We’re spending more on gasoline this month, and this year. In the first half of February, the price of the U.S. oil benchmark, WTI, climbed to an eight-year high of $95 per barrel, from $88. This rapid increase is a growing concern for the Biden administration. Rampant inflation of consumer staples is bearing down, especially on lower- and middle-class Americans, and flyaway energy prices are exacerbating tight financial situations. The only remedies the Biden administration has offered, so far, are ineffective and cannot provide anything more than a transient reprieve.
So far, the Biden administration has tried a coordinated, multi-nation release of oil from strategic petroleum reserves. That did not move the market. The administration has proposed a temporary suspension of the federal gasoline tax, but that would give relief of only $0.18 per gallon for a short time. The White House also tried to lobby Saudi Arabia and OPEC to increase production, but the cartel did not abide.
But there is much more the Biden administration could do to help calm oil prices in the short term and prevent serious spikes in the long term. Here are five policy options:
Reduce the rhetoric and hype over tensions in Ukraine: One of the primary factors pushing up oil prices lately has been the fear of a conflict between Russia and Ukraine. More specifically, the market is anxious about potential sanctions on Russian oil and gas from the U.S. and disruption of supplies to Europe. Rather than stoke these fears, the White House could provide confidence to the market that it is on top of the situation. Instead of fanning market volatility with rhetoric about an imminent invasion, the White House could issue reassuring statements that its diplomats are managing the situation and that there are plans to alleviate energy shortages if the situation deteriorates. After all, the Biden administration can make the market feel as though someone responsible is in charge.
Provide regulatory certainty to domestic oil and gas producers: From the beginning of his term, President Biden has mishandled the regulatory processes for oil and gas production and transportation. He has suspended permits, reinstated them, promised new environmental regulations and royalty schemes that have never materialized, and had courts overturn initiatives. U.S. producers simply can’t trust the federal government to follow through on its promises and they are confused about what’s to come. Even with the administration’s commitment to renewable energies and new technology, assurance that oil and gas have not become an enemy of this administration would go a long way toward encouraging investment and growth in oil and gas production.
Even now, with growing demand and exceptionally high oil prices, U.S. producers are still producing 1.6 million barrels per day less than they were in January 2020, when prices were about $35 dollars per barrel less. Fundamentals indicate that U.S. producers should be producing more and expanding drilling to increase production in the future. However, this is not the case. Indications are that large producers aren’t spending the capital needed to ramp up production and instead are focused on maximizing productivity or only drilling enough to keep up with the replacement rate. Most firms that do plan to expand production are small enough in size that production may grow by only 100,000 barrels per day (bpd). Oil prices are high enough that companies should be producing more and planning for growth, but they are not. The White House should be working to alleviate producers’ concerns about environmental regulations, the permitting process and other regulatory issues so that producers can feel confident investing profits in future oil production. After all, more supply means more reasonable prices. This is perhaps the quickest way to lessen pain at the gasoline pump.
Curb inflation: Inflation has a two-fold impact on oil prices. Like all industries, the cost of production and transportation in oil rises with inflation. Moreover, U.S. inflation has a particularly harsh impact on the price of oil because oil is almost exclusively traded in dollars globally. Thus, when the dollar’s value drops, the price of oil must rise for global producers to earn what they think they deserve. The White House will need to get a hold on inflation to stop rising oil prices. It appears an interest rate increase is in the works but has not yet materialized.
Alleviate supply chain issues: Supply chain issues hurt oil producers like everyone else. A broken supply chain means it’s hard to expand and operate new wells. Although the White House cannot fix supply chain issues overnight, it can help alleviate the problem by suspending certain regulations on trucking and shipping to expedite growth. One example of a regulation that can be amended is that the Federal Motor Carrier Safety Administration could issue a commercial learner’s permit (CPL) exemption to interstate truckers. A major trucking company filed such a petition last summer because such an exemption would help work around state-level delays in issuing new licenses and put drivers who have passed the CDL skills test to work immediately.
Sign a nuclear agreement with Iran: Of course, there are more important national security issues involved in the relationship with Iran and those must take precedence. However, if the focus is just on the problem of high oil prices, a deal with Iran would help. There has been significant progress in negotiations over the past two weeks, and Iran analysts seem positive that a deal could be reached soon. According to the latest deal under discussion, an agreement would lift sanctions in the second phase of implementation, which could be between one and three months after signing. If this moves forward, Iran potentially could put between 67 million and 87 million barrels of condensate and crude oil that it has in storage on the global market immediately. In fact, Iran is communicating with potential buyers in Korea, a sign that they believe a deal and sanctions relief is possible.
In the longer term, Iran may be able to increase production by as much as 1 million bpd, which would be a significant increase in global supply and would help alleviate high prices this summer, when demand typically peaks.
Ellen R. Wald is a senior fellow at the Atlantic Council’s Global Energy Center, and president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise. Follow her on Twitter @EnergzdEconomy.