About Those Gas Prices

As someone born into the era of big tail fins and bumpers with breasts, it’s not news to me that we Americans get irrational about our cars.

So of course we also obsess about gas prices. If the rent or the cable bill goes up, we’ll grumble and pay it. If the price of beef skyrockets, we’ll eat more chicken. When there was no toilet paper on the shelves, the most common response was frantic desperation, not anger. But high gas prices bring out the pitchforks and torches: This has to be somebody’s fault, and we’re going to make them pay.

So maybe it’s Biden’s fault or Putin’s or Exxon’s or environmentalists’. Let’s see if we can sort this out, starting from the beginning.

How bad is it? Various commenters had already been talking about “record gas prices” for several weeks, but prices didn’t actually start breaking records until March 7. Even then records were not being broken by much, and only if you didn’t adjust for inflation. In July of 2008, national average gas prices hit $4.11. Cumulative inflation in the last 14 years has been 32%, so gas prices won’t equal 2008 prices in inflation-adjusted dollars unless they hit $5.42. AAA’s current national average price is $4.25.

The price a year ago, when Covid was keeping most people close to home, was an unusually low $2.89. So there’s been a steep increase since then, but not to off-the-charts levels.

Rockets and feathers. The apparent reason for the increase was that the price of oil went up. But oil prices crashed back down this week, and gas prices are still high. (Though they are trending somewhat downward. AAA reports a drop from $4.33 in the last week.) This is the main reason people give when they blame the oil companies for price gouging.

The following chart was on the Trending Economics web site Saturday morning.

So a year ago, the world price of oil was about $60 a barrel. It started creeping upward as economies recovered from the Covid emergency, reaching $90 by late February, when the Ukraine crisis began to get serious. Post-invasion and post-sanctions, it jumped up to $123 on March 8. Then it fell back below $100, and ended last week at $104.70.

The complaint is that gas prices go up immediately when the price of oil rises, but they don’t fall immediately when it drops. This is not your imagination.

The trend is called “rocketing and feathering,” according to oil industry analysts. Gas prices rocket up and then they come down slowly like a feather in the wind.

Think about how this works: Suppose you run oil tankers back and forth between, say, Nigeria and the United States. A trip takes weeks, maybe a month, depending on conditions. So the oil you loaded in Lagos was worth about $90 a barrel, but by the time you get to America, the price has risen to $120. So what do you sell for?

The way a lot of people’s economic intuition works, you ought to sell for $90 plus a reasonable profit on your expenses; say, $93 or $95. (Those numbers are based on several minutes worth of googling, so don’t use them for anything other than illustration.) This way of thinking is called “just price economics“, and it was popular in the Middle Ages.

But the world doesn’t really work that way. Of course you sell for $120, making a $30-a-barrel windfall profit. On other trips you might have windfall losses, so you’d better take the money now.

That’s how rocketing works, all the way up and down the path from oil well to gas pump: Increases get incorporated into the price immediately. Imagine you own a local gas station. Your last delivery arrived when you were selling gas for $3.50 a gallon, so in theory you could still sell for $3.50 and make a profit. But your next delivery is going to cost $4 a gallon. So why would you sell something for $3.50 when it’s going to cost you $4 to replace it?

But now picture what happens when prices fall: You paid $4 a gallon for the gas in your tanks now, so you’re going to be reluctant to sell it for less than that, even if you can replace it for $3.50. You’ll lower your price when you have to, i.e., when the gas station across the street lowers its price.

How fast prices fall depends on how much competition there is. If there are bottlenecks in the market — say, a small number of refineries producing gas for a large region — the businesses that control that bottleneck are in a position to insist on getting at least a just price. And they will. You would too.

The conclusion I draw from all this is that no one in the rocketing-and-feathering scenario is particularly villainous. Price drops would happen faster if markets were more competitive, as in the classic Adam Smith model. But this situation is very different from monopoly pricing, where sellers are only restrained by consumers’ inability or unwillingness to keep paying. (True monopolists don’t need an excuse to raise prices or to keep them high.) Supply-and-demand is working, albeit with a little sluggishness.

A long-term partial solution — nothing would solve it completely — would be more rigorous antitrust enforcement. Short-term, a direct government payment financed by a windfall profits tax would deal with the painful symptoms.

Why is oil so high? Oil is an unusual commodity, because in the short term, neither supply nor demand have much elasticity. An oil field isn’t like a car factory that can run longer shifts, pay overtime, and deliver more cars to the dealers in a matter of days. In the medium term, an oil company can drill more wells, and reopen wells that weren’t economical to run at lower prices. Longer term, it can explore for new oil fields. But none of that increases supply immediately.

Similarly, when the price goes up by 10-20%, you still have to get to work, and you’re probably not going to cancel your vacation plans. Airlines aren’t going to cancel flights. It takes time to arrange a carpool, replace your gas-guzzler with an electric, or move closer to your job.

The result of that lack of elasticity is that oil prices swing more wildly than most commodities. It goes way up and way down because that’s what it takes to change people’s behavior. (Remember what a market price is: The price at which buyers want the exact quantity that sellers are offering. So price moves that don’t cause people to enter or leave the market aren’t big enough.) So when demand crashed at the beginning of the Covid lockdowns, the price on the most volatile oil markets briefly went negative. (Imagine the grocery paying you to take away their excess milk.) Here’s the 25-year version of the graph above.

Not a lot of other prices relevant to your life went up 7 times between 2002 and 2008, only to crash all the way back by 2020.

I learn a few things from this graph.

  • If you just look at the 2020-2022 part, the price is skyrocketing. But if you take a longer view, you see a lot of zigging and zagging within a wide range. It’s a mistake to imagine that the Covid-lockdown price of $20 was “normal”.
  • I’m not surprised that oil production doesn’t instantly ramp up in response to a high price. If I’m deciding whether to drill a well that I expect to be productive over 5-10 years, how can I be sure the price won’t be much lower for most of that time?
  • The price increase didn’t start with the Ukraine War. Oil prices went up because the world economy was recovering (and speculators anticipated further recovery). The effect of war and sanctions sits on top of that rise.

Is Biden to blame? Mostly no, but there are hooks you can hang that argument on if you really want to.

First, there’s inflation in general. Like many other governments, the US policy response to the Covid lockdowns focused on avoiding a depression, which was a real possibility. So the Federal Reserve pumped a lot of money into the economy, and the government distributed money directly to individuals and businesses. Both policies started under Trump, but Biden continued and even increased the depression-avoiding spending with his American Rescue Plan.

Two consequences come out of that: the intended one of keeping the economy afloat, and the unintended (but somewhat expected) one of inflation. So unemployment is now at 3.8%, down from 6% a year ago and 15% two years ago. It’s close to the pre-Covid 3.5% that Trump claimed as evidence of “the greatest economy ever”.

The price of those jobs is inflation, which was up to 7.9% before the Ukraine invasion and the sanctions against Russia. Personally, I think that’s a price worth paying. But other people may disagree, and many more will argue in bad faith, criticizing Biden for the inflation without crediting him for the jobs.

Second, we come to the sanctions, which again are a trade-off. Getting Russian oil off the market leaves a production gap, which raises prices. I don’t have a good explanation for why oil has almost returned to its pre-invasion level, but I wouldn’t count on it to stay there.

It’s possible that a President Trump might have been able to call his good buddy MBS and get the Saudis to produce more to make up the gap. (Of course he won’t do that now, because a larger oil supply would just benefit America, and not Trump personally.) Other possible sources of increased oil production would be the other sanctioned countries: Iran and Venezuela. (Iranian oil might not be sanctioned at all if Trump hadn’t scrapped the Iranian nuclear deal.) But none of that has worked out either.

Finally, there’s the question of American production. And here is where the case against Biden is flimsiest. The accusation is that American oil production would be much higher if Biden weren’t so hostile to the oil industry. If he had only kept building the Keystone XL pipeline, or opened more federal land to drilling, or not rejoined the Paris Climate Accord, or maybe had just smiled more at oil executives — then we’d have so much production the world wouldn’t need Russia.

This is nonsense, and I can’t explain it any better than Jen Psaki did.

  • Keystone XL wouldn’t be operating yet anyway. It wasn’t scheduled to open until 2023.
  • Pipelines don’t produce oil, they just move it. The Canadian oil Keystone XL would move is getting to market by other means.
  • Psaki claimed (and I have no way of checking) that the oil companies have 9,000 unused drilling permits. It’s not that they have nowhere to drill.
  • US production went down when the price of oil went down, but it is ramping back up. Next year the US should produce more oil than ever before.

Some of the points here are related to the next blame-object, environmentalists.

Are environmentalists to blame? As Fox News reporter Peter Doocy put it (in a question to Psaki): “How high would [gas prices] have to get before President Biden would say ‘I’m going to set aside my ambitious climate goals and just increase domestic oil production, get the producers to drill more here, and we can address the fossil fuel future later’?”

The unstated assumption behind that question is that climate change isn’t really that big a deal. Global warming is the liberal version of made-up conservative issues like critical race theory and cancel culture. So in the face of a real threat like Russia, and a real consequence like $4 gas, why can’t liberals just get off it?

But the vast consensus of scientists who study this issue is that climate change is a big deal, and will have catastrophic consequences (some of which are already apparent) if humanity continues to burn fossil fuels at an ever-increasing rate. There will always be competing problems that present more obvious short-term dangers. If we let those problems delay action on climate issues, we will never take action, with dire results.

Breathing is more of a short-term necessity than eating, but if we are to survive, we must envision a future where we can do both. In the same way, we have to find a path into the future where we deal with both aggressive autocrats and climate change.

Right now, Germany’s decision to close its nuclear plants makes it more dependent on Russian natural gas. (The proper role of nuclear power in limiting carbon emissions is a debatable issue that I haven’t studied.) That choice has certainly made the current situation more difficult.

But in a longer view, the faster we get to a sustainable-energy future, the less dependent we will be on fossil-fuel exporting countries, many of whose governments are repugnant. The price of wind energy has not increased at all in the last few months, and Vladimir Putin cannot affect it.


In conclusion, higher gas prices have two main causes: The general inflation that comes from choosing to stimulate job creation as we come out of the Covid economic downturn, and the reduced supply of oil as Russian oil is pushed off the market. Those are both policy decisions that were made for good reasons.

Other Biden decisions, like canceling the Keystone XL pipeline, have had little to no effect. Anything the US government could do now to stimulate oil production wouldn’t produce results for many months or even years. Meanwhile, market forces are raising US oil production without any new government encouragement.

Oil companies are gaining windfall profits as the price of oil rises, but I don’t see anything sinister going on there. They could altruistically decide to charge less, but none of the rest of us do that. If those profits are a problem, they could be taxed.

And in the long run, the pain caused by the current high gas prices is one more reminder that we need to become less dependent on fossil fuels. Trying to get out of the present crisis by finding more oil somewhere is just trading one problem for another.

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  • Geoff Arnold  On March 21, 2022 at 9:58 am

    It’s also important to note that Wall Street has been discouraging the oil companies from increasing production.
    Many oil producers need Wall Street money to fund new wells. Investors control the purse strings. And right now, investors just aren’t impressed by how many barrels a company says they can drill.

    “Investing for the sake of growth is not what investors want,” says Pickering, of Pickering Energy Partners. “Growth got us more barrels. It got us too many barrels. It got us low prices. It got us weak returns.”

    Less oil, more cash in hand: That, in a nutshell, is what oil financiers are demanding. And in response, executives are vowing that they’ll be responsible, and focus on profits over oil.

    In earnings calls this spring, CEOs who once boasted of how much oil they could pump are now on the defensive over every new drilling rig they deploy.


    • Geoff Arnold  On March 21, 2022 at 10:00 am

      Sorry – I tried to tag that quote as a quote, but WordPress doesn’t like HTML.

  • Dan Breslau  On March 21, 2022 at 12:16 pm


    I also find it impossible to imagine this argument being taken seriously if she’d refused to marry a mixed-race couple. We (as a society) finally agreed decades ago that discrimination based on race is unacceptable to the point where no exception based on religious beliefs is valid (see Bob Jones University v. United States.) Protections for LGBT people are still provisional in far too many cases.

  • JTF  On March 21, 2022 at 4:45 pm

    I love how the argument is never that we should be consuming less oil. The USA consumes more oil than any other nation. China has 5x the population in about the same size country, yet we use far more oil. Same with India (though they are a smaller country in area.) What country is the highest producer? USA! USA! USA! We produce more oil than Saudi Arabia, Iraq & Kuwait combined, yet still need to import another 10% of what we burn. If we cut our consumption by 25% we would be completely free of dependency on foreign oil… and still the largest consumer and producer of oil.

    The problem is our reliance on oil.


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