The Reason Behind High Gas Prices — and Why Some Commonly Proposed “Solutions” Won’t Help

This Thanksgiving, AAA estimates that more than 48 million Americans will get behind the wheel to visit friends and family—about 5 million more than last year. When they do, it will cost them dearly, as the current national average of regular unleaded gasoline is $3.41. That’s a 61% increase from the $2.12 average gas price this time last year.

These high gas prices aren’t going unnoticed by both consumers and politicians alike, prompting “solutions” designed to help. Let’s take a deeper look at the real problem and obvious solutions, and why some of those other ideas in the headlines aren’t good ones.  

More demand, less supply

Fundamentally, gasoline prices are a function of supply and demand. Oil and natural gas are global commodities traded in a global market, and the current spike in prices is being felt around the world due to high demand as we come out of the pandemic. The obvious solution, then, is to increase supply, and fortunately, the U.S. is well positioned to do so—if industry is allowed.  

Despite the need for more supply, the White House has not only not encouraged more domestic production, but actually taken steps to discourage it. For instance, President Biden has proposed a ban on production on federal lands and waters—which constitute 22 percent of U.S. crude oil production.  While the current supply and demand issues can’t be attributed to this ban specifically — courts have ordered that leasing continue for the time being — over time, taking this supply offline will further exacerbate supply issues and could push prices higher. In addition, other moves such as cancelling the Keystone XL pipeline — a priority of both President Obama and President Biden — and repeated calls from progressive politicians to ramp down oil and natural gas production are sending the wrong signal. 

Ironically, however, the White House has repeatedly called on OPEC to produce more oil — boosting foreign economies. Given that U.S. oil is produced under the strictest environmental standards in the world, this approach doesn’t make environmental sense either.  

Tapping the Strategic Petroleum Reserve

Another approach — announced by the White House Tuesday — is to tap into the Department of Energy’s Strategic Petroleum Reserve (SPR). The SPR was created in 1975 in response to the Arab Oil Embargo, and is intended to provide a 90-day supply of oil in the event of an emergency. The SPR has been tapped previously during actual emergencies such as in 1991 (Gulf War) and 2005 (Hurricane Katrina). Although the White House is trying to coordinate a SPR release with other nations, the effects of a SPR release would be short term and limited. The release is likely to result in OPEC+ producers decreasing expected production to offset any impact. Further, the SPR exists for use in a true crisis—a global event or disruption that requires swift action. While today’s high gas prices are presenting many challenges, this situation is not being caused by disruption. 

Banning Oil Exports

Thanks to the shale revolution, over the last decade the United States became a net exporter of oil and petroleum products — in other words, since 2017 we have been exporting more than we import.   

This has led to some politicians to call for a ban on oil exports in order to address gasoline prices. Aside from the fact that much of the U.S. crude sold overseas can’t even be refined in the U.S., a new study from IHS Markit also demonstrates the fallacy of this approach. Jim Burkhard, vice president and head of crude oil markets at IHS Markit explains that banning exports would actually raise the price of gasoline rather than lowering it:

“A U.S. crude oil export ban would make the situation worse—for the United States and the world—at a time when global supply chains are already under exceptional strain.  Such a ban would disrupt global oil supply chains, run counter to decades of U.S. policy promoting the free flow of oil and gas, lead to inefficient and costly re-allocation of domestic crude oil production, disrupt supplies for allies and discourage domestic production—which would all put upward pressure on U.S. gasoline prices.

“Removing the 3 million barrels per day of crude that the United States exports to Europe, Asia and elsewhere would deliver a shock to the world market… Such a disruption of international crude oil flows would lead to a scramble to find other oil and generate more upward pressure on crude oil prices—and thus increase the price of U.S. gasoline.”

Blaming Oil Companies

Last week, President Biden asked the Federal Trade Commission to investigate oil companies, alleging (without proof) that companies are engaging in illegal conduct to drive prices higher. This is not the first time that such an allegation has been made, and past FTC investigations have found no such evidence. Oil markets, like other commodities, are carefully regulated and monitored. Further, oil companies have little to gain from a sharp rise in gas prices, which may actually reduce consumption of their product. 

Bottom Line:  At the end of the day, oil is a global commodity trading in a global market. Supply is outpacing new production, and OPEC has not been responsive to calls to increase oil production. The United States is fortunate to be able to produce enough oil, natural gas, and gasoline to be self-reliant, but the current Administration has been hostile to new energy production and is taking steps to limit production and infrastructure, while at the same time asking OPEC and other nations to produce more oil. 

About the authors

Matt Letourneau

Matt Letourneau is managing director of communications at the U.S. Chamber of Commerce’s Global Energy Institute (GEI). He coordinates external communications and strategy and serves as a spokesman to media on energy and environmental issues for the Chamber.

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