A range of world actors and events share the blame for the run-up in prices.
If you, unlike Michigan Democratic senator Debbie Stabenow, have bought gasoline lately, there’s a good chance that you’ve seen a sticker on the gas pump with a picture of President Biden saying, “I did that.” Typically, those stickers are placed by customers, not gas station owners, and for that reason, I’m against them: they violate the owners’ property rights.
But I’m more interested here in the substantive question: did Joe Biden “do that”? My answer is “somewhat.” It wasn’t Biden alone. The Federal Reserve had some role, and the recovery from the pandemic had a large role. But the many actions Biden took before Vladimir Putin’s invasion of Ukraine and some of his actions afterwards have certainly caused the price of oil and gasoline to rise. Biden didn’t do all of “that.” Other governments have contributed to the problem, and various US government restrictions in the oil and gasoline markets have also contributed.
More important, many of Biden’s actions, unless reversed, will contribute to high oil and gasoline prices in the future. We shouldn’t be surprised. After all, he and his employees John Kerry, special presidential envoy for climate, and Jennifer Granholm, secretary of energy, explicitly want a diminished role for fossil fuels in the near future. If future oil production falls, then, for a given demand for oil, oil prices will rise.
We need to separate two categories of gasoline price increases: increases due to inflation and increases due to actions specific to the oil and gasoline markets.
Between January 2021, when Biden took office, and May 2022, the consumer price index (CPI), which is the usual measure of the inflation rate, rose by 11.7 percent. So, if gasoline prices had simply kept pace with the CPI, they would now be 11.7 percent higher than in January 2021. In January 2021, the average retail price of gasoline in the United States was $2.42. By the week of June 13, 2022, it had reached a whopping $5.11 per gallon. That’s up by $2.69. The 111 percent increase is, of course, much bigger than the increase in the CPI. Clearly, other factors besides inflation have caused gasoline prices to rise.
The major entity responsible for inflation is the Federal Reserve. In the 1960s, Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon.” What he meant is that any persistent inflation that we have observed has been preceded by an increase in the money supply. That’s why a standard line that people have used is that inflation is due to too much money chasing too few goods.
There are several measures of the money supply. The one that monetary economists use most is M2, which includes M1 plus time deposits under $100,000 and shares in retail money market funds. M1, in turn, consists of currency and coins held by the non-bank public, checkable deposits, and savings deposits. In February 2020, just before the pandemic-induced lockdowns, M2 was $15.46 trillion. By April 2022, it had reached $21.73 trillion, an increase of 40.6 percent. Of course, we didn’t get close to a 40 percent inflation rate. The main reason is that Americans’ demand to hold money increased dramatically early in the pandemic. With fewer goods and services for people to buy, they (we) hoarded money. Now, with the pandemic largely behind us, our demand for money is slowly falling.
But why did the money supply increase so much? A major factor was the huge increases in pandemic-related federal government spending, during both the Trump and the Biden administrations. The CARES Act, which President Trump signed in March 2020, increased government spending by $2.2 trillion. To put that in perspective, total federal spending in FY 2019 was $4.45 trillion. And FY 2019 was not exactly a low-spending year, except in retrospect. Nor was Trump done. In late December 2020, he signed another spending bill that included $900 billion in further pandemic-related spending. Those spending increases weren’t enough for President Biden. In early March 2021, Biden signed a further $1.9 trillion pandemic-related spending bill.
All three of these spending measures massively increased the federal budget deficits for FY 2020, FY 2021, and FY 2022. That meant that the federal government had to borrow additional trillions of dollars. The Federal Reserve “monetized” a large part of that additional debt by buying federal government bonds that had first been sold to the public. According to Veronique de Rugy, of the $6 trillion in new federal debt issued during the pandemic, the Federal Reserve monetized $2.7 trillion, or 45 percent. That’s how the money supply increased.
So, if we’re going to blame the entities that caused inflation, they are, in order, the Federal Reserve, Donald Trump, and Joe Biden. On the plus side, we should give huge credit to Joe Manchin, the Democratic senator from West Virginia, for standing strong against Biden’s further huge spending increase, misleadingly labeled “Build Back Better.”
The Oil Market
But the major cause of gasoline price increases, as the earlier data show, has not been inflation. The other causes are specific to the oil and gasoline markets.
Start with oil. The biggest factor in the increase in gasoline prices since January 2021 is the increase in the price of oil. Between January 2021 and May 2022, the price of West Texas Intermediate oil (a standard measure of prices) increased from $52.00 per barrel to $109.55, an increase of 111 percent. There are 42 gallons per barrel of oil. The $57.55 increase in the price of oil, the major input in gasoline, accounts for $1.37, or over half, of the $2.69 increase in the price of gasoline.
Before we turn to other factors that account for the gasoline price increase, let’s first consider who or what is responsible for the increase in the world price of oil. The major factor is the increase in worldwide demand as we make our way out of the economic collapse of 2020. We can’t have data on demand because demand is always a schedule: it gives the amount demanded at each price and all we observe at a point in time is the price and the quantity consumed. But here’s how we know that demand increased. Between the first quarter of 2021 and the fourth quarter of 2021, worldwide consumption rose from 93.9 million barrels per day (mbd) to 99.2 mbd. When both the consumption of oil and the price of oil rise, that necessarily means that demand increased.
Besides increases in demand, what factors have led to higher oil prices, especially in the past few months?
One factor is Biden’s and many European governments’ response in the oil market to Vladimir Putin’s invasion of Ukraine. They have colluded to keep Russian oil off the market. The Russian government has responded by selling oil to China and India that it would have sold mainly to European consumers. This could be just a game of musical chairs, with the qualification that the number of chairs equals the number of players. In such a case, the overall effect on the world oil market would be small. But the collusive agreement seems to be holding up. Why do I say that? Because the prices that Russia is charging China and India are deeply discounted from world prices. If the collusion had broken down, the prices would be close to equal. The EU and Biden have effectively segmented the world oil market. Chinese and Indian consumers move down their demand curve at the lower prices they pay, buying more than they would have, and we other consumers are bidding over a diminished supply. So, the EU and Biden have definitely contributed to the higher price of oil since the Russian invasion.
Interestingly, Biden admits that his and the EU’s actions have increased oil prices. In a June 22, 2022, speech, Biden stated:
We cut off Russian oil into the United States, and our partners in Europe did the same, knowing that we would see higher gas prices.
Longer term, Biden will contribute to higher oil prices regardless of what happens with Russia and Ukraine. The reason is that he has signaled in many ways his hostility to US production of oil and natural gas. The American Energy Alliance has listed “100 Ways Biden and the Democrats Have Made It Harder to Produce Oil and Gas.” As with most such lists, some of the items seem minor. But the shocking thing is how many appear to be substantial. They include an executive order imposing a moratorium on new oil and gas leases on government lands and a proposed rule by the Securities and Exchange Commission that would require public companies to disclose their greenhouse gas emissions. No oil company decision maker could miss the overall negative tenor of the list. I recommend a quick perusal of the list of 100.
Interestingly, one of Biden’s cabinet members recently admitted her hostility to long-term production of oil and natural gas. In a June 15 interview with CNN’s John Berman, Energy Secretary Jennifer Granholm admitted that she and Biden want oil companies to produce more oil this year but not produce more in five to ten years. The video is priceless. You can tell by the look on Berman’s face and by his tone that he is skeptical that oil companies can be motivated to bear a lot of startup costs just to produce more oil for only a year or two.
But you don’t have to go with tone or facial expression. Berman laid out the problem beautifully:
But that’s the problem for these companies. These companies are saying, you know, “you’re asking me to do more now, invest more now, when in fact five or ten years from now we don’t think that demand will be there, and the administration doesn’t even necessarily want it to be there.”
You might think that because oil prices are determined in a world market, US government actions that discourage domestic US production don’t matter much. But that’s not true. Because oil demand worldwide is fairly inelastic, small changes in supply can cause large changes in price.
As noted above, the increased price of oil between January 2021 and May 2022 accounts for $1.37 of the $2.69 increase in the price of gasoline. What about the remaining $1.32 of the increase? The problem is that the increased demand for gasoline is pushing against a very inelastic refining supply. Here’s how Debnil Chowdhury and Susan D. Bell put it in “Restart or remain shuttered—why rationalized US refineries will not come to the rescue” (IHS Markit, June 24), after noting the amount of refinery capacity that has been sidelined by storms or other incidents:
General market sentiment, our medium-term outlook included, is that the current high-margin environment [for refineries] will be fleeting. Recouping recommissioning costs will be difficult unless these strong margins are sustained beyond 2023. Refiners are unlikely to invest hundreds of millions of dollars in recommissioning costs for only one or two years of strong returns.
Getting permission to build a refinery in the United States is not easy. While the US Energy Information Administration lists thirteen US refineries that have been built since 1978, none of these has the capacity to refine more than 84,000 barrels per day. Compare that to the Marathon Oil refinery in Garyville, Louisiana, built in 1976, which has the capacity to refine 578,000 barrels per day. Oil company executives would have to think long and hard before applying for permission to build a new refinery or putting serious resources into expanding a refinery. You can bet that all of them heard, loud and clear, Granholm’s statement about not wanting so much oil in five or ten years.
As I noted earlier, I’m not a fan of violating the property rights of gasoline station owners and so I would never put an uninvited sticker on a gasoline pump. But if I were to do so, the sticker would have a picture of Joe Biden saying, “I did some of that, and I’ll do more.”