With every new inflation report, the Biden administration seems to get even more laser-focused on a single goal: making gas cheaper. Its strategy so far has been a little baffling, though—as is its explanation for why prices are high.
Sometimes the White House blames “Putin’s Price Hike,” pointing to the massive supply chain disruptions caused by Russia’s invasion of Ukraine and ensuing international sanctions. The White House and top Democrats have also accused Big Oil of price gouging and blamed it for not producing more, even trying to rally congressional support behind a fine on companies for not drilling on their unused leases. Or is it Wall Street’s fault for wanting to keep companies from going on another spending binge, as state department special envoy and co-ordinator for international affairs Amos Hochstein has said? As the Biden administration desperately attempts to do something ahead of midterms, federal agencies have been even more generous than usual with new permits, giveaways, and regulatory rollbacks for drillers.
One obvious casualty of all this is the climate crisis, which seems to slip further down the list of national priorities by the hour. Needless to say, trying to keep gas prices low and boost production by any means necessary is probably not the right answer, here. But what is?
Answering that requires understanding what gas prices actually are and what policymakers can do to influence them.
A century ago, these questions were a little simpler to answer. Gargantuan U.S. and U.K. producers (the “Seven Sisters”) used to be vertically integrated, overseeing everything from extraction to transportation to refining and sales. That means the company that dug up oil was probably the same one you bought it from at the gas station.
That picture started to change dramatically as oil-producing nations began nationalizing production, eventually replacing the long-standing Anglo-American cartel with the Organization of Petroleum Exporting Countries, or OPEC (and now OPEC+, including Russia). Breaking up the old imperial producers helped to open up space for commodity traders to negotiate transactions at each point along the supply chain.
“The gas Exxon sells may not have been refined or produced by Exxon. It may have been produced by a national oil company, sold to a commodity trader who sold it to a refinery in Europe who sold it to another commodity trader who sold it to Exxon,” Javier Blas, author of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources, told me. “Those traders are the lubricant on the chain to make sure everything keeps moving.” Deals frequently happen on the high seas, and tankers can change hands several times to fetch higher prices while transiting a single body of water. “I have seen cargoes of crude change three or four times on the way from Nigeria to Europe,” Blas added.
Oil majors and national oil companies like Saudi Aramco have profitable trading desks. Shell’s was made uncomfortably public a few months ago, when the London-based oil major was forced to apologize after its traders bought up 100,000 metric tons of Ural crude at a steep discount after Russia invaded Ukraine and Western powers imposed sanctions. Some of the biggest players, though—Vitol Group, Trafigura Group, Glencore Plc—get a lot less press. Privately owned and often headquartered in tax havens from Switzerland to Singapore, these companies operate in a virtual black box. Asked what regulatory oversight exists over the transactions that bring oil (and many other important commodities) around the world, Blas had one word: “None.”
“Say you have an oil trader incorporated in Switzerland selling a cargo of Nigerian oil on the high seas to another trader incorporated in the U.S. Virgin Islands. Who is doing any oversight on that? The answer is no one,” Blas said. There isn’t even a reliable repository of data that regulators could look to if they wanted to rein in commodity traders, he explained. As Blas pointed out in a recent column for Bloomberg, the world’s biggest financial institutions are basically at a loss for what to do about this level of commodity trading. The International Monetary Fund, for instance, called attention in its “Global Financial Stability Report” to a “small group of large energy trading firms that operate globally, are largely unregulated, and are mostly privately owned.”
For politicians, there’s not much political payoff in going after companies no one has heard of. Democrats currently attacking Big Oil for price gouging, Blas noted, “are just hitting the usual suspects.” Neither is it clear how the United States would go about targeting commodity traders over pricing. “Can you find examples where traders try to inflate prices? Maybe,” he said, “but all of that is well beyond the scope of the Federal Trade Commission,” the body Democrats are looking to embolden to investigate oil industry price gouging. “They’re not going to be looking at a vessel that changes hands four times on its way from the Irish coast to New York Harbor. Everything that happens 20 miles off the coast is outside of their jurisdiction.”
And that’s just the physical trading, or “wet barrels,” per industry jargon. “Paper barrels”—futures, options, derivatives, and financial contracts—are theoretically easier to regulate via bodies like the U.S. government’s Commodity Futures Trading Commission, since that trading tends to be run out of banks in the U.S. and Britain. But paper barrels introduce their own set of wild cards into pricing, and interests eager for their role to stay in the shadows.
The deregulation of derivatives trading in the 2000s and introduction of lightning-fast algorithm-based trading, Rupert Russell, author of Price Wars: How the Commodities Markets Made Our Chaotic World, told me, has created a more abstract relationship between commodity prices and underlying supply and demand dynamics, which have never been the perfectly efficient forces economists tend to paint them as. It also means that commodities whose physical forms share little in common tend to be closely synced on the trading market. A trading algorithm scanning worrying headlines about an attack on an oil field in Iraq can drive up the price of bread in Egypt, far more so than if it were just a matter of the fuel used to transport wheat getting more expensive. Richer countries can insulate themselves from such swings. Poorer ones generally can’t. “You essentially have [an] amplification effect,” Russell tells me. “The way speculation works is that it incentivizes guessing what other people are doing. You’re not rewarded for being correct. You’re rewarded for guessing what the others are guessing.”
The Dodd-Frank financial reforms—passed in the aftermath of the 2008 financial crisis—attempted to rein in some of these volatile dynamics in paper-barrel trading, but the language included in the original law has never been implemented, in part thanks to lobbying and lawsuits brought by secretive and enormously influential forces such as the International Swaps and Derivatives Association, or ISDA.
That’s not to say these things prices would be steady without deregulation or A.I.-aided trading, Russell cautions. “When there is a threat of conflict or disruption it can be totally rational for the prices to rise. You want prices to rise [during a shortage] so [that people] want to consume less of it. The problem with that, even if the market is working as it should in an Econ 101 textbook, is that there’s no guarantee that’s going to feed people or that people can afford the price at the pump to take your kids to school,” he told me. “This is a crazy way to run the world. There are certain things we want to provide. We can think of them as rights. But the idea that we’re going to leave it up to international prices—even if they are operating on a rational basis—makes no sense.”
According to the U.S. Energy Information Agency, 59 percent of gas prices are determined by crude oil prices, subject to all of the above, the last few years’ supply chain chaos, and the considerable impact of both official and “self-” sanctions on Russian oil. Retailers—i.e., gas stations—have some leeway to set prices in accordance with their own labor costs, supply chain woes, or profit motives, though EIA figures indicate that in aggregate those are as influential as taxes—accounting for 12 percent each of the price per gallon of gas as of March 2022. The bigger single variation in retailer price comes from refining capacity (18 percent), which has declined from its 2020 peaks in recent years.
Refining introduces a lot of uncertainty into the supply chain. Crude oil can refer to any number of different liquids that go by deceptively appetizing names like “sweet” and “sour.” Not all of them can be refined in every place. Much of America’s refining capacity—particularly on the Gulf Coast—was built to process heavier crude, not the lighter kind being produced by fracking in the Permian Basin. That mismatch in refining capacity was a major reason why lobbyists pushed so hard to repeal the crude oil export ban in 2015, allowing them to ship out by then abundant and uncomfortably cheap supplies of fracked oil to refiners abroad.
As a net exporter of oil, the U.S.—at least in theory—has tremendous flexibility to insulate consumers from market volatility. By global standards, gas in the U.S., where 40 gallons costs about 1 percent of monthly income, is some of the most affordable on earth. We buy a lot of it, though: Americans spend as much of their income on gasoline as Sierra Leoneans, who live in a country that doesn’t produce oil, with a gross domestic product, per capita, that’s 120 times less ($509) than that in the U.S. ($63,206).
In other major oil-producing states, prices are kept low as a matter of politics, to meet domestic demand and seed goodwill about the exploitation of a nationally important resource. There’s a cynical element to that, of course: High fuel prices can (and do) bring down governments. But in many places, it also reflects a dramatically different relationship to natural resources. In some countries, natural resources are seen as something that populations should benefit from, meaning that demands are met domestically and revenues from exports are funneled toward economic development and more generous welfare states.
Unlike most other major oil producers, the U.S. fossil fuel sector has been historically dominated by the private sector, which mostly siphons oil profits to the already rich. While the U.S. is the world’s largest oil producer, oil rents account for just 0.2 percent of GDP here—the same contributions they make in Romania and Barbados. “The U.S. is a net exporter. It can just set the price, but to do that you would need either nationalization or nationalization-like things” Russell says, to exercise control over production and exports.
Unable or unwilling to exercise a direct say over fossil fuel investment, production, and (certainly) the machinations of commodity traders, policymakers in the U.S. have resorted to nudging companies to boost domestic production in the hopes this will have some oblique effect on the index prices influencing the price per gallon at the pump. Policymakers could, in theory, also encourage more investments in refining capacity, Blas told me, which has declined in recent years. That’s all a lot easier said than done, though. Production now is the result of investment decisions made two, five and 10 years ago. It’s only really a few Gulf Oil producers—Saudi Arabia chief among them—that can turn the taps on virtually overnight. Bringing a new shale well online is a little quicker, and rig counts have been picking up in recent weeks, but bullish projections about supercharged production are still fairly modest.
“Even under the most optimistic view, U.S. production increases would likely add only a few hundred thousand barrels per day above current forecasts,” Dallas Federal Reserve researchers Garrett Golding and Lutz Kilian noted in a blog post this week. “This amounts to a proverbial drop in the bucket in the 100-million-barrel-per-day global oil market, especially relative to a looming reduction in Russian oil exports due to war-related sanctions that could easily reach 3 million barrels per day.” There’s simply not much more oil to be had.*
Increasing production is a dubious goal for other reasons. “Anything you do in the short term to increase production of gasoline goes against climate policies, 100 percent,” Blas said. Alas, the Biden administration has set an expectation that prices should stay low. “We are removing a lot of oil from the market,” Blas says of sanctions on Russia and their impact on prices. “Politicians were not able to articulate [that impact] at the beginning of the crisis, because no one really wants to come home with bad news. There was no way that sanctions on Russia weren’t going to be disruptive.” But there is a powerful tool that the Biden administration simply isn’t using. As it talks up “Putin’s Price Hike,” Blas noted, it’s sitting on an altogether more climate friendly and easier-to-wield weapon: cutting demand for fossil fuels with robust investments in public transportation and electric vehicles. Beyond speeding up decarbonization, such investments would help U.S. residents spend a less absurd portion of their income on fossil fuels.
Oil industry price gouging isn’t a novel, abhorrent dynamic of the last few weeks so much as a century-long feature of U.S. policy: The U.S. government has systematically ceded control of an essential natural resource to a hive of private actors whose sole interest is making money.
Wild price swings aren’t the only, or even the most pernicious, result of that policy. By global standards, gas here still stays pretty cheap. The deliberate nonregulation of oil has allowed an industry to amass enormous wealth off what—in most of the world—is treated as a kind of public good. With that wealth, oil execs and their companies have attempted to shape everything from urban planning (can’t have public transit decreasing gas demand!) to the composition of Congress and the Supreme Court, making comprehensive climate policy in the U.S. feel almost hopelessly out of reach.
Pleading with the fossil fuel industry to go easy on American consumers, in this system, isn’t going to do much. To have a real chance of controlling the effects of the price of gas—and global warming—requires getting off fossil fuels as quickly as possible.
* An earlier version of this article contained a punctuation error that misattributed a sentence by the author to the Dallas Fed.