Several factors contribute to soaring gasoline prices, but the greed of oil barons is an unlikely explanation no matter what President Joe Biden claims. It's not that energy companies don't want to make a buck; to the contrary, we count on their self-interest to drive the innovation and competition that puts fuel in our tanks. But it's not as if they've grown greedier in recent months. What has actually changed is that the world has become more chaotic even as overregulation and an ideological crusade against petroleum discourage investment and make it difficult for supply to catch up with demand.
In a letter to seven oil companies this week that alternated in tone between begging and berating, Biden complained that "since the beginning of this year, gasoline prices have increased by more than $1.70 per gallon." After first placing blame on Russian President Vladimir Putin's invasion of Ukraine and the resulting economic sanctions, the president pointed at "historically high profit margins for refining oil into gasoline, diesel and other refined products" which he called "not acceptable."
"To be sure, the shortage of refining capacity is a global challenge and a global concern," Biden added. "I request that you provide the Secretary with an explanation of any reduction in your refining capacity since 2020 and any ideas that would address the immediate inventory, price, and refining capacity issues in the coming months."
In response, the American Petroleum Institute, a trade association, pointed to a 10-point plan it published just the day before and sniped back: "While members of your administration have recently discussed the need for additional supplies to solve the energy crisis, your administration has restricted oil and natural gas development, canceled energy infrastructure projects, imposed regulatory uncertainty, and proposed new tax increases on American oil and gas producers competing globally."
The hobbling effect of regulatory burdens and taxes aren't a new discovery.
"My business contacts have regularly complained of the fog of uncertainty emanating from Washington," Richard W. Fisher, then-president of the Federal Reserve Bank of Dallas, noted at a conference in 2013. "They have consistently cited fiscal and regulatory uncertainty as major impediments to capital investment and expanding payrolls."
The specific effects of red tape on refining capacity are also not a new concern.
"The refining industry is one of the most highly regulated in the country and has been struggling for years to maintain minimal profit margins," the Institute for Energy Research warned a full 10 years ago. "In the face of even more regulations from the Environmental Protection Agency (EPA), who are, imposing carbon-emission regulations as well as proposing overly-strict ozone regulations and other regulations, more closures are likely."
A huge part of regulatory uncertainty is the push for ending reliance on carbon-based fuels in the future. The European Union plans to ban the sale of vehicles with internal combustion engines by 2035, multiple U.S. state governments last year urged the federal government to do the same, and the Biden administration pledged itself to a clean-energy policy, including the acquisition of only zero-emission vehicles by 2035. Ending the sale of traditional cars and trucks would hugely crimp demand for gasoline.
Last year, everybody including oil companies struggled to recover from the economic tribulations of lockdowns and suspended travel. But "New Mexico operators say regulatory uncertainty at the federal level under President Joe Biden's administration, plus the prospect of new, adverse regulations pursued by legislators in Santa Fe, is slowing recovery even more on New Mexico's side of the Permian," according to the Albuquerque Journal.
These concerns bleed over into the financial sector, where the environmental, social, and governance (ESG) movement brings a quasi-religious fervor to investment. ESG activists explicitly discourage traditional energy production in the oil industry which they see as unacceptably polluting. Corporate executives aren't stupid; they see the writing on the wall.
"US oil companies used to ramp up production at even the slightest hint of higher prices," CNN reported last November as gasoline prices rose well before Russian troops crossed the Ukraine border. "The rise of the ESG movement is forcing fossil fuels companies to rethink their futures. Pressure from socially conscious investors hit a crescendo earlier this year when activist investors won board seats at ExxonMobil (XOM), America's largest oil company. That vote sent shockwaves through the industry because it was the first proxy campaign at a major US company in which the case for change was built around a shift away from fossil fuels."
"At the same time, governments around the world are setting ambitious targets for cutting emissions," CNN added. "The oil industry has pointed to how this regulatory uncertainty is depressing its ability to invest in future projects."
In April, Netherlands-based LyondellBasell announced that it would shut down its refinery in Houston, Texas by December 31, 2023. "Our exit of the refining business advances the Company's decarbonization goals," interim CEO Ken Lane commented at the time.
Last week, Reuters reported that LyondellBasell's refinery might close even sooner and added: "At least five oil-processing plants also shut during the pandemic, leaving the United States structurally short of capacity for the first time in decades."
Is the uncertain regulatory and political environment the full explanation for rising gasoline prices? No, it's not. Russia's invasion of Ukraine and the ensuing economic sanctions converted price increases from merely painful to agonizing. Pandemic lockdowns disrupted supply chains and distorted demand in unpredictable ways. And "there's no doubt that tariffs are contributing to higher prices throughout the economy," as Reason's Eric Boehm emphasized.
But, as CNN pointed out not long ago, oil companies used to respond like other businesses to rising prices by increasing supply. Burying their industry in red tape and choking off access to capital has been a very effective signal to rethink their entire business strategy. Oil industry insiders may coast along and enjoy the profits from existing capacity, but they're unlikely to invest in facilities to meet demand for gasoline, and offset soaring prices, until they're certain their industry will be allowed a future.
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