I apologize for the length of the link. I still haven’t figure out the tiny url thing.
It should not be paywalled as I am allowed 10 articles per month to share as a subscriber. If it is, I apologize for that as well.
And I know what the blowback is going to be because it is a Paul Krugman piece. (Maybe should have kept that to myself). But it is not a “theory” piece; it is a legitimate explanation on the state of oil prices. Not a long read, but it supports points that have been made by several posters here concerning things like “the market” and how presidential policies have little to nothing to do with prices.
28 thoughts on “An Explanation of High Gas Prices”
But you’re right about Krugman. Ask all those folks who bailed out of the stock market on his advice when Trump was elected.
RATS!!! I tried.
Here are a couple of key takeaways and REMINDERS of the reality of gas prices.:
“So rising gas prices in America, then, are part of a global story that has nothing to do with the policies of the current administration. Still, can’t the United States have some impact on that global story? We are, after all, the world’s largest oil producer, accounting for about 20 percent of world output in 2020. Can’t America do something to reduce global oil prices?
Yes, in principle. Not so much in practice.
U.S. oil production did increase a lot after 2010 — a trend that, as it happens, began under the Obama administration and continued for part of Donald Trump’s term.
But this had little to do with policy; it was all about new technology, specifically fracking. Oil production then slumped in 2020, not because of policy but because prices plunged during the pandemic. Now it’s coming back, again thanks to events rather than policy. It seems safe to say that nothing either Trump did or Biden did has had any appreciable effect on U.S. oil production, let alone U.S. gasoline prices.”
And I knew it would be you to first jump on the Krugman crank-o-meter! 😇
What it comes down to is the reality that policies have little to nothing to do with pricing. Yet the GOP jumps on the idea when prices go up. Why be honest when lying gets you re-elected?
Well, when it comes to economics, Krugman is a policy compass.
If you do exactly the opposite of what he says, you can be confident you are going on the right direction.
He is right about the combination of directional drilling but wrong about policy not affecting price.
Oil companies typically drill exploratory wells to ‘prove’ a formation, and then drill exploitation wells later when market conditions are favorable. There is usually an inventory of proven formations that can be exploited quickly when prices surge, and the existence of that inventory serves as a moderator on volatility because there is normally a lot of oil that can be produced quickly.
There is no inventory to speak of now because leases have been delayed. Billions of dollars of drilling equipment is sitting idle.
BTW, did Krugman mention the idle leases? Cause that ain’t so either.
…”but wrong about policy not affecting price.”
Funny, but most economists agree with the sentiment. If another one had posted a similar essay, I would have used that instead just to stay away from the “Krugman is always wrong” sentiment that YOU have.
..”he idle leases? Cause that ain’t so either.”
Not part of the essay. But Secretary Granholm called out the oil companies for not using the tools they already have available. You have a cite saying she is wrong, share it.
” Billions of dollars of drilling equipment is sitting idle.”
Talk to the companies that have idled them.
Oil leases are sold by “blocks,” not by formations.. A potentially oil bearing formation might span dozens of lease blocks. A driller can exploit that formation from an one of those blocks, but if he only leases one, then once he takes the risk and proves the formation, other driller could then lease adjacent blocks and drill on the now known productive formation. So, he has to lease ALL of the covering blocks to protect his investment. Those leased, but undrilled blocks are the leases Ganholm is talking about.
With prices this high, drillers are exploiting every formation available to them.
…”drillers are exploiting every formation available to them.”
Then why so many billions of dollars of idle equipment?
Because offshore drilling rigs can drill in Utah.
“Because offshore drilling rigs can drill in Utah.”
But the rigs that are already there can:
That doesn’t do anything for the offshore rigs parked in the Gulf
If they are itting in the gulf idle, who is that on; the companies or the policies that won’t have an effect for three or more years.
There are large parts of the Gulf with exploitable formations that are held off the market, not to mention the entire Atlantic Coast
“Billions of dollars of drilling equipment is sitting idle.”
2020 caused a major decline in demand. Oil companies AROUND THE WORLD curtailed production. Not one policy of Biden’s has stopped them from ramping back up. They can increase supply and still make their obscene profits.
They have to have a place to drill.
They have the places to drill. But why rush to drive the market price back down when they can make their obscene profits. All that idle equipment not being used, or paying people to operate the equipment is saving them millions of dollars. And the equipment won’t break if they don’t use it. Let’s save a couple more millions to put in our pockets.
What leases have been delayed. I understand that there are at more drilling leases out in Biden’s first year than in Trump’s first.
Plus we are on schedule to pump more crude than in recent times, at 12.4 million bbl.
The oil is not “ours.”, it is the oil companies, and they sell in a global market. If the price is $110/bbl in Asia, it is the same here.
So if we are leasing more, pumping more, but the rest of the global supply is forcing prices up, is there anything we can realistically do?
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Paywalled for me, too. Perhaps you could summarize Krugman’s argument.
Most economists I know of describe excessive government spending is a common source of inflation. If Krugman has some alternative explanation for gas prices, I’d love to hear it.
…” explanation for gas prices, “…
It’s called “The Global Oil Market”.
I have already posted the key summary above. Sorry if you missed it.
I see it now, and I can tell you where Krugman is wrong, or at least where you may be reaching the wrong conclusions based on his observations.
Krugman says the current spike in gas prices is due to preexisting supply-and-demand factors that government policy did not affect. He’s wrong for a number of basic reasons, the most important one being that supply and demand doesn’t cause prices to be what they are. Economists rejected that idea almost two centuries ago.
Economists today use a different pricing theory called marginal utility theory to account for market pricing. You can read about it at Wikipedia.
But Krugman makes another mistake in suggesting that government policy doesn’t affect gas prices. He fails to account for excess money in the economy, money that is created by government spending and debt and, yes, policy. Even if you assume — wrongly — that global supply and demand create gas prices it would remain true that prices couldn’t go up unless there was excess money floating around to pay them.
The excess money in our economy today is a direct consequence of government policy (deficit spending, Covid relief, pandemic lockdowns that forces businesses to close, etc.). Biden could do a lot (by policy) to remove the excess money or create productive ways for it to be put to use, but his administration shows no sign of understanding the predicament we are in.
The explanation of gas markets is correct.
I disagree with your idea you think Krugman only thinks it is supply and demand.
Why do you think Krugman focuses on oil production in the extract you quoted? Production = supply.
Inflation is global, not just in the US. Demand is outstripping supply world wide, but also people worldwide have been saving for almost 2 years. New and used car prices are very high because there aren’t enough to meet the demand of either.
Likewise, oil prices are global, not just in the US. We are big producers and we both import and export petroleum, but we cannot fill the gap in the market caused by the loss of Russian oil. Much of the oil we are pumping only pays when oil prices are very high, particularly in the shale areas like PA and the Dakotas.
I am not sure that any policy we pursue now would affect either one to a great degree.
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RE: “Inflation is global, not just in the US.”
Is that a fact? And what does it mean to say such a thing? Do other countries in the world even measure inflation using the same methods we do?
I recommend you divorce yourself from thinking in terms of supply and demand. Try thinking about inflation as a monetary problem, not a commodity problem. We could have lower gas prices if our money supply were better managed.
“ And what does it mean to say such a thing?”
It means that prices are rising in most countries as pandemic eases and restrictions are lifted.
Our infusion of cash to our citizens probably helped fuel some of the inflation, but it was also a lifesaver for many during lockdowns and the surges of COVID variants.
No matter how you parse it, auto prices, used and new, are high because people want cars and fewer are available. The same holds true for air travel, and most everything else that has not ramped up manufacturing and distribution to pre-pandemic levels.
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To paraphrase a former President, “It’s the market, stupid”
“About crude prices: A number of countries export oil: Saudi Arabia and other Persian Gulf producers, Venezuela, Norway, various others and, in normal times, Russia. Where they ship the oil depends on the price they can get. This more or less levels prices around the world: Any country with above-average prices will attract extra shipments, driving prices down; any country with below-average prices will see imports fall off, driving prices up.
As usual in economics, there are some pesky details: Not all crude oil is the same, and refineries in any one country may not be adapted to use oil from all sources. But these things only matter at the margin. There are two widely cited prices of oil — West Texas Intermediate, which reflects prices in, duh, Texas, and Brent, which reflects prices in Europe. And they move almost perfectly in tandem”
Why do I have to explain the market to someone(Don) who says the market can solve all of our problems if left alone. The policies have had little to no interference and the policies in question won’t have had an effect on production for several years down the road.
RE: “Why do I have to explain the market…?”
You should understand something before you try to explain it. Dr. Tabor can help you understand the oil market, if you let him.
I don’t know where the quotation you cite comes from, but I recommend you examine this particular statement carefully:
“Any country with above-average prices will attract extra shipments, driving prices down; any country with below-average prices will see imports fall off, driving prices up.”
This is probably backwards. Usually, lower prices attract sales, not higher prices.
This story smells of excuses that Biden isn’t Carter redux. Of course policy affects prices. It’s easy to see price differences all over the US even though the base price of oil is the same. Some of that is tax and some not. If the US cuts off imports from a source, that creates a shortage here but a glut elsewhere as the oil stays in the market. Prices of our gas had almost doubled under Biden in his first year due to anti-petroleum policies that cut off the XL pipeline and all exploration on federal land and ocean which is ALL of our economic boundry coast. Now, cutting off even more supply makes foforever more shortage. Krugman is a known dope.
As Biden pushes the US into the EV market, not only prepare for not being able to go many places but prepare to pay 3 times the price of gas if you do venture out. The contradiction that EV is “eco-friendly” when it takes the same amount of energy to supply one supercharger as it takes to supply 150 to 250 homes should tell us something but the anti-gas policies that drive up prices will continue for at least the near term.
For GG ot link again