Over the weekend, the Organization of the Petroleum Exporting Countries (OPEC) agreed to increase crude oil production from August. Immediately, crude oil prices fell 5%. This sounds like good news for anyone who is happy to be back on the road but currently has to shell out $ 3.00 or more for a gallon of gas.
OPEC’s expected expansion is expected to ultimately bring overall production back to pre-pandemic levels. But how much of our $ 3.00 gasoline is really about the OPEC cartel, and how much is about actual changes in supply and demand? To what extent is this the result of producers’ efforts to adapt to a post-pandemic world?
In a nutshell, there is no way for us to know everything that determines oil price changes in a world market still in unexplored waters. That said, a long-term look at the situation can help determine what kind of “new normal” we as consumers can possibly expect at the pumps. Maybe we’ll at least see more stability on our summer trips on the country’s highways or the streets of our hometowns next year.
A quick look at the Department of Energy’s weekly average regular gasoline prices, which on July 12 averaged $ 3.13 per gallon across the county, tells us what happened. past the past few years. The nominal price (unadjusted for inflation) steadily exceeded $ 3.00 in 2008. Then, after a period of great recession, the price per gallon again remained above $ 3.00 from December 2010 to November 2014, when the shale oil revolution began to affect oil prices in the United States. From November 2014 to July 2021, for almost seven years, the price per gallon remained below $ 3.00.
In a sense, we consumers have been spoiled by an energy revolution in our own country – an increase in supply that has propelled the United States to the top of the list of the world’s largest producers of petroleum products. Interestingly enough, the nation reached an energy milestone that had been sought after at least since the Nixon administration. President Ford called for energy independence by 1985, and President Nixon made a similar bugle call even earlier. It took a lot longer.
But instead of popping champagne corks and celebrating cheap oil and happier household budgets, the resulting shale oil celebration was rather muted. Not everyone is concerned about the cost of vacation travel or commuting to work every day. Much of America’s elite feared that the discovery of low-cost shale oil production techniques would delay the necessary transition to a renewable energy world. They weren’t interested in praising fossil fuels. They preferred to keep it buried.
Today, once again, we are seeing a rise in gasoline prices. In a relative sense, we’re pretty much where we were before the shale oil revolution. Those who yearn for the end of the oil age can celebrate in peace.
It is unclear to what extent the current rise in gasoline prices is due to fundamental shifts in supply and demand or disruptions from coronaviruses. Why? We have the interplay between an oil cartel, a virus-induced economic transition (some of which are likely permanent), and a strong environmental movement to end dependence on fossil fuels. In short, the market does not tell us what causes what.
But given that the United States has been in the driver’s seat of an energy revolution for the past decade, we are not on course. Whether prices rise or fall will likely depend on the actions of our own policymakers. To a large extent, this will depend on how well the average American consumer is willing to tolerate higher prices at the pump and how comfortable they are letting politicians, activists or special interests solve the problem between them.
What many of us know from personal experience is that taking a long-distance trip right now will involve high gas prices, expensive hotel rooms (if one can be found), and expensive hotels. crowded highways. People released from coronavirus closures are on the road again. In the meantime, I bet we’ll see a drop in gasoline prices before the end of 2021.
Bruce Yandle is a Distinguished Fellow of the Mercatus Center at George Mason University and Dean Emeritus of Clemson College of Business and Behavioral Sciences.