Will producing more oil lower gas prices? It hasn’t in the past.

Source: By Philip Bump, Washington Post • Posted: Sunday, March 13, 2022

Gas prices are seen in front of a billboard advertising HBO’s “Last Week Tonight” in Los Angeles on Monday. (Jae C. Hong/AP)

What most Americans want seems simple in its outline: inexpensive gas that doesn’t leave the United States beholden to bad actors such as Russia, Saudi Arabia and Venezuela. Not all Americans want this, certainly. There are a lot of environmentally conscious Americans who recognize that the downside to inexpensive gas is more gas consumption and, therefore, more greenhouse gas emissions. But as a broad benchmark, the twin goals stated above seem to represent a majority opinion — and have for some time.

And yet it hasn’t happened. Despite the uptick in domestic production that accompanied the surge in hydraulic fracturing, and despite various global disruptions and controversies, we still import a lot of oil and gas from overseas and we still see gas prices going up.

On Tuesday, President Biden announced that the United States would turn away Russian oil and other energy products. It’s certainly a morally justifiable position, but it’s important to remember the unique ways in which that oil is enmeshed in our economy and how little control American decision-makers have over gas prices.

Let’s illustrate that second point first.

Below are charts of weekly gas prices (top left), spot prices for Brent crude oil (top right), weekly gasoline imports and production (bottom left), and weekly crude oil production and imports (bottom right). Brent crude oil is produced and traded in northern Europe.

A few things are obvious pretty quickly. The big drop in Brent prices and domestic gas production in 2020, for example, was a function of the pandemic. Also that cliff in the crude oil production graph that occurred at the same time.

Less obvious is how these factors correlate. Is there a relationship between domestic production and gas prices? We can illustrate that separately. For example, here’s the weekly oil production figure compared to weekly gas prices since 2005. When production was lower, prices were often higher — but they were often lower, too.

In graphs like this, strong correlations are often indicated by the points falling into a line showing that as one factor rises or falls, the other responds.

Strong correlations, in other words, look more like this.

That’s the domestic gas price compared to the Brent crude price. When one rises, so does the other one. There’s some wobbliness; it’s not a perfect correlation. But it’s a strong one.

What this shows is that domestic gas prices are driven largely by international oil prices, because the American oil industry is intertwined with the global marketplace.

That’s not the only factor, certainly, but it raises the question of what might happen if America switched to entirely domestic sourcing. We still import more oil than we export, but if we simply increased output to obviate the need to import, couldn’t we establish our own market?

There are a few problems. The first is that the oil infrastructure in the United States is built around an international market. That’s one of the complexities of the Russian-import question: because of where American refineries are, what they refine and whether they are connected to primary pipelines for American or Canadian oil, it’s often more feasible to import oil from overseas. The issue is economic, not political.

That works the other way, too. Imagine a perfectly integrated American oil supply system that keeps refineries running, meets demand and keeps prices low. Oil producers might then be able to pick between providing oil to the U.S. system or selling it at (presumably) higher prices to the international marketplace. Even in this system, market factors would probably affect supply. At the same time, the country would possibly still need to import some oil in the event of production reductions. Remember that deep freeze in Texas last year? It took 40 percent of domestic production offline. Or what about that ransomware attack on the pipeline? Limiting the American oil network means making a network that’s more susceptible to domestic interruptions.

This is not to say that the system cannot be improved. Reducing demand would, of course, greatly reduce the need for imports or for overhauling U.S. infrastructure. Eliminating imports from places to which we’d prefer not to send millions of dollars would bear its own rewards.

What’s unclear about the truncation of Russian imports, though, is how it might affect the role that those imports play in the current system. We’ve walked through this before, but those imports fill a specific gap for coastal refineries. The risk that there would be effects on gas prices as a result — recognizing the way in which domestic prices broadly are driven by global prices — seems to have been a concern of the Biden administration.

There’s a political risk here. Gas prices are a tangible component of inflation concerns and, with midterms approaching, Biden and his party would be happy to see prices fall. The war in Ukraine is already contributing to rising global oil and therefore domestic gas prices, which Republicans are quite happy to blameon Biden. Republicans have already spent a good deal of time trying to blame Biden’s cancellation of the Keystone XL pipeline for increased prices and the need for Russian imports (neither of which is the case); it’s almost guaranteed that any increase after cutting off Russian supplies will not be offered as a caveat by GOP officials when discussing how gas prices have risen.

Which, of course, is a large part of why American oil infrastructure looks the way it does: politics.

 

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