action is much more important than vague promises of “net zero emissions” by mid-century.
The Biden administration has little control over near-term gasoline prices, but it can make the investments needed to both address the climate crisis and also bring down energy prices over time.