Record high gasoline prices are upending family budgets, contributing to worsening inflation and at the center of federal efforts to cool the economy without rolling into a recession. officials are seeking a way to bring down prices without throwing the economy into a recession.
Meanwhile, President Joe Biden, like his predecessors, has few tools to help reduce the soaring fuel prices for which he is often blamed. That doesn’t mean he’s not wielding those that he can, like taking out withdrawals from the country’s Strategic Petroleum Reserve. He’s also urging the industry to boost crude production and refining capacity. And when those have failed, he’s criticized producers, accusing them of exploiting high oil and gas prices.
“We’re going to make sure everyone knows Exxon’s profits. Exxon made more money than God last year,” Biden said at an event last week, referring to the $23 billion Exxon Mobil made in 2021, one year after posting a $20 billion loss. The Houston-based company is on pace for a bigger 2022 after making $5.5 billion in the first quarter.
So, is Big Oil to blame for high gas prices?
In Houston, high energy prices are a double-edged sword. Like all Americans, Houstonians are paying more at the pump and to power their homes. But unlike the rest of the nation, Houston’s regional economy directly benefits from the success of the oil industry, which usually hires more workers during oil booms. And oil and gas jobs are returning, though industry automation and growing efficiency has likely muffled the potential benefits this time around.
Of course, companies want to make money and reward shareholders, and when the prices of crude and gasoline are high, Exxon, Chevron, Shell, and BP can rake in massive profits. However, Big Oil often says it doesn’t set those prices – the market does. Petroleum products are global commodities, and their prices are mostly driven by supply and demand. Right now demand is surging as the world economy recovers from the pandemic, and supply can’t keep pace. Supply problems were made worse when Russia invaded Ukraine, leading to sanctions on Russian oil and gas, essentially striking some of Russia’s supply from an already tight global market.
People are accusing Big Oil of price gouging, basically holding back on increasing supply to keep prices high. However, companies like Exxon Mobil don’t produce enough oil to influence the global market – OPEC, the international cartel of oil producing companies, controls about 35 percent of global oil production, and has more influence over prices. Exxon Mobil controls less than 3 percent of the world’s oil, and overall the U.S. controls less than a quarter.
But can’t Big Oil just drill for more oil?
Yes…and no. Most public oil and gas companies are increasing oil production this year, but those plans were put in place before Moscow’s war against Ukraine. Before the war, companies were already working through global supply chain snags lingering from the pandemic, but the war has exacerbated those – meaning companies are having a hard time getting needed resources for drilling, and even if they were able to find workers to quickly ramp up drilling, they might not be able to get the equipment. Oil field services companies like Halliburton have said the equipment market is “almost sold-out.”
On top of that, Big Oil’s investors have been pushing companies to exercise more discipline when it comes to spending, and to take more meaningful steps to combat the worsening effects of climate change. That’s left companies focused on shareholder returns, and left them wary of making any moves that could hurt their environmental plans since ramping up production could lead to more pollution than well planned increases.
OK, what does refining capacity have to do with gas prices?
Even if oil and gas companies were able to accelerate oil drilling more quickly than planned, last week U.S. refineries were running at 93 percent of their collective capacity.
Still, in a widely reported letter from Biden to the head of Exxon Mobil and sent to other Big Oil companies on Tuesday, the president said companies “have an opportunity to take immediate actions to increase the supply of gasoline, diesel, and other refined product you are producing and supplying to the United States market.”
However, in his own letter, Biden notes the significant impact the pandemic took on refining capacity. As businesses shut down and people stayed home in hopes of halting the spread of the virus, demand for gasoline plummeted, and as noted by the president, refineries reduced their capacity by 800,000 barrels of crude oil a day. Globally the world has lost 3 million barrels per day of refining capacity since the start of the pandemic.
It’s also been decades since a new refinery was built in the U.S. Most existing refineries are set up to process the heavy crude oil coming out of places like Venezuela, Canada, and the Middle East, not the light crude oil mostly produced in the U.S.
So, what is to blame for high gas prices?
A lot of finger pointing is going on. The president is blaming Big Oil, while the oil and gas industry and others have pointed fingers back at the president. However, a mix of things are to blame for the current high prices.
In addition to the lack of refining capacity and restraints on increasing domestic production, OPEC has been slow to increase production and add oil supply to the global market. Experts say OPEC member countries like Saudi Arabia and the United Arab Emirates have the ability to quickly ramp up production by a million or more barrels per day, but so far OPEC has only agreed to moderate increases, and experts say they’re even falling short on those.
If OPEC did swiftly increase crude oil production, it would reduce gas prices. Also, if Russia ended its assault on Ukraine, it could reduce them. The president and Big Oil have little control over those things.