Opinion: Gas Prices Keep Risiing — Why?

Gas Prices Keep Rising — Why?

BY: JAMIE HICKEY

In recent months, consumers have been noticing continually rising prices at the pump. With the Biden administration’s campaign promise to go green, it appears its members are acting in a hypocritical manner by trying to influence the Organization of the Petroleum Exporting Countries (OPEC) and its allies to drill more oil to cool down oil and gas prices. If the administration will encourage other countries to produce more oil, then why not encourage those in the U.S. who have unused leases and permits to use them to drill oil? Since the Biden administration has taken office, gas prices have reached all-time highs. However, many factors are causing these prices. Over the past two years, we have seen a considerable price variation in the cost of a gallon of gasoline. The cost of a regular gallon of gas went from a low of $1.84 in April 2020 to a high of $3.29 in October 2021, and prices have reached nearly $4 in California and other parts of the Northwest. It is estimated that Americans pay $430 million more every day on gasoline than they did one year ago. Numerous events have resulted in this fluctuation, the largest likely being the COVID-19 pandemic that shut down the world in March of 2020 and a change in demand resulting from it. In Figure 16, we can see the price plummet from January 2020 (at $2.55 per gallon of regular gas) to April 2020 (at a low of $1.84 per gallon of regular gas). The most considerable decrease was when all lockdowns started taking effect; the average gas price went from $2.23 per gallon in March 2020 to $1.84 in April 2020 — a drop of nearly $0.40 in one month. The decrease at the beginning of 2020 was due to the decrease in gas demand and the subsequent excess supply. With most stores being shut down aside from grocery stores and other essential businesses, there was almost nowhere

for people to go. Those who worked at nonessential businesses worked from home if possible or were furloughed; this drove demand for gas down, as not many people were commuting or going places. Despite still being in the midst of the COVID-19 pandemic, we are still seeing high prices at the pump. First, unlike in March of 2020, COVID-19 has been researched, and vaccines have been created to protect Americans and people worldwide from the deadly virus. This means lockdowns are being lifted across America and around the world, and economies have begun to open back up. In turn, this has led to increased demand for gas as people return to work and enjoy pre-pandemic activities, meaning oil suppliers need to increase their output. One of the most significant factors that determine gas prices is the price of oil; these two goods’ price trends go hand in hand, falling and spiking together. In October, oil prices reached the highest point since 2014 at $85 per barrel. Outside of demand itself, other factors played roles in the rise in oil prices. In October, OPEC and its allies decided it was best to output oil gradually to meet the new demand and raise production by 400,000 barrels in November. This slight increase in a world economy that would require a much more sizable output to get prices to start cooling off only caused costs to rise more. The motive for such a slight increase in oil production is to boost oil-drilling countries’ revenues by keeping oil prices high. Another factor that drove gas prices to reach a seven-year high in the U.S. was the Department of Energy’s announcement that it did not have any plans to utilize the U.S. petroleum reserves to reduce the rapid rise in gas prices across the country, as these reserves are meant for emergency use only. Aside from the COVID-19 pandemic, other factors have affected gasoline prices and supply in the U.S. One was Hurricane Ida, which made landfall on Aug. 29, 2021, in Louisiana and caused the most damage to offshore energy production since 2005. Almost all offshore oil production sites in the Gulf of Mexico were shut down, and at the beginning of September, 79 percent of the sites remained shut down. It is estimated that approximately 17.5 million barrels could not be put into the economy in that period, and hurricane-caused shutdowns were expected to result in a loss of 30 million barrels. The Gulf of Mexico’s offshore sites produce 1.8 million barrels per day, or 16 percent of the U.S. daily oil supply. These losses counteracted any international increase in oil production.

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Figure 16: U.S. Regular All Formulations Retail Gasoline Prices Dollars per Gallon

Gas Prices Keep Rising — Why? CONTINUED

President Biden should call those companies sitting on unused leases to drill oil to add more supply to the economy, lowering gas prices. … These actions would help put more supply into the economy, offset OPEC’s plan, and ultimately decrease gas prices.

Another factor that affected gas prices was the Continental Pipeline running from Texas to New Jersey being hacked on April 29, 2021, due to a compromised password. This incident affected the gas supply in East Coast states because officials completely shut down the pipeline; a ransom note was found on May 7, 2021, that stated the hackers would release data they obtained through the breach if the ransom was not paid. The shutdown was precautionary as no one knew the hacker’s intentions. The pipeline, which transports 2.5 million barrels of oil to the Eastern U.S., was shut down until May 12, 2021. To offset the supply issues the East Coast would see as a result, the U.S. government altered rules on fuel transportation on the roads to help the supply issue; despite this, many gas stations ran out of gas, and U.S. fuel prices rose $0.06 in one week. These events have compounded the price of gasoline. Now — how do we fix it given OPEC’s current plan to only gradually produce more oil despite President Biden encouraging it to produce more? At the beginning of his term, President Biden halted the processing of new permits or leases for drilling oil on federal lands and waters. Currently, the U.S. Department of the Interior has estimated that there are 26 million acres leased to oil companies onshore; of those acres, 14 million are not being used, and out of the 12 million acres of offshore federal land, 9 million are not being used to produce oil. These leases last 10 years, and with Biden’s order, companies will still be able to receive permits and file applications for permits to drill (APD) on land they have already leased. Given the fact that there are millions of acres’ worth of unused drilling leases, President Biden should call those companies sitting on unused leases to drill oil to add more supply to the economy, lowering gas prices. If such companies decide not to abide by this call to action, then they should be at risk of their unused leases being revoked. These actions would help put more supply into the economy, offset OPEC’s plan, and ultimately decrease gas prices.

REFERENCES

Bureau of Land Management. (n.d.). Programs: Energy and minerals: Oil and gas: Leasing: General Leasing: Bureau of Land Management.

Retrieved November 29, 2021, from https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/ leasing/general-leasing Domonoske, C. (2021, July 7). Oil prices are in turmoil right now. here are 5 things you need to know. NPR. https://www.npr.org/2021/07/07/1013721716/oil-prices-are-in-turmoilright-now-here-are-5-things-you-need-to-know Fahys, J., & Kusnetz, N. K. (2021, January 28). Biden’s pause of new federal oil and gas leases may not reduce production, but it signals a reckoning with fossil fuels. Inside Climate News. https://insideclimatenews.org/news/27012021/biden-federal-land-oilgas-drilling/ Morrison, S. (2021, May 10). How a major oil pipeline got held for ransom. Vox. https://www.vox.com/recode/22428774/ransomeware-pipelinecolonial-darkside-gas-prices Ponciano, J. (2021, September 27). Oil prices surge to three-year highs after hurricanes and unexpected demand-how much higher can they go?

Forbes. https://www.forbes.com/sites/jonathanponciano/2021/09/27/oilprices-surge-to-three-year-highs-after-hurricanes-and-unexpecteddemand-how-much-higher-can-they-go/?sh=d3f9e2f54c3e Rapier, R. (2021, September 26). Revisiting the blame for high gas prices.

Forbes. https://www.forbes.com/sites/rrapier/2021/09/26/revisiting-theblame-for-high-gas-prices/?sh=53aa6f2de31e Russon, M.-A. (2021, May 10). US fuel pipeline hackers ‘didn’t mean to create problems.’ BBC News. https://www.bbc.com/news/business-57050690 Stevens, P. (2021, October 9). U.S. crude oil price tops $80 a barrel, the highest since 2014. CNBC. https://www.cnbc.com/2021/10/08/us-crude-oil-price-tops-80-abarrel-the-highest-since-2014.html U.S. Energy Information Administration. (n.d.). U.S. regular all formulations retail gasoline prices (dollars per gallon). Retrieved November 29, 2021, from https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_ epmr_pte_nus_dpg&f=m Valle, S. V., & Varghese, A. V. (2021, September 8). U.S. oil losses from Hurricane Ida rank among worst in 16 years. Reuters. https://www.reuters.com/business/energy/oil-losses-hurricane-idarank-among-worst-16-years-2021-09-07/

Jamie Hickey ’22

Major: Behavioral Economics with a Finance Minor Hometown: Port Jefferson, NY