As the average cost of gas in the U.S. reaches the unthinkable of $5 a gallon, Americans are beyond sticker-shocked – now they are just angry.
A recession seems inevitable, and Americans are being hit on all sides, with rising grocery prices, increased travel costs, surcharges on restaurant bills, and gas prices unlike any we’ve ever seen. Consumer costs are up 8.6 percent, the largest increase in 40 years.
Last week, President Biden, who many have accused of doing nothing to stop the surge in prices, issued a letter to U.S. oil refiners insisting that they act to lower prices of gasoline. In part, the letter stated, “The crunch that families are facing deserves immediate action. Your companies need to work with my Administration to bring forward concrete, near-term solutions that address the crisis.”
Biden believes these companies are capitalizing on the Russian war against Ukraine by increasing their profit margins to historic levels. Economists, however, argue that rising gas prices are much more complex that one single factor.
Ed Hirs, a University of Houston Energy Fellow, says that policy decisions and shifts that began during Richard Nixon’s presidency and continued through Donald Trump’s administration have all played a part in bringing us to this point.
“The first big policy shift occurred in 1973 – the year Biden joined the Senate — when President Nixon removed President Eisenhower’s oil import quota to fight inflation,” says Hirs. “OPEC’s cheap oil began to flood the U.S. market and undercut domestic producers.
“The subsequent Arab oil embargo from October 1973 to March 1974 raised crude oil prices everywhere except the U.S., because Nixon’s August 1973 price controls were in force. While domestic refiners could buy foreign oil and refine it – which they did – selling it at home was a money-loser.”
Throughout the Reagan administration, he says, these controls remained in place, making the U.S. increasingly dependent on foreign oil supplies. When the controls were lifted, so much lighter oil was fracked that processing facilities couldn’t keep up with the demand.
Once Russia invaded Ukraine in 2022 and sanctions were put in place, the European market created a demand for U.S. oil, and the U.S. is struggling to meet that demand while providing for its own. Finally, Hirs says, Biden pulled our troops out of Afghanistan “thereby ending the ‘blood for oil’ trade begun by President George W. Bush with the invasion of Iraq and continued through President Trump.”
The pandemic continues to rear its ugly head, as fallout from lack of oil production and loss of workforce has exacerbated the problem. Several refineries have closed, and with increased attention and resources being funneled to renewable fuels, mounting environmental restrictions, and weather incidents that have destroyed or slowed production facilities, the rise in gas prices is now out of control.
So what is being done to give Americans some relief? According to a Time Magazine report, “The White House has considered implementing a federal gas tax holiday that could reduce average gasoline spending by between $16 and $47, according to an estimate from the Penn Wharton Budget Model. A suspension of this tax, which costs Americans around 18 cents per gallon, would require an act of Congress to take effect, though some lawmakers oppose the idea of losing out on critical tax dollars needed to fund infrastructure projects around the country.”
Frustratingly, analysts at JPMorgan estimate that prices could surge another 37% by August, raising prices to an astounding $6.20 per gallon on average. As the saying goes, “Buckle up. It’s going to be a bumpy ride.”