Why are Fuel Prices Rising?

I’ve been looking into this question since it came up in the Forum recently. The answers are somewhat complex, but it turns out there really are “evil doers” to blame.

The first thing I learned is that there is no physical shortage of oil in the world. Every major oil country could produce more, and has produced more in the recent past.

Second, there are no significant supply chain problems making delivery and distribution of oil and oil-based products more difficult.

Finally, while journalists tend to use loaded language to describe it, demand for oil today is about the same as it was before the pandemic. Demand is not “surging” or “soaring” as you may read, but has simply returned to normal after a temporary sales decline (not counting aviation fuels).

On the whole, supply and demand cannot explain the rise in fuel prices, although the old chestnut of supply-and-demand reasoning is widely used to create misleading narratives.

So, what is happening?

In broad outline, it appears that oil companies and their investors simply want higher prices. This is understandable on many levels: Everyone who stands to gain from higher prices almost always wants them. This, BTW, would include so-called “green investors.”

What’s different today is that our political establishment also wants higher oil prices, and is taking steps to encourage them. The Biden administration openly wants to replace the oil industry with some form of expanded electrical industry. If you are an oil producer or investor, now is the time to harvest profits before cashing out of that market.

Consider the new and more aggressive regulation of methane pollution, for example. The regulations will add to the cost of oil at every stage, but will also give the industry an opportunity to raise prices slightly in excess of the regulatory burden. The result will be profits derived purely from rent as economists understand the term. This dynamic amounts to government “paying” industry to go out of business.

It is almost impossible to describe the enormity of the moral problem in collusions of this type. In a healthy, non-distorted economy, profits derive almost entirely from process improvement leading to greater productivity. With Joe Biden, oil profits are being made simply by raising prices. Real people are going to be hurt.

28 thoughts on “Why are Fuel Prices Rising?

  1. There is truth to the assertion that Big Oil is screwing around. Oil deposits are not profitable under about $79 per barrel. When world demand dropped for a year or so, barrel prices dropped below $57. (My memory might be off a bit, but the point is the same.)

    Liked by 1 person

    1. RE: “When world demand dropped for a year or so, barrel prices dropped below $57.”

      Did demand drop or did supplies rise?

      Actually, both happened. That’s why we can’t blame the oil companies in isolation.

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      1. If demand drops, I would guess supplies effectively increase for a period until production slows. Oil flows around the world and contracts must be honored, so it could take weeks or months to effect changes.

        Liked by 1 person

        1. RE: “If demand drops, I would guess supplies effectively increase for a period until production slows.”

          Exactly right. The reality is ambiguous.

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  2. Not buying it.

    Of course the oil producers want a higher price. Bread producers want a higher price for bread. What stops them is the baker across the street.

    There is no brand loyalty for gasoline. Petroleum is 100% fungible at the wholesale level. Market share always trumps profit margin. If the price of gas at WaWa was 10 cents lower than BP, there would be a line at WaWa and tumbleweeds blowing across the BP lot.

    For prices to be higher there has to be some new, imposed universal cost of production, or a shortage of AVAILABLE crude.

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    1. Cartels are a big deal in oil. Most domestic laws outlaw cartels when they collude to effect shortages. But the global economy is pretty helpless if the Saudis cut production.

      Liked by 1 person

    2. RE: “For prices to be higher there has to be some new, imposed universal cost of production, or a shortage of AVAILABLE crude.”

      In a free market, yes. In a controlled or manipulated market, not so much.

      In my reading, I repeatedly came across discussions of how OPEC+ currently is holding back an available supply of 1 million barrels a day from the global market and how U.S. producers are restricting supplies to take advantage of higher prices. That’s all OK by me, but you just can’t use supply and demand to explain today’s oil prices when physical supply is high, AVAILABLE supply is low, and demand is neither high nor low.

      You need something else, such as pressure from investors or government regulation to explain the current oil market. Today’s WSJ mentions both:

      https://www.wsj.com/articles/bidens-gas-price-diversion-oil-and-gas-companies-ftc-lina-khan-letter-11637190339?st=qevpu6lal37jzwh&reflink=desktopwebshare_permalink

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  3. “demand for oil today is about the same as it was before the pandemic”

    Yep, and so are prices at the pump.

    The pandemic killed a lot of demand which readily explains the lower prices of 2020.

    I would not quarrel with the idea that higher gas prices are good for Green technology. OPEC effectively stymied investments in – and choices for – energy efficiency for decades by keeping prices artificially low. Gas guzzlers came roaring back when they did. With that said, whatever he may prefer, President Biden has almost no power to make gasoline prices go up or down – certainly not in the short term.

    Liked by 1 person

        1. Your source is behind a paywall for me, but the graph also ends in 2020, almost a year ago. Mine is today’s WSJ, citing current government reports: “The price of fuel oil has risen by 59% in the past 12 months, gasoline by 50%.”

          https://www.wsj.com/articles/strap-yourself-in-inflation-isnt-going-away-gas-labor-shortage-supply-chain-biden-fed-yellen-11637075522?st=kd5za6i80trggju&reflink=desktopwebshare_permalink

          Before posting, I verified my statement by googling. In 2019, just prior to the start of the pandemic, average U.S. gas prices were slightly above $2.00 per gallon. Today they are well over $3.00.

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          1. 2018 and 2019, pre-pandemic, prices were around 2.70 to 3.00/gal.

            We are now 3.30. (Costco was 3.14 two days ago.) How is that a dollar increase?

            Liked by 1 person

          2. Per your graph: Pre-pandemic low $2.39; today $3.38.

            Also, most gas prices since 2000 have been substantially lower than today’s rate.

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          3. That low was one month, January 2018. All the rest were hovering closer to 2.70 plus.

            Pre-pandemic high in those years was 3.00 compared to 2021 high of around 3.30. That’s a 10% increase.

            And comparing high to high.

            Liked by 1 person

          4. All the rest of what? I said gas prices at the pump are up $1.00 compared to pre-pandemic levels. That’s a true fact according to your own data. Prove it wrong, if you can, but you can’t.

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          5. You can cherry-pick data points all you want. The picture is clear. Gas prices fell sharply as the Trump economy collapsed. They are now rebounding sharply as the Biden economy takes off. BUT they are still far below past levels and even more so in constant dollars.

            Since the President has nothing to do with the price of gas at the pump, this “issue” is just one more way that the lying liars of the right prey on the weak-minded. IMHO.

            Liked by 1 person

        2. You are always full of crap, when are you going to learn we know better. Average gas prices at the pump haven’t been close to $3 since 2014. Here is a historical graph.
          https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m
          California gas pricesjust hit an all time HIGH of almost $5 a gallon. Strangely, with the exception of 2008, they were only above $3 during Obama for many years and now under the idiot Biden. We only suffer high prices under Democrats!!! Why is that??

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  4. May through October of 2018 gas was almost $3.

    Similarly most months in 2019 were from $3 to 2.70.

    So if I paid $3.15, then that is not $1.00.

    Cherry picking the lowest is deceitful in my opinion.

    Liked by 2 people

    1. RE: “Cherry picking the lowest is deceitful in my opinion.”

      The lowest is real and illustrates the point that gas prices are up about $1.00 since before the pandemic. Are you trying to prove that gas prices are down? Look at the graph.

      Like

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