Wondering why gas costs so much? Blame consumer demands and the oil market
The summer driving season officially starts this weekend, so now should be a good time to take an admittedly subjective look at trends in American automobile preferences. It is a mixed/muddled picture and Washington, from where this is written, is probably not a good vantage point. In the fashionable north-west of our capital, a noticeable trend started 10-plus years ago toward hybrid vehicles. Increasingly, the new cars on at least my block have been (rechargeable) Teslas. A week ago, beyond the Bay Bridge, on a visit to the Eastern Shore of Maryland, new Ford F-150 trucks seemed to dominate.
A parallel and important reality is that there are many, probably more than usual, oil market factors in flux. Most people probably don’t read newspapers these days, never mind the financial news. But there is a helluva lot going on. In the “Heard on the Street” column in today’s Wall Street Journal, there is an analysis headlined “Big Oil’s Tough Clean-Energy Transition,” on how the likes of ExxonMobil, Shell and Chevron are being dragged, kicking and screaming, into what will, or perhaps just may be, the future — decarbonization. A dramatic graphic neatly illustrates the size of the challenge: Global oil supply has risen since 1971 from around 50 million barrels per day to just shy of 100 million. Reaching “net-zero” carbon emissions requires that, by 2050, production falls to 25 million.
Last Wednesday, the Financial Times had similarly used the word “transition” in an analysis of the oil and gas industry, “Oil producers face costly transition as world looks to a net-zero future,” in that day’s “Big Read.” The essence of its argument was that oil producers will struggle to diversify away from hydrocarbons. The result will be drastically falling revenues. Iraq was a worst-case scenario, with Libya a close second. Saudi Arabia and Russia are vulnerable but their comparatively complex economies have “boosted their resilience.” To policy wonks in Washington, this will be interesting. Some might interpret it, on balance, as good news, but in the Middle East low government revenues are usually a recipe for domestic trouble and perhaps yet more regional tensions.
These possible/probable long-term trends have also to cope with short-term realities. Oil prices are bouncing along just under $70 per barrel, regarded as relatively high even though still not enough to balance the Saudi budget. Supplies may be boosted shortly by the lifting of at least some sanctions on Iran, if nuclear talks progress, but demand is also being boosted by the prospects of a post-COVID-19 recovery, so the net result may be a net increase in price.
The recent cyber attack on the Colonial Pipeline, which stretches from the oil hub of Houston all the way up into the northeast, was a reminder that not all oil disruptions are Middle Eastern. But the customer reaction is the same as the time of the Arab oil embargo in 1973: keep your tank filled, rather than let it go down to less than a quarter. The result? Widespread shortages, albeit temporary. Perhaps the lines were marginally shorter because of hybrids, but ordinary people, trying to organize jobs, kids and other obligations of the daily grind, care about now rather than climate warming or a post-oil future. (Mea culpa: I topped up my tank and, a post facto justification, realized that when it indicated three-quarters full, in reality it was more like just half.)
The near-total collapse of the electric power supply in Texas last winter neatly illustrates that a post-oil future isn’t without its own risks. Even the path toward it has to balance short-term fluctuations in oil supply, which prompt seemingly disproportionate price movements. And while the U.S. is arguably the most significant economy in terms of any transition, its efforts can be undercut by other major players, notably China. It is, after all, just one world.
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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