One reason why oil prices are soaring
With crude oil prices hitting five-year highs and gas at the pump following right along, consumers are wondering what’s next.
President Joe Biden has released 8% of the U.S. strategic petroleum reserves in an attempt to cool prices. But it has made little difference. The 50 million barrels set loose are only about half of a normal day’s flow in global markets. As large a player as the United States is, the global petroleum market is larger yet.
As usual, there is far more to this story that deserves to be told. Prices can be volatile for a number of reasons, including the current outbreak of armed conflict involving Yemen and Abu Dhabi, on top of disturbances in Iran and Russia. U.S. regulatory policy matters, too. Liberals in power have not been bashful about their desire to somehow eliminate the production of all carbon-based fuels.
Let’s look at yet another piece to the rising price puzzle, one our leaders have had more than enough influence over. The public is driving more these days, and that relates to government efforts to counter COVID-19 hardships by essentially printing several large stacks of money and shipping it to consumers. When the money rolled this past March, the public literally rolled out. Having been somewhat housebound and unable to fly, they got in their cars and hit the road. As indicated inside the dashed circle in the chart below, at about the time of the COVID-19 relief payments, there was a more than 50% increase in U.S. miles driven, and much of the increased driving is still taking place. And yes, there was a significant increase in demand for gasoline along with it.
It’s interesting that our leaders in Washington never wish to admit that the steps they’ve taken to soften the blows of COVID-19, which may be desirable and helpful in many respects, still do come at a cost. The trillions of additional dollars in circulation, beyond casting a shadow on government balance sheets, are inflationary. We consumers best be prepared to weather the consequences that follow such immense fiscal policy actions.
Perhaps we could have been better warned. Admitting that human beings respond to incentives is an economic equivalent to “following the science” and acting accordingly. But this has never been the strong suit of politicians who are in the business of selling their preferred solutions and downplaying the consequences, large or small.
Even now, long after the economy was first vaccinated with a load of new money, there are still holdouts who argue that the higher-priced gasoline and empty grocery store shelves are just anomalies that will soon pass. Those taking a longer view believe we may just have to live with high prices and limited choices for as long as politicians stay on this course, and then some.
As for gasoline, there’s enough world capacity to accommodate huge increases in demand that come when Uncle Sam distributes lots of freshly printed money — just not necessarily at the prices we’re accustomed to paying.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.