Welcome to a discussion about the upcoming 5th Revolution in the US, which I’ve titled the “Revenge Revolution.” For more about the Revenge Revolution and the author, Entry #1.  Periodically I write a “sense check” to assess whether a revolution in the US is possible or whether the entire exercise is based on a statistical aberration — i.e., a roughly 50-year cycle between major upheavals in the US. Entry #430 was the most recent “sense check.”

ENTRY #443 BEGINS: With the rise in gasoline prices, many politicians and their supporters are blaming the Biden administration for the price increases and also demanding that the Biden administration expand the number of leases on Federal land, including allowing drilling in the Artic National Wildlife preserve.  The rhetoric makes for good campaign soundbites, but who or what really determines the price of gasoline in the US? And, is there a more effective way to manage gas prices?

Crude oil is a commodity.  Like virtually every commodity, there is an exchange where contracts are negotiated and traded.  The price for a barrel of oil on the exchanges, aka “spot price, can fluctuate wildly based on how oil traders view the potential impact of world events on crude-oil supply and/or demand. The benchmark quality for these contracts is based on oil produced in West Texas (West Texas Intermediate) or the North Sea area (Brent crude).

In the US, pump prices for gasoline generally track changes in the spot price.  The spot price, however, bears almost no relation to the cost of production.

As the US has produced a larger share of domestic consumption, the rationale for linking the price of crude-oil as feeder stock to pump prices has been minimized, if not eliminated.  According to data from the US Energy Information Administration, for CY2021 the US exported more petroleum (crude oil and related products) than it imported – exports of 8.63 mmb/d vs. imports of 8.47 mmb/d. 

in CY2021 more than 50% of the imports were from Canada.  Some of the exports may be linked to trade agreements with other countries and/or to ensure that certain countries friendly to the US have a constant supply of oil and/or refined petroleum-based products.

Given the widespread concern within the US about fluctuating gasoline prices, why does the US continue to link gasoline prices at the pump to spot prices? Aside from the link benefiting the oil companies, either no one in Congress understands the issue or the oil lobby is in the pockets of many members of Congress, or possibly both.

Even if the US imported say 50% of daily consumption, one needs to ask whether it is necessary to link pump prices to spot prices. If the cost of 50% of gasoline is stable, then why does the pump price fluctuate solely based on the other 50%?

A solution to more stable pump prices would be to set a national price for gasoline (and diesel).  For discussion set the price without any taxes at $3.00/gallon.  Over time, the $3.00 price would be adjusted for inflation.  As is done now, the state and the Federal governments could add a tax to the $3.00/gallon price.

Would a fixed national price reduce supply of crude and gasoline? Businesses do not like uncertainty. The greater the uncertainty, the higher the required profit margin to compensate for the risk. The premium for uncertainty applies at each stage of the supply chain. The more stable or known the raw material cost for a product, the lower the premium for the finished product.

In the oil-and-gas business, most of the cost is incurred up front – exploration, leasing the land, drilling and installing equipment to operate the well. Improvements in processes and technology have reduced significantly the likelihood of a dry hole. Further, 3D imaging has increased the accuracy of the estimated size of the reservoir and the expected production rate.  Once in operation, the cost of extracting oil is minimal in most fields.

The Biden administration might be well served to conduct a comprehensive analysis of anticipated crude-oil supply based on different fixed prices.  Given the effectiveness of applying technology in exploration and drilling techniques, a safe bet would be US production could be maintained for many years extracting oil from existing fields and reopening abandoned fields. Further, with a known, or certain price for gasoline and possibly other refined oil products, US production likely would increase, not decrease.

With such a large domestic supply and production base, why does the US continue to allow the world spot price to have such an enormous impact on the pump price?  A fixed national price for gasoline and diesel (before tax) might be an example how the political parties can work together to solve real problems. The solution to managing gasoline pump prices might also eliminate some of the political divisions that seem to be making a 5th US Revolution more likely. ENTRY #443 ENDS

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