Gasoline prices hit a new 7-year high of $3.488 a gallon today, and West Texas Intermediate crude oil ended the day at $95 a barrel. This is partly due to tensions in the Ukraine, but prices have been rising for months and U.S. regulations have exacerbated the circumstances.
Higher gasoline prices harm all Americans, particularly low-income Americans, who spend about a quarter of their income on electricity and motor fuel.
Lower supply equals higher prices, as recent supply chain lessons have taught us, and the Biden Administration has discouraged oil and natural gas drilling, contributing to the high prices of energy.
Next month the Federal Reserve will likely raise interest rates by half a percentage point to try to tame inflation. The Biden Administration can help the Fed reduce inflation by moving away from its zero-emission goals and anti-fossil fuel policies, even if only temporarily until oil prices recede.
New regulations are discouraging the development of oil and gas fields. In November 2021, only 560 oil and natural gas rotary rigs were in operation, compared to 810 in November 2019 and 1,077 in November 2018. (In 2020 demand was lower during the pandemic.) Excluding the pandemic, the figure of 560 rigs in operation is the lowest November count since the Energy Information Administration’s data series began in 1973.
These higher prices should not be a surprise. President Biden was elected on a platform of ending the use of fossil fuels, and he lost no time in putting his campaign promises into practice. One example: during the second presidential campaign debate, then-Candidate Joe Biden told America that he wanted “to get to ultimately a complete zero emissions by 2025.”
Whether or not one agrees with the president’s policy, he should be praised for following through on his pledge.
On President Biden’s first day in office, he issued his Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis. Among other provisions, this Order reduced oil and gas leases on Federal lands, including in Alaska’s Arctic National Wildlife Refuge. By expanding State land devoted to national monuments in Utah and off the coast of Cape Code, the Order placed further limits on drilling.
With the same Executive Order, President Biden has stopped oil from coming into the country. He ended the Keystone XL pipeline, which would have brought oil from the U.S. ally Canada to America to be refined.
The oil would have been transformed into gasoline and heating oil, some for the United States and some for export. This would have lowered gasoline and heating oil prices in the United States.
With the same Executive Order, the president announced the imposition of new regulations on oil and gas companies concerning emissions of methane, ozone, and other compounds.
Later, when gasoline prices rose, the president asked the Federal Trade Commission to investigate oil and gas companies for price gouging—even though Americans know that lower supply always leads to higher prices.
Congressional Democrats support President Biden’s regulation of oil and gas. Democrats in a House Natural Resources Committee on November 1 attacked oil company CEOs for producing oil rather than renewables, and called on companies to phase out fossil fuel drilling—which would raise prices further.
Back in 1973 and 1979 oil price increases contributed to inflation because the Federal Reserve was then pursing an accommodative monetary policy. Without that loose monetary policy, write Rutgers University professor Mike Bordo and Berenberg Capital Markets economist Mickey Levy in a recent paper, oil shocks would not have resulted in the inflation levels of the 1970s.
Today the United States is in danger of repeating the same inflationary mistakes. From the beginning of 2020 to the end of 2021, the M2 measure of the money supply rose from $15 trillion to $21 trillion, a 40 percent increase. Despite increasing inflation, the Fed is still buying billions in Treasuries and mortgage-backed securities. The Fed’s balance sheet now tops $8 trillion. At the same time, deficit spending to offset the effects of the pandemic exceeded $5 trillion.
The Fed can reduce inflation on its own, but these inflation reductions would be less painful to the economy and the American consumer if energy supply constraints were loosened. Oil is an obvious example where rolling back federal regulations and allowing more exploration would lead to lower prices.
The American consumer does not want inflation, particularly in the energy sector. Low income Americans are the hardest hit by high energy costs. The Fed is working to solve the problem. The Biden Administration should do its part by removing impediments to the reasonable development and production of energy.
