Over the weekend, the Organization of Petroleum Exporting Countries (OPEC) agreed to expand production of crude oil starting in August. Immediately, crude oil prices fell 5 percent. This sounds like good news for anyone who is happy to be on the road again but currently has to shell out $3.00 or more for a gallon of gasoline.
The expected OPEC expansion should eventually bring overall production to pre-pandemic levels. But how much of our $3.00 gasoline is really about the OPEC cartel, and how much is about real changes in demand and supply? How much of it is a result of producers’ efforts to adjust to a post-pandemic world?
In a few words, there is no way for us to know everything that’s driving petroleum price changes in a global marketplace still in uncharted waters. That said, a review of the long-term situation may help determine just what kind of “new normal” we consumers can eventually expect at the pump. Perhaps we’ll at least see more stability as we navigate summer trips on the nation’s highways or the streets in our hometowns next year
A quick look at Department of Energy weekly average prices for regular gasoline, which on July 12 averaged $3.13 a gallon across the county, tells us what has happened in recent years. The nominal price (not adjusted for inflation) rose above $3.00 consistently in 2008. Then, after a stretch of Great Recession months, the per-gallon price again stayed above $3.00 from December 2010 until November 2014, when the shale oil revolution began to affect U.S. petroleum prices. From November 2014 until July 2021, for almost seven years, the per-gallon price stayed below $3.00.
In a sense, we consumers were spoiled by an energy revolution in our own country — an increase in supply which vaulted the United States higher up the list of the world’s leading producers of petroleum products. Interestingly enough, the nation achieved an energy milestone that had been sought since at least the Nixon administration. President Ford called for energy independence by 1985, and President Nixon sounded a similar clarion call even earlier. It took a lot longer.
But instead of popping champagne corks and celebrating cheap petroleum and happier household budgets, the resulting shale-oil celebration was rather muted. Not everyone is concerned about the cost of vacation travel or of getting to work each day. A large segment of America’s elite expressed concern that the discovery of low-cost shale oil production techniques would delay the needed transition to a renewable energy world. They were not interested in praising fossil fuel. They preferred to keep it buried.
Now, once again, we are experiencing rising gasoline prices. In a relative sense, we are about where we were before the shale oil revolution. Those who pine for an end to the petroleum age may be quietly celebrating.
Exactly how much of the current gasoline price run-up is due to fundamental changes in supply and demand or from coronavirus disruptions is anyone’s guess. Why? We have the interaction between a petroleum cartel, a virus-driven economic transition (some of it likely permanent) and a strong environmental movement to end fossil fuel reliance. In short, the market doesn’t tell us what is causing what.
But given that the United States has been in the driver’s seat of an energy revolution over the past decade, we’re not at the whim of fate. Whether prices go up or down from here will likely depend on the actions of our own policymakers. To a large degree, that will depend on how much the average American consumer is willing to tolerate higher prices at the pump, and the degree to which they’re comfortable letting politicians, activists or special interests work it out among themselves.
What many of us know from personal experience is that taking a long-distance trip right now will involve high gasoline prices, costly hotel rooms (if one can be found) and jam-packed highways. People set free from coronavirus shutdowns are on the road again. Meanwhile, I am betting we will see lower gasoline prices before the end of 2021.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.