Success: Biden Gets the High Gas Prices He Promised

For decades now, the Democrats have painted gas and oil producers as whipping boys for the failure of their own party’s policies. This year as pump prices have skyrocketed and every single facet of our economy is suffering from the shortfalls in production, they once again seek others to blame. Sticking with their playbook that nothing is ever their fault, despite the fact that the record is clear that it is, President Biden casts the blame on Putin and the producers.

The record is clear, however, that the shortfalls are the direct result of the administration’s policies. And Exxon’s response to Biden’s blame shifting is telling but incomplete. Noting that the company has been in “regular contact with the administration” it describes the steps it has taken to increase production and expand refinery capacity, something the administration has obviously ignored:

We increased production in the Permian Basin by 70 percent, or 190,000 barrels per day, between 2019 and 2021. We expect to increase production from the Permian by another 25 percent this year. We’re spending 50 percent more in capital expenditures in the Permian in 2022 vs 2021 and are increasing refining capacity to process U.S. light crude by about 250,000 barrels per day – which is the equivalent of adding a new medium sized refinery.

We reported losses of more than $20 billion in 2020, and we borrowed more than $30 billion in 2019 and 2020 to support our investments in production around the world. In 2021, total taxes on the company’s income statement were $40.6 billion, an increase of $17.8 billion from 2020.

The Forbes writer, David Blackmon, goes on to note:

The president of the United States is simply lying to us. The reality is that Exxon and other oil companies are drilling and investing, on a massive scale, both in the United States and worldwide. They pay many billions in local, state and federal taxes. And if the government doesn’t think it’s enough, then Congress can change those laws.

Penury by design.

Here are some significant specific actions the administration has taken to reduce gasoline supply, something they expressed pride about as it in their words, will speed the transition to “renewables.” And this cockamamie plan certain to raise gas prices was cheered on by the major media 

  1. Cancelled the Keystone pipeline  bringing crude oil from Canada to U.S. refineries
  2. Pulled three offshore oil lease sales and curbed new drilling this year
  3. Failed to appeal a judicial ruling revoking drilling leases in the Gulf of Mexico
  4. Limited fracking
  5. Issued regulations that strained our already too-limited refinery resources
  6. Promoted new taxes on oil and gas production

Last month, before the consequences of this lunacy became fully apparent to voters, Biden bragged about these deliberately destabilizing policies. Try diagramming this jumbled thinking:

Out of touch as ever, President Biden celebrated record-high gas prices Monday, gushing that the pump pain was part of “an incredible transition” of the US economy away from fossil fuels. “[When] it comes to the gas prices, we’re going through an incredible transition that is taking place that, God willing, when it’s over, we’ll be stronger and the world will be stronger and less reliant on fossil fuels when this is over,” Biden said during a press conference in Japan following his meeting with Prime Minister Fumio Kishida.

The president then insisted that his administration’s actions, rather than increasing the price of gas, had actually been able to “keep it from getting worse — and it’s bad.” Only then did Biden pay lip service to millions of Americans who have found themselves spending thousands of extra dollars to fuel up their vehicles.

The oil industry is fighting back. On Wednesday, the American Petroleum Institute sent the letter below directly to the White House, rebuffing Biden's disgraceful demagogic attacks with facts. Have a look:

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Oklahoma senator James Lankford is one who does understand what the major media do not, and smashes the ball right back into Biden’s court:

Twenty-four percent of the oil that we get in the United States comes from those federal leases. So when he has now, still, not re-opened the short-term moratorium on federal leasing, he’s cutting off the future of oil into our country. And it continues to accelerate prices….. And literally, this week, the Biden Administration announces that they want more American companies to do more production, but then this week they release they’re budget after saying to American companies, ‘Why aren’t you producing more oil,’ the Biden Budget has 15 brand-new tax proposals that they’ve got on the production of oil and gas.

And the production is just part of the picture. The petroleum has to be refined. Forty-two years ago I co-authored a book, noting the refinery shortfalls and the need to upgrade and build more refinery capacity. Spoiler alert: we didn’t.

No worries, I'm off to Delaware for the weekend.

As the editors of the Wall Street Journal report, the president has finally noticed we are short of refinery capacity to process crude, and “a major culprit is U.S. government policy.” When the government insists on an abrupt shift from fossil fuels to tackle a largely imaginary problem of "climate change," it’s hard to justify spending more to upgrade refineries to process crude oil. And then there’s the EPA, which has tightened permitting requirements and demanded steeper mandates for biofuels. But there’s more: having to blend more ethanol requires that refiners must purchase regulatory credits to comply and those credits have increased in price driving some refineries out of business.

If the President wants “concrete ideas” to immediately increase capacity and production, maybe he should reverse policies that are designed by his administration to put producers and refiners out of business? Well, that’s just a thought. The people in this crowd who can’t master the simple math of supply and demand are unlikely to be able to follow this line of reasoning.

The Great Ethanol Boondoggle

During the Jimmy Carter administration when gas shortages and long lines at the pumps were high on voters long list of dissatisfactions, a bright idea took hold: mandate ethanol, the creation of gasoline from crops, most especially food stock like corn –about 40 percent of which is  now used to produce it.  It was convenient for politicians on the left. It was renewable. It was domestic and, not least of all, it was a political plus for those who supported it because Iowa was the first primary election in the country and it is corn country.

For decades afterward, even when there was no shortage of available fuel from conventional sources, Congress adored ethanol. Of course, there have always been problems created by the ethanol mandate. It raises the price of food—corn and meat in particular. It can damage car engines and fuel pumps. Two years ago, the Atlantic decried the lost promise of ethanol, once the darling of the Democrats:

 In the United States, the cultivation of corn for ethanol now requires a staggering 38 million acres of land—an area larger than the state of Illinois. By comparison, the total area of cropland used to produce grains and vegetables that humans eat is only about twice that acreage. In other words, the U.S. devotes enough land to corn-ethanol production to feed 150 million people.

The 2007 Energy Independence and Security Act requires ever-increasing amounts of ethanol in gasoline sold in the United States. Small refineries are theoretically allowed to seek EPA exemptions from the mandates when the high compliance costs threaten their operations. Sixty-five small refineries have sought exemptions -- but the EPA has denied every one of them. If they shut down because operations are no longer profitable, East Coast fuel supplies in particular will be hard hit and prices more volatile.

It appears that while hawking renewables at the same time it substantially reduces conventional fossil fuel production, the Biden Administration has decided to increase the blend of ethanol required in gasoline and, in the process, raising gasoline prices even higher. A week ago, the EPA scaled back the corn-ethanol mandate for 2020 due to the widespread lockdowns and now proposes to raise the mandates for cellulosic ethanol, biodiesel, and advanced biofuels. Renewable diesel costs between fifty cents and one dollar more than petroleum diesel, an increase passed on to consumers.

Who benefits from the shift? It's not vehicle owners, because as fuel economy has improved, the quotas have become "increasingly unattainable" and the damage to older cars greater. Refiners are forced to buy credits from EPA to comply with the quotas or turn to more expensive biofuels, which are often imported.

Who's to blame? Not Iowa corn  farmers. It’s the oil giants and hedge funds. And the Iowa corn farmers who banked on their state’s early presidential caucuses to keep them in the ethanol drivers’ seat? Well, the writing  on the wall appeared in 2016 when Ted Cruz, who opposed the ethanol subsidies and mandates, won the Republican primary there.  And their doom was sealed when in 2020 Donald Trump won the presidential race in their home state.

Maybe the only way to kill this program is for oil-producing states to run their primaries before any state that produces the now-favored mandated substitutes for corn-based ethanol.

A View from the Bakken Oil Fields

As you drive into western North Dakota it becomes painfully evident that the energy industry has hit the pause button. There is an eerie stillness. The roads are less trafficked than is typical in this wide-open prairie country. Even the flares are smaller, dancing less wildly in the wind as if to communicate that they know the music has stopped… and there aren’t enough chairs for everyone across the oil and gas industry.

Statistics tell part of this painful story. It's a tale of supply meeting demand in a virus-laden, economic brawl that has left both sides wounded and bleeding. On the supply side, the industry is hemorrhaging revenue, jobs, talent, and institutional knowledge. There is simply too much oil and gas being produced for the current global demand. On the demand side, input prices are low. But everyone is locked in their houses, hunkered down for a statistically unlikely contraction of a largely non-fatal cold.

Even Russia, one of the instigators of this international, global throw-down that seeks to harm North American shale producers, is now feeling market pressures. Their commitment to increase production has led to storage shortages for them, like the rest of the industry has been already experiencing. According to Department of Energy officials, the talks between the U.S., Russia and Saudi Arabia will soon yield fruit with Russia committing to reducing production.

But substantial harm has already been done to American shale producers. As of this week, the rig count in North Dakota is down 35 percent, from 53 to 35. Expectations by the North Dakota Petroleum Council are that the number could drop to as low as 25. Layoffs are abundant for service companies. According to One Basin One Way, an industry orientation and training partnership, oil and gas employs somewhere between 35,000-50,000 employees. While official layoff counts are not available because it is difficult to get real time data, estimates are that there could be thousands of layoffs in North Dakota in the coming weeks and months. Some industry sources suggest as many as 70-75 percent of service companies will close their operations due to limited or no cash reserves, contracted employees returning to their families in other states, and an inability to ensure work into the future. With the memory of the 2016 market softening and related economic pain still a topic in therapy sessions for many owners and workers alike, many owners know they cannot withstand the 24+ month road to recovery of higher prices.

To further underscore the current reality, consider that 3,600 of the nearly 16,000 producing wells in North Dakota have been "shut in" over the last few weeks. Wells get shut in when the cost to operate the well is more than the revenue that could be realized by continuing to operate it. Current market conditions have driven some producers to make this decision. This is essentially asset retirement.

While prices have fallen to 18 year lows recently, storage is perhaps a more immediate challenge to producers and refiners alike. Traditional tanks have long been filled, as were many vessels. Now, even rail tankers have become an storage option. The U.S. government is trying to offer some help to the producers in the form of storage capacity. The Strategic Petroleum Reserve (SPR) will be open for an initial tranche of 30 million barrels. Awards will be handed down next week and the SPR will be able to accept oil beginning in May, if not sooner. With a daily capacity of 685,000 barrels, opening the strategic reserves will help with storage issues for the next 45 days. The hope is that within that period demand will begin to pick up, even as prices remain low. A second tranche is slated to open to accept another 45 million barrels.

On the demand side, well…that’s a reality everyone is experiencing. Equally bloodied are the consumers and businesses who use the refined product as a normal part of their everyday lives. Shutting down a national and global economy hopefully has cleared up any question about whether "trickle-down economics" is real: it’s an affirmative. Global daily consumption has fallen from 100 million barrels to 30 million. So while the price of the input is low, so is the demand for the output of refined products. As such, refineries are trying to limit their runs while they store what they are refining. They are hoping the storm breaks and global demand comes roaring back.

We can only hope that job seekers from all the shuttered businesses around the world decide to drive and fly great distances in their attempts to get re-employed.