Can we trust President Biden to cut gasoline prices?

Conventional wisdom has it that relief is on the way for those drivers suffering from sticker shock following the sharp increase in gasoline prices this year.

Even with the continued recovery in demand following the COVID-19 pandemic, many forecasters expect the oil market to run into a significant surplus in the months to come. And lower prices – for crude oil and gasoline – are expected to follow. The Department of Energy thinks so. The same goes for Saudi Arabia’s oil minister, who cited impending oversupply as a reason for rejecting President Joe Biden’s request to increase oil production.

Lower prices would be a welcome respite for drivers. Here in the United States, retail prices have increased by nearly $ 1.30 per gallon over the past year. I estimate that higher prices at the pump will cost the typical American family about $ 1,000 this year.

In its most recent forecast, the Energy Department expects international crude oil prices next year to average around $ 72 per barrel, about $ 10 lower than current prices. . This translates into a drop in gasoline prices of about 25 cents per gallon.

But how sure can we be that help is on its way to consumers?

Not very.

Saudi Arabia and other producers, the group says OPEC + because it includes members of the Organization of the Petroleum Exporting Countries and other major oil producers, including Russia, have drawn up plans to increase production every months, gradually canceling the major production cuts made by the group. during the pandemic. The promised monthly increases (400,000 barrels per day) amount to an additional 4 million barrels per day by next September, when all the reductions in the pandemic will have been reversed.

An increase of 4 million barrels per day would constitute a considerable increase in the world oil market, significantly higher than the expected growth in world demand during this period. As a result, the Energy Ministry predicts that the global oil supply will exceed demand over the next few months, reversing the situation we have seen this year.

Many other forecasters follow the same logic.

But why would OPEC + increase production if it drove prices down? What if, on the contrary, the group enjoyed the confidence of forecasters?

It is true that the group is sticking for the moment to the plan of modest monthly production increases that it had announced in July. The OPEC + countries compare this communication of future plans to Fed-style “forward guidance”.

But as with central banks, forward guidance does not block a particular path in stone; it simply signals the group’s intentions at that time. The OPEC + group continues to meet monthly to assess current market conditions and changing expectations.

The OPEC + group has already shown its willingness to deviate from its forward guidance in the face of changing market conditions. Last December, the group announced its intention to increase production by 500,000 barrels per day and consider further monthly increases up to the same size. Less than a month after the announcement, however, a spike in COVID-19 infections raised new fears for global oil demand, and in response the group suspended its planned increases (with the exception of Russia and Kazakhstan), while Saudi Arabia announced a new voluntary supplement. cuts 1 million barrels per day.

A drop in world oil prices of just $ 2 from mid-December caused OPEC + to change behavior in January; will the group now stick to its plan to continue increasing its production if oil prices fall much more sharply in the coming months (as expected in the outlook of the Ministry of Energy)?

Meanwhile, OPEC + countries are profiting by continuing to promise additional supply in the market. A tight market today supports high prices, but the prospect of large future increases supports expectations of lower prices in the coming months. This expectation has two effects: it helps consumers come to terms with today’s high prices by offering them the prospect of imminent relief, while discouraging competing suppliers (such as U.S. shale producers) from investing heavily. aggressive to increase production. I’ve written elsewhere that a key motivator for OPEC + production increases was an effort to capture market share from US shale operators.

Of course, oil prices are notoriously hard to predict. Prices could easily dip even if the OPEC + group again suspends planned production increases. A spike in COVID-19 infections could once again threaten global demand for oil. The American shale producers could once again surprise us with their resilience.

But hoping for lower oil and gasoline prices on the promises of OPEC + countries to increase production is a risky bet.

In addition to increasing costs to consumers, the sharp increase in prices at the pump has helped lower consumer confidence and lower the approval rate of jobs for Biden. Its initial response to rising gasoline prices was to ask the OPEC + group to speed up plans to increase production. When that failed, he and other administration officials raised the possibility of an emergency release of the strategic oil reserve (potentially in coordination with other major consumers, including China). A potential reintroduction of the crude oil export ban (which was lifted in 2015 under President Barack Obama), easing of biofuel requirements and other anonymous measures are also on the table.

But the most obvious path is one that the administration has not followed so far. US growers so far remain reluctant to aggressively increase investment, even with higher prices. In our system, these companies make their own investment decisions without government instruction, and the main reason for producers’ caution has been strong pressure from their investors to focus on generating cash rather than growing the market. production. In addition, however, many operators fear that the administration is devoting itself to aggressive climate action and hostile to investments in fossil fuels.

With oil and natural gas still playing a dominant role in America’s (and global) energy mix, the central challenge for all of us – government, businesses and citizens alike – is how to ensure sufficient and affordable energy for today while at the same time. continuing a rapid transition. towards a lower carbon future. It’s not one or the other; we have to do both at the same time. The White House is missing an opportunity to make this point to U.S. oil and gas producers and to help ease consumers.

Marc Finley is a global energy and oil researcher at the Baker Institute for Public Policy at Rice University. He wrote this column for The Dallas Morning News.

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