The problem at the pump has been caused by the reduction in domestic production and inelastic demand.
Launching a Federal Trade Commission investigation of oil companies for collusion has long been the go-to response by politicians eager to shift the blame for higher gasoline prices away from their own misguided energy policies (“Biden’s Gas Price Diversion,” Review & Outlook, Nov. 18).
Most branded retail gas stations aren’t owned by Big Oil; they are owned and operated by independent franchisees, who set prices themselves. Those prices are set partly in response to wholesale prices, which again are not set by Big Oil, but by supply-and-demand conditions faced by independent wholesale “jobbers.”
The run-up in gasoline prices has been caused by the reduction in domestic production and inelastic demand. According to U.S. Energy Information Administration data, domestic crude-oil production increased by almost 50% from about 8.9 million barrels per day in January 2017 to 12.9 million bpd in November 2019. By May 2020, however, production had plummeted to 9.7 million bpd, a 25% decrease. This year, production has averaged around 11 million bpd.
A 1-2 million bpd decrease may not sound like much. But consumers cannot suddenly switch to more efficient vehicles and have few options for significantly adjusting their consumption. Supply fell and demand stayed high.
Coupled with slow-walking of new drilling leases on federal lands, designating vast swaths of the West off limits and killing the Keystone XL pipeline, the Biden administration has baked in much higher gasoline prices.
Jonathan Lesser
Manhattan Institute
Edgewood, N.M.
The Renewable Fuel Standard isn’t an ethanol mandate and the cost of ethanol isn’t driving gas prices 24 cents higher. Despite price rises affecting almost every commodity, ethanol is trading at only $2.20 per gallon. The base gasoline that is blended with ethanol trades at $2.28 per gallon. Mixing in a cheaper component doesn’t raise the price of anything.
Even if wholesale ethanol were more expensive than wholesale gasoline, ethanol serves the valuable role of raising the finished fuel octane number, which is essential for modern high-gas-mileage engines. Without ethanol, blenders would need to compensate with far more expensive—and toxic—aromatics to meet the same performance standards.
C. Boyden Gray
Washington
Mr. Gray was White House counsel to President George H.W. Bush. His firm represents corn growers and other clients with interests in lowering regulatory barriers to ethanol sales.
President Biden talks a good game on the need to clean up the environment by 2030 or 2050. But when it comes to gas in the tank today, he is so upset about fast-rising prices that he wants the FTC to launch a probe of oil-company conduct. Higher gas prices, not lower, would reduce demand for carbon-emitting fuels. His objectives are incompatible, providing a wonderful example of present-focus bias. As failed dieters can attest, seeking immediate gratification can be such a powerful force that it often undermines our rational long-term goals.
Paul E. Greenberg
Brookline, Mass.
When you shut down significant parts of U.S. oil production and pipelines on your first day in office, you don’t need an FTC investigation to figure out why gas prices are up 60% from last year. If Mr. Biden is looking for the culprit in the “anti-consumer behavior” raising prices at the pump, he could save time and energy by taking a stroll to the nearest mirror.
William David Stone
Beverly Hills, Calif.
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Jonathan A. Lesser, PhD, is the president of Continental Economics, an economic consulting firm, and an adjunct fellow with the Manhattan Institute.
This piece originally appeared in The Wall Street Journal