Friday, October 7, 2022

The facts on what’s behind our energy crunch and high gas prices

Do cold facts matter these days, or is it just a question of who provides the answers that people want to hear? The comment can apply to several, if not many, of today’s political issues. But it is particularly appropriate for the discussion about the factors behind high gasoline prices and what should be done about them.

Put simply, the White House likes to blame oil companies for high prices, and the oil industry says the circumstances — the war in Ukraine, OPEC, etc. — are beyond its control. The Biden administration’s suggestion that oil companies should make some sort of sacrifice because of the crisis is not appreciated. (A version of this tension is observable in many other industrialized countries as well.)

A breakdown and explanation of the key factors for the non-expert goes like this:

Oil prices: There are minor differences of price between different sorts of oil, depending on its quality, and how much it needs to be refined. But there is essentially one price across the world, reflecting the fact that oil can be transported easily by pipeline or tanker from where it is produced, across the world to where it is refined and sold. That price shot up because of disruption and uncertainty after the Russian invasion of Ukraine.

Refineries: Capacity to refine oil into its range of possible products, which includes gasoline, is currently strained by a lack of capacity. Indeed, a few weeks ago, Saudi Arabian officials were briefing that the kingdom didn’t need to produce more oil because increased prices were caused by refinery shortages and not lack of production. But, political spin aside, companies are less than enthusiastic about building refineries with a more than 20-year projected lifespan if the demand for oil in, say, 10 or 15 years is going to make the installation redundant. Raising funds for such an investment is a challenge, not helped by a government showing off its “green” credentials.

Natural gas prices: These, sort of, track the oil price. Natural gas, which is “cleaner” than oil, can increasingly substitute for it but the full transition will take many years. That transition depends on shipping gas in specially-built liquefied natural gas tankers, the infrastructure for which is hugely expensive, covered by a built-in premium on the price.

energy-transition: Although sounding trendy today, this has been going on throughout history. Many of us burn wood these days only for backyard gatherings, but a couple of hundred years ago, it was the main way of cooking and keeping warm. Wood was replaced by coal, now hugely despised for its dirtiness, although still a significant contribution to the world energy mix for generating electricity. At one point, nuclear energy was considered a wonderful future until the calculation of its cleanliness was changed to include its waste product.

The energy future: There is an increasing amount of electricity being generated by wind and solar, and other clean fuels — but there is also a growing demand for such electricity, to substitute for gasoline in cars, natural gas in home cooking, and the like. The “green” debate was intense enough before the Ukraine crisis. The attempts to diminish Russia’s revenues from oil and natural gas exports, as well as the strategic advantage its huge market share gave it, have only made the debate starker.

For the moment, the White House appears to be holding to its green agenda, seeing oil industry frustration as almost opposition/opportunism, taking advantage of the world’s latest crisis to retain what should be an outdated stance.

Presumably, the Biden administration sees its line as being a vote-winner in the November midterms. It will be interesting to see whether the oil industry’s position on refining changes at all after Thursday’s meeting between the top companies and Energy Secretary Jennifer Granholm. Democratic Party candidates don’t want to find that they themselves are blamed for the price of gasoline, especially if it is above the headline $5-per-gallon rate.

Another future reference point could be any discussion President Biden has with the Saudi leadership during his visit to the kingdom in mid-July. Was the earlier-than-expected increase in OPEC+ quotas considered enough, or is the US hoping for more — and perhaps a split in the Saudi-Russia cooperation on oil?

Cold facts or political positions? There may be some clarity, but don’t bet on it.

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.

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