Why are oil prices so high? And what can we do about it?

President Joe Biden faced a delicate moment during the international climate change conference in Glasgow, Scotland, when he was asked at a press conference about inflation in his country, including the gasoline prices.

“If you look at gas prices and you look at oil prices, it is a consequence, so far, of the refusal of Russia or the OPEC countries to pump more oil,” Biden said. . noted November 2 during the United Nations COP26 summit. “And we’ll see what happens to that score as soon as possible.”

OPEC is the group of 13 oil exporters mainly from the Middle East and Africa who act collectively to set production levels; it has recently been joined in decision-making by Russia and some other non-member countries.

One of the reasons for the awkwardness is that Biden was at a conference that aimed to cut carbon emissions, including oil, but he felt compelled to call for more production from oil-producing countries.

The administration’s demand for increased production “is a recognition that oil is by far the primary source of energy for the US and global economy today, even with aspirations for a rapid transition into the future. low carbon, ”said Mark Finley, energy researcher. and world oil at the Center for Energy Studies at Rice University.

The fact that the United States is itself a major oil producer is exacerbated by the embarrassment. In fact, the United States is the largest in the world, accounting for about 20 percent of world production. So we decided to take a closer look at the reasons for the current high price of oil and what the United States can do about it. (The White House did not respond to a request for this article.)

Are OPEC and Russia to blame?

At the root of the rise in gasoline prices, like so many other commodities, is the coronavirus pandemic. Since the virus first hit the economy in the spring of 2020, demand for gasoline has increased steadily as business activity has increased. Yet supply has not been able to recover as quickly, due to delays in restoring drilling capacity, higher transportation costs and slow increases in production.

As a result, crude oil prices have steadily increased in recent months, even though they are still around 40% below their peak in July 2008.

These higher prices are ultimately found in the prices Americans pay for refined petroleum products like gasoline.

“Higher prices at the pump matter,” Finley said. According to his calculations, he said, this year’s increases are costing every American household an additional $ 1,000.

So how are Russia and OPEC playing in this? Together they account for just over half of global production, so experts agree they can do all they can to increase supply, which would lead to lower prices at the pump.

After aggressively reducing production at the start of the pandemic, the OPEC-led group has gradually, but not completely, restored production. Since July, OPEC and Russia have agreed to increase production by 400,000 barrels per day each month, less than the United States and other oil importers like China, India and Japan do. are looking for.

OPEC and Russia have just “increased production at a slower and ‘cautious’ rate instead of doing it according to the schedule desired by Biden,” said Patrick De Haan, head of petroleum analysis at GasBuddy.

On November 4, two days after Biden’s press conference, OPEC and Russia meet and chose not to ramp up production, outsmarting Biden and the other importers.

Couldn’t the United States increase its oil production on its own?

It is theoretically possible for the United States to produce more oil, but it would be politically and practically difficult, experts said.

One obvious obstacle is the pressure Biden is under from his allies in the environmental movement. Biden has campaigned to fight climate change and promote electric vehicles, so encouraging more production now would be at odds with his long-held position.

Another obstacle is that American producers cannot increase their production as quickly as OPEC can.

“The reason the administration is asking OPEC and Russia to increase is that they have spare production capacity as a result of their previous cuts, which can be brought to market quickly,” said Finley. “Here in the United States, producers must decide to increase drilling and completion of new wells, which could take months to add significant volumes.”

For producers, this means betting that prices will remain high enough to justify the additional investment.

De Haan agreed. “I don’t think the United States has the leverage to increase production fast enough,” he said. “More like slow, steady growth which should lead to a noticeable increase in production within three to six months.”

Another factor is that Biden can’t just flip a switch and increase American production.

“Increasing domestic production is not a political decision. It’s a private sector response, ”said James H. Stock, professor of political economy at Harvard University. “In principle, yes, it could rise quickly to offset much of the rise in oil prices, but that is a decision of private entities.”

And it’s unclear how effective Biden might be in influencing that decision, De Haan said.

“The White House demonized the industry, issuing executive orders intended to slow the growth of oil production, and that certainly played a role,” he said.

To make more supply available, a president has the power to release stored oil from the strategic oil reserve. But this option is generally reserved for emergencies and short-term supply disruptions that threaten the economy.


Source link

Steve R. Hansen

Leave a Reply

Your email address will not be published. Required fields are marked *