Who is responsible for the rise in gasoline prices?
Last week the national average price for regular gasoline rose to $ 2.71 per gallon. This marks an increase of $ 0.46 / gallon since the start of the year.
On a daily basis, I see accusations on social media that this price hike is a consequence of Joe Biden’s victory in the presidential election. I will explain why this is ridiculous, but I would like to ask the following to those who believe it is.
Since Biden’s inauguration, daily Covid-19 cases have fallen by two-thirds. Daily deaths are reduced by almost half. Is Joe Biden responsible for this? If you say “no” or feel the need to cover up or qualify your answer, you are probably realizing that the cause and effect is not that simple. The same goes for gasoline prices.
The main reason I can say that Biden is not responsible for the rise in gasoline prices is that we understand quite well why these prices are increasing. These reasons have (for the most part) nothing to do with him.
Factor 1: rising oil prices
The main factor influencing changes in gasoline prices is almost always the underlying changes in the price of oil. Show me a time where gasoline prices have gone up or down, and the vast majority of the time you will find that oil has followed the same pattern.
On the first trading day of January 2021, the price of West Texas Intermediate (WTI) closed at $ 47.47 per barrel (bbl). Two months later, on the first trading day in March, the price closed at $ 60.54 / bbl. While gasoline prices increased by $ 0.46 / gallon, the price of oil increased by $ 0.31 / gallon.
But gasoline prices are often lower than oil prices. Over the past six months, the price of oil has increased by $ 0.56 / gallon, while the price of gasoline has increased by $ 0.50 / gallon. In other words, the vast majority of the increase in the price of gasoline can be explained by the increase in the price of oil.
I will explain other factors that influence the price of gasoline below, but why are oil prices rising? Is Biden responsible for this?
These are two factors that have driven up the price of oil. The first is that demand collapsed last year with the implementation of measures against the pandemic and the stopping of movement of people. The price of oil has fallen. This, in turn, ended up idling 3 million barrels per day (BPD) of US oil production compared to a year ago.
As the end of the pandemic approaches, demand for oil is rebounding. Supply does not respond as quickly, which puts pressure on prices. If you think Biden is responsible for precipitating the end of the pandemic, you can blame him for the rise in oil prices. But that’s because the economy is starting to recover, which is a good thing.
Second, unlike a year ago, OPEC and Russia recently decided to cooperate by extending most of the current output cuts. Despite some recovery in demand, Saudi Arabia maintained a reduction of BPD 1 million. This move drastically spiked oil prices and will likely ensure further gains in gasoline prices.
Factor 2: loss of refining capacity
Beyond oil prices, what other factors can influence gasoline prices? One of the most important is any event that limits the capacity of the refinery. If crude oil cannot be refined, gasoline supplies will start to run out. This in turn will lead to higher gasoline prices. This often happens when a hurricane passes through the Gulf of Mexico, but it also happened last month when the winter storm swept through Texas.
During the first two weeks of February, refinery use in the United States was 83%. Then, the winter storm negatively impacted a dozen refineries in Texas. By the last week of February, refinery utilization had dropped to 56%. Again, pinning this on Biden is difficult.
There are only a few mechanisms by which a president could have a short-term impact on gasoline prices. If they signed a bill to change the gasoline tax, which currently stands at about 21%, it would be worth it. If the cost of gasoline is 100 percent, that would have a rapid impact on gasoline prices. Or, if a president announced a major release of oil from the Strategic Oil Reserve, it could cause oil prices to drop temporarily and could impact gasoline prices in the short term.
Longer term, there are certainly things Biden can do to influence gasoline prices. Some of the moves he’s making right now could potentially impact prices. The cancellation of the Keystone XL pipeline, for example, could potentially impact gasoline prices.
But these are long term impacts. Other than the two mechanisms I mentioned above (or, I guess he could also step up military action in the Middle East), a president just doesn’t have a mechanism to move prices sharply. gasoline.
Factor 3: transition to summer gasoline
Where do the prices go from here? Definitely higher. A final fact that affects gasoline prices is whether the United States is in gasoline season in winter or summer. Winter gasoline blends are cheaper to produce and demand is lower.
In summer, gasoline blends cost more to produce and demand is higher. Therefore, the price of gasoline generally increases between January and May. Last year was a notable exception caused by the pandemic, but rising gasoline prices as summer approaches are the norm.