Biggest myths

The biggest myths about gas prices

Making sense of the political theater over gas prices.

By Rebecca Leber

Gas prices are still climbing, and President Joe Biden has nothing but bad options.

Last week, Biden called on Congress to suspend the federal gas tax for three months — a move that would lower gas prices by 18 cents per gallon. But the proposal for a gas tax holiday already looks to be dead. Republicans have remained firmly opposed, arguing the real problem is Biden’s climate agenda, and Democrats have also called it “shortsighted” to redirect the money away from roads.

That leaves Biden with just the limited powers of the bully pulpit to make a difference in costs. On Thursday, he used it to bring oil executives to the White House to meet with Energy Secretary Jennifer Granholm, after weeks of accusations that they are ripping off consumers.

The US would be a very different kind of economy if the president could simply turn on and off the faucet for oil. But by design, oil is a free and global market, one that in recent years has been shaped by a decade of low profit margins, turmoil from the pandemic, and Russia’s war on Ukraine. In March, I wrote about what to make of the political theater surrounding gas prices. The list of myths is getting longer as prices climb past $5 a gallon.

Myth 1: Federal and state gas tax holidays are the answer

Biden has called on Congress to pass a three-month federal gas tax holiday. “By suspending the 18 cent federal tax, we can bring down the price of gas and give families a little bit of relief,” he said Wednesday. These taxes normally fund the Highway Trust Fund to pay for roads, but Biden claimed higher tax revenues this year and the federal infrastructure law mitigates the impact.

Economists are largely cold to the idea of a gas tax holiday, though. An analysis of the three states that passed gas tax holidays in March — Maryland, Georgia, and Connecticut — found that consumers benefited briefly, even though the savings from the tax decrease were not entirely passed along to the consumer.

The study, from the Penn Wharton Budget Model, found that about 70 percent of savings in Maryland and Connecticut were passed onto consumers, and around 60 percent in Georgia. Refiners captured the rest of that profit.

The real issue is that the benefits are fleeting, because lower prices lead to higher demand. When that happens, “suppliers can capture part of the economic benefit of the tax reduction if pump prices do not fall by the full amount of the suspended tax,” Wharton’s experts wrote. Even when there’s a short-term gain for consumers, it won’t make a difference in the longer term. And when a gas tax holiday fails, it’s the wrong people who stand to benefit with higher profit margins.

Politicians are racing to show they are responsive anyway. Twenty more states may be on their way to enacting a tax holiday, including Florida and New York. But as states pass tax holidays, it helps to remember that these taxes also make up a relatively small portion of the price. The two factors driving gas prices right now are refining and crude oil prices.

Myth 2: Oil companies are price-gouging American consumers

No quick fix came out of the oil industry’s meeting at the White House last week. But the oil industry lobby group, American Petroleum Institute, asked for a “tone shift” from the administration. Biden has said that oil companies are ripping off the American consumer by taking advantage of a war-time situation to reap massive profits. “To the companies running gas stations and setting those prices at the pump, this is a time of war, global peril, Ukraine, this is not normal times,” he said Wednesday. “Bring down the price you are charging at the pump to reflect the price you are paying for the product.”

Price-gouging typically means companies charging higher-than-usual prices in an emergency situation when people have no other options to turn to. Think if a supplier marks up the price of water bottles after a hurricane or selling face masks at a premium in a pandemic.

Oil companies making handsome profits is not necessarily the same thing as textbook price-gouging, or spiking prices when consumers have no other choice to turn to. Sam Ori, executive director of the Energy Policy Institute at the University of Chicago, acknowledged “there is a disconnect between the the price of crude oil and the price of gasoline at the pump in the United States right now, but that’s not because of price gouging.”

Oil prices were already increasing last fall, a sign that Russia’s war and the resulting sanctions are not the full story. The problem is refining. US refineries are operating at about 90 percent capacity right now. A major reason why is refineries have shut down in the past few years, outpacing the new refineries being built.

During the pandemic the US lost a 1 million barrels a day worth of refining capacity. A similar trend happened globally. There’s less refining capacity than before the crisis, but demand is back up to where it was before.

This issue is “very similar to lots of other elements of the pandemic supply chain,” Ori said. “Many of our key supply chains were battered during the pandemic and they have not ramped back up.”

A function of tighter refining capacity and higher prices is large profits, the kind the oil industry hasn’t seen in well over a decade.

There might be some political options to control those profits, but it’s very unlikely that any of these would be enacted. One is the Democratic proposal for a windfall profits tax, a version of which existed in the 1980s, and was recently enacted in the UK.

The second and third ideas are even more controversial: Lawmakers can impose some direct price controls on the otherwise free market to set commodity prices more directly. As complicated (and unlikely) as it sounds, it’s not unheard of — it’s how monopoly electric utilities function. A final idea that’s been floated is to use the Defense Production Act to force companies to accept contracts at below-market prices.

Myth 3: Biden killed oil production

Fox News has been arguing that Biden’s so-called extremist green agenda is the real problem. In March, Republicans on the Senate Natural Resources Committee sent a letter to Biden claiming that he has shut down leasing for oil and gas and is holding back more production. “There has not been one lease sale on federal lands since you imposed a ban in violation of federal law,” the letter said. “No other major oil-producing nation shuts off its own reserves to production.” Sen. Joe Manchin (D-WV) echoed the myth at a hearing: “The time for leasing pauses has come & gone.”

To repeat it again: Biden has done nothing to halt oil leasing. In fact, the Biden administration has outpaced Trump in issuing drilling permits on public lands and water in its first year, according to federal data analyzed by the Center for Biological Diversity. His administration set a record for the largest offshore lease sale ever in the Gulf of Mexico last year, before a federal court blocked the lease sale for not considering climate impacts.

These canceled leases, and even a temporary pause on new federal leases in the first few months of Biden’s administration wouldn’t have helped in the current situation. Even if a lease sale is successful and finalized, it would take years to ramp up production. The marginal Biden measures — like reversing Trump-era environmental rollbacks — haven’t made any kind of dent in the global oil market.

“The constraints are within the industry itself, and have very little to do with any policies from the federal government,” Ori said. Oil companies are having other issues, too, such as accessing the labor and materials like steel needed for putting pipes in the ground.

Meanwhile, the president has done nothing to prevent the vast amount of gas production that occurs on private lands or halt existing oil leases on federal lands. The moratorium is now irrelevant, anyway, because a Louisiana federal judge ruled against it last June. (There’s a second, temporary pause on new lease sales because another court invalidated the administration’s use of a social cost of carbon.) The US also became the world’s largest exporter of liquified natural gas (LNG) for the first time in 2021.

Republican critics of Biden aren’t engaging with the consequences of their own ideology. “There’s an irony here: We’re seeing many people with strong pro-free market ideologies expecting politicians to intervene when markets don’t produce the results they like,” Clark Williams-Derry, a researcher at the Institute for Energy Economics and Financial Analysis said. “Perhaps what they’re really in favor of, then, isn’t free markets, it’s simply cheap gas.”

Myth 4: The oil and gas industry can quickly ramp up production to make a dent in prices

According to an op-ed in the Hill from Rep. Gus Bilirakis (R-FL), increasing oil and gas production is as easy as “flipping the switch.”

The White House would probably be pulling those levers if it could; Biden advisers have said they’d like to see more production. “Prices are quite high, the price signal is strong,” White House National Economic Council Deputy Director Bharat Ramamurti said in an interview. “If folks want to produce more, they can and they should.”

But oil companies have made it clear in earnings calls with shareholders that they don’t plan to produce much more, anyway. Remember that just two years ago the industry was in a complete free fall when demand crashed because of the pandemic. Banks sought government bailouts for oil investments that went under, and oil prices actually hit negative levels as producers grew desperate for oil to be taken off their hands.

Oil and gas prices have climbed in the US because demand during the pandemic has bounced back faster than supply, and with instability caused by factors that include Russia’s war in Ukraine. In the past decade, Americans have gotten used to cheap fuel, but crude oil is now well over $100 a barrel, as of March 8.

Higher profits won’t necessarily change companies’ calculations on production levels. “Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans,’’ Pioneer CEO Scott Sheffield told Bloomberg Television in February. “If the president wants us to grow, I just don’t think the industry can grow anyway.’’ The largest US fracking companies reiterated in earnings calls in February that they intend to keep output roughly flat, according to reporting from the Wall Street Journal.

In other words, now that companies are making handsome profits, they’re using that extra cash to reward investors and pay down debts, not invest in new production.

Myth 5: LNG exports will fix Europe’s problems and help US gas prices

Lawmakers and pundits have offered an overly simplified solution that the US can just make up that difference in exports. Columnist Karl Smith at Bloomberg Opinion argued, “Fracking may be America’s most powerful weapon against Russian aggression.”

But liquified natural gas exports don’t solve Europe’s or America’s energy challenges. In some ways, they exacerbate them.

To export gas to Europe, a facility first needs to convert it to liquified natural gas, which cools and pressurizes the methane so it can be shipped across continents. On the other end of the ocean, another facility must turn it back into gas for shipment via pipeline.

That’s a lot of infrastructure, which is impossible to scale up in enough time to make an impact on Europe’s prices. There’s one new LNG terminal that opened this year in Louisiana. On the European side, the LNG terminals are already at capacity. This isn’t going to help make up Russia’s supply of 40 percent of Europe’s gas either.

So it’s not particularly helpful or possible to boost exports to Europe, but it also wouldn’t help prices in the US.

Williams-Derry considers US exports of liquified natural gas to be a reason for climbing prices. In 2016, the US completed its first LNG export terminal in decades, which the gas industry hoped would alleviate a glut of natural gas that was keeping US gas prices too low for the industry’s liking.

Freeport LNG, one of the largest operators in the US, shut down because of a fire and explosion on June 8. It won’t come back online until at least the end of the year. As a result, US natural gas futures dropped immediately,

“The reason we’re experiencing higher natural gas prices right now is we’re exporting more,” Williams-Derry said. “It’s not that we’re consuming more. It’s not that we’re producing less. It’s that we’re exporting.”

Myth 6: The economy is doomed because of high gas prices

It’s understandable to feel grim about the economy when gas price signs are listing anywhere between $5 and $7 per gallon. But remember that oil and gas aren’t the entire economy. A better metric than absolute gas prices is looking at Energy Information Administration data on the percentage households are spending on gas. That ratio is still around 3 percent, not much higher than where it was pre-pandemic.

At the last gas price peak in 2008, it was around 5 percent, but thanks to better vehicle mileage, greater access to hybrids and electric cars, and richer households, the number is climbing much more closely than we’d might expect.

There’s an important lesson in this data. Climate policies can pull double-duty to both tackle fossil fuel pollution and help people become more self-sufficient from oil during its booms and busts.

Countries have still not learned that “part of what we’re seeing here is the cost of reliance on fossil fuels,” Ori said. But clean energy isn’t a panacea either. “Once you’re in the [energy] crisis, it’s too late,” he added.

Yet there’s a real opportunity to break the cycle of instability, even though the US risks doubling down on dangerous policies as Biden ups the calls for more oil production.

In the long run, investing in fossil fuel infrastructure can seriously backfire by raising energy costs for Europeans and increasing reliance on Russian gas. LNG will always be the more expensive option because of its processing and transport. “By locking yourself into a gas-powered future, you’re locking in higher costs for the long haul,” Williams-Derry said. “There’s not a good alternative to Russian gas if you want to have inexpensive gas in Europe.”

“If you’re going to double down on gas, essentially, you’re doubling down on Russia,” Williams-Derry added.

The biggest risk is if the US and Europe respond to this crisis by overinvesting in the future of fossil fuels. Actions like building LNG terminals and approving new leasing don’t help in the short term when people are struggling to pay high bills. It doesn’t achieve energy independence. But it would lock the world onto a dangerous path for climate change.