Why are gas prices so high?

Prices at the pump are nearing record levels. Gas prices have hit a national average of over $5 per gallon for the first time in history.

What is the cause, and is there relief in sight?

Record Oil Company Profits

It’s unpopular in some sectors, but it’s worth starting from the most obvious consideration - the companies that sell oil and gas in the United States are posting record profits.

ExxonMobil, Shell, BP, ConocoPhillips, and Chevron raked in $35 billion in the first quarter of 2022. That's about 28 percent of what Americans spent on gas in the same period. In other words, after taxes, expenses, and everything else is accounted for, these five companies made over 13.1 percent on their products. Compare that to Walmart's net profits percentage of 2.26 percent as of April 30, 2022.

ExxonMobil alone doubled its profits in the first quarter of 2022 over profits in the first quarter of 2021.

This follows a record-setting 2021, where the top 25 oil companies brought in $205 billion.

If the old adage, “Follow the money,” still applies, oil company profits are a good place to start.

The War in Ukraine

Russia is the world's third-largest oil and gas producer, behind the United States and Saudi Arabia. The U.S. became the top producer of petroleum liquids in 2013 and the top crude producer in 2021.

Because Russian oil is under boycott around the world, that effectively spreads the oil that's on the market further. Even though the U.S. only imported about 3 percent of our oil from Russia, there is simply less oil on the international market to buy for the United States and Europe.

A look at the international markets shows that some of the increases blamed on the war are profit-taking, but part of it is a real drought of oil and gas.

The Great Resignation and Supply Issues

The oil companies have been struggling to get the employees and equipment they need to open new wells.

As with many industries, there are too few employees available. In areas with high unemployment, many potential employees either can't or won't relocate to where the wells are. Compound that with a lack of experience, the entire industry is struggling to maintain current; production levels, let alone add many new wells.

Supply chain issues and the fact that many parts for oil rigs are sourced outside the United States, many companies are struggling just to maintain the rigs they have or put new ones in.

Drilling Productivity Down

According to the Energy Information Administration, oil well productivity around the country fell from May to June. New wells are producing less oil than they did the month before.

Less oil will mean higher prices.

Refining Capacity

Refineries have been plagued with fire and issues for the last couple of years. An Exxon-Mobile refinery in Texas, a Valero refinery in Louisiana, and a Marathon refinery in California are just a few of the refineries that have had fires or explosions in the United States. A massive fire in South Korea affects prices as oil companies seek to shore up supply in Asia.

Refinery capacity dropped from 2019 to 2020, as some refineries were offline. Many refineries were shut down or at slow capacity during the pandemic and are struggling to get to full capacity again.

Bright Spot: More Drilling

Oil and gas drilling has been on a steady increase since 2021, when the pandemic stopped a lot of new wells. This increase continues to this day. Drilling went up 60% from March 2021 to March 2022. Still, oil production only went up only 8%.

While many people feel that once you put a hole in the ground, you should be able to get oil out, there is a lag time between starting the drilling process and getting useful levels of oil.

In April 2019, there were about 830 rigs drilling for oil in the U.S., according to Forbes. That number dropped to about 200 in July 2020. It has only bounced back to about 500 in March 2022.

It may take years for the oil industry to drill at the capacity it had in 2019.

What can President Biden do about gas prices?

The truth is that there is very little President Biden can do about gas prices. The one thing he can do he has done release oil from the strategic oil reserve to ease prices. That oil still needs to be refined, so that slows the process.

For all the rhetoric from the White House and from his opponents, there is almost nothing else the President can do except ask Congress to pass new legislation and hope that oil companies can find more capacity to refine and drill.

What can Congress do about gas prices?

There’s more that Congress can do about gas prices than the President, but they are unlikely to get anything done.

In May, a bill backed by Democrats in the House passed along party lines that would have empowered the President to declare an energy emergency. It would have stopped oil and gas companies from raising prices in an "excessive" or exploitative manner. The bill would have allowed the Federal Trade Commission to punish companies that gouged customers. Every Republican in the House voted against it. They say the bill is misguided and that there is no evidence of price gouging, implying that they will pass a law once a crime has been committed.

Congress can suspend the federal gas tax, which has been at 18.3 cents per gallon for decades. Two Democratic Senators introduced a bill in February. Congressman Adam Schiff introduced a House bill in May. So far, neither bill has moved because both bodies are working to overcome conservative opposition to the bills which also would have prevented gas companies from making windfall profits.

When will the price go back down?

No one knows. Some think it will drop next fall when demand lightens up from the summer vacation season. It will be months or years before capacity is built up again by the oil companies. As long as profits remain high, there's little incentive for private companies to put more oil or gas on the market.

We’ve been close to here before.

The chart from inflation data adjusts historical gas prices to 2022 inflation levels. As one can see, gas has been near $5.00 (in today's dollars) several times in the past.

While the pinch at the pump is difficult, it's only part of the economic story. The U.S. is also at record low unemployment and record-high average wages to balance out the price of gas.

Bob Peryea

National Correspondent

The Kentucky Daily

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