Q&A: The complexity of energy policy in the United States
Since Russia’s invasion of Ukraine, gasoline prices have skyrocketed as many countries boycott Russian oil. And despite falling crude oil prices, consumers saw little relief at the pumps. On Wednesday, lawmakers on the House Energy and Commerce Committee lobbied oil executives over high prices.
The national average load hit a record high of $4.33 per gallon on March 11. After adjusting for inflation, however, that’s still below the $4.11 a gallon Americans paid in 2008. The national average now stands at $4.15 a gallon, AAA reports. Colorado is $3.96 per gallon.
Prior to the invasion of Ukraine, gas prices had risen steadily as demand grew and supply, cut at the start of the pandemic, tried to follow.
In a conversation with DU Press Room, Frank Laird, associate professor at the Josef Korbel School of International Studies, explains the complexities of US energy policy.
This conversation has been edited for length and clarity.
How would you define energy independence?
There is nothing like that. We are entangled in a global energy market, particularly oil, but to some extent natural gas and, for that matter, solar and wind. The United States is self-sufficient in coal. There’s a lot of coal in the United States Coal consumption has been declining for about a decade in the United States, so we don’t import coal. Oil production in the United States has increased significantly over the past 15 years. We even export, but we are still in a global market. If the price goes up anywhere, it goes up everywhere.
When we hear that oil is at $130 a barrel, what does that mean?
What is the price of oil is a complicated question. But when you see it in the newspapers, they’re talking about crude oil, and they’re usually talking about what’s called the 30-day futures price. You could say, “I need 10,000 barrels of crude oil today,” and you would buy it in what’s called the spot market. They would give you a price for delivering 10,000 barrels today. Or you could say, “I need 100,000 barrels in 30 days,” then you would buy what’s called a 30-day futures contract. This is the price you usually see quoted in newspapers and on television.
When do you start to see relief at the pump?
It takes a little time. It’s starting to go down. I don’t know exactly who is getting all that money, because you have to go from an oil refinery, to wholesalers, to distributors, to retailers. Retailers only earn pennies on gasoline. It’s a super competitive market. That’s why, by the way, most gas stations are now just convenience stores with gas pumps because the profit margin on gasoline is zero, but the profit margin on soft drinks is very high .
The public often blames or praises the president for gas prices. Is this something that presidents control?
It goes back to the 1970s, and you have to kind of feel sorry for the president in this situation, because it really is a global market, and there’s not much the president can do to affect it. This president tried, so he calls other countries that produce oil and says, “You can’t increase your production? And there is talk of improving relations with Venezuela and Iran because we have cut off their oil exports for foreign policy reasons. But they have a lot of oil and they could sell more of it on the market. More oil on the market would lower prices. Saudi Arabia has spare capacity. A few other Persian Gulf states do as well.
Biden is trying to encourage producers, even American ones. I mean, it’s a volatility issue. Many capped wells in the United States have been shut down during the pandemic because demand for oil has gone down, so President Biden would like those folks to start producing oil again. But they’re looking at it from top to bottom, thinking, “Wait a minute, I’m spending all this money to unclog the well,” because it’s not just flipping a switch, is it? ? You have a pretty elaborate procedure, so they think, “I could spend all this money to start producing, and then prices go down again, and I lose.
They are waiting for stability to decide what to do, and President Biden has released oil from the strategic petroleum reserve. But there’s not enough oil there to really affect world markets. The United States has hundreds of millions of barrels of oil in underground caverns, believe it or not, in the southern United States, and this (reserve) was created in the 1970s as a result of these crises energy. It released a few tens of millions of barrels, but the United States consumes about 20 million barrels a day. So you could get this thing dry pretty quickly if you tried to pump it really fast. The president is kind of stuck because the public tends to blame whoever is in power, and there’s actually not much he can do.
In February, several oil executives publicly stated that they would not produce more because of their duty to stakeholders. Can Biden do something to force American oil companies to produce more?
One of the great distinctions between the United States and most of the rest of the world, the United States and Canada in particular, these two countries, oil producers are private companies owned by investors. They decide what they’re going to produce, and there’s not much the president can do. In countries where the government owns the oil company, they may be successful in pressuring the company and saying you have to do it. But for investor-owned oil companies, you can’t force them to do that. I mean, you can just give them a bit of a jaw-drop. You can say, “Hey, it’s your patriotic duty. But at the end of the day, they are supposed to be responsible with their shareholders. They should also be accountable to the general public, but that tends to take a back seat.
Couldn’t they make more money if they produced more oil?
Well they could. But if enough oil comes into the market and prices go down, supply goes up, then suddenly they’re making less per barrel. The new wells they would open are more expensive to produce. You produce from your cheapest wells first, then move up the cost ladder. They want to believe that the price of oil will stay above a certain level so they can make a profit. If it costs $50 to produce a barrel and you think the price per barrel goes down to $40, you’re not going to produce oil. You can’t stay in business long doing this. Where you can really get extra capacity is in places that still have cheap reserves to produce that aren’t being tapped, and there aren’t a lot of those in the United States. The United States is a major oil producer because of hydraulic fracturing. Fracking has opened up huge oil reserves and dramatically increased production, but it’s not quite as cheap.