President Joe Biden followed up his War on Energy—which began the day he took office with his abrupt and malicious cancellation of the Keystone XL Pipeline— with a direct threat wrapped in the flag on Wednesday, demanding in a letter to oil industry CEOs that they increase production while complaining about their profit margins: “There is no question Vladimir Putin is principally responsible for the intense financial pain the American people and their families are bearing. But at a time of war, refinery profit margins well above normal being passed directly onto Americans are unacceptable.”
His verbally-challenged press spokesperson Karine Jean-Pierre followed up with a vague threats that Biden might invoke the Defense Production Act or some other executive powers if the oil industry doesn’t “voluntarily” comply. The fate of President Harry Truman’s seizure of the steel industry in 1952 (declared unconstitutional by a pro-New Deal Supreme Court) must have fallen out of the Biden White House history books, along with any reference works on economic literacy. The facts are these:
- Oil production and refining margins are at or slightly below average for all American manufacturing industries (between 5 and 12 percent, depending on region and product), and considerably below several other industries that are Democrat favorites because they’ve gone woke, especially tech.
- ExxonMobil is expected to earn less than one-half as much as Apple this year (Exxon: $41 billion; Apple: $100 billion), and Apple enjoys a much larger profit margin on sales than ExxonMobil (Apple: 26 % in its most recent quarter; ExxonMobil, 6.2%). But liberals never criticize Apple’s “profiteering” or Google, or Facebook, or...
- Our refineries are running over 92 percent of capacity‚ up from 86 percent last fall, and will likely reach 95 percent this month according to Biden’s own Energy Department. Our refineries can’t increase output much more even if they want to. And the government never offers to backstop oil companies or refiners when market downturns squeeze their margins close to zero, as periodically happens, such as 2009, when refining margins collapsed to -7 percent.
It is impossible to exaggerate the ignorance and hubris—and greed—of the Biden leftists about energy. The Financial Times reported a startling detail a few days ago: “When the White House started calling around in a panic, they thought shale oil production could grow sharply in the near term — like in a matter of months or quarters,” said Bob McNally, head of consultancy Rapidan Energy. “They were shocked to learn that that’s like asking for blood from a stone. It’s almost impossible.”
But it's easy to be shocked when you’ve lost your grip on reality. A CEO of a major American transportation company who agreed to serve on Barack Obama’s Council on Jobs and Competitiveness back in 2011 once privately told me that he asked Obama why we didn’t encourage more domestic production of oil and natural gas. Obama’s answer stunned him: “Stephen Chu [the Nobel Prize-winning Secretary of Energy] tells me we’ll be well on our way to a transition to renewable energy by 2016, so we don’t need more oil and gas.”
President Biden seems even more self-deluded about oil and gas than Obama, peddling the same dreamy nonsense about energy. Last month Biden said that high gasoline prices were part of the “incredible transition” toward a world of “renewable” energy that won’t need fossil fuels. But the inexorable rise of gasoline prices has set off political alarms in the White House, prompting the administration to try to make nice with domestic oil and gas—and even with the Saudis, otherwise a pariah state for this administration—in hopes they will increase oil production and relieve Biden’s political gas pains.
But Biden’s grasp of the oil and gas industry is as simplistic and confused as every other aspect of his doddering administration. Having demonized the oil and gas industry as required by environmentalist orthodoxy, Biden now thinks he can get the industry to bail him out of his self-induced political and economic crisis.
There are two primary reasons why domestic oil and gas can’t be turned on or off like a water faucet in your kitchen. The first is long-wave oil market cycles. The second is political and regulatory risk. The oil and gas industry has at length figured out how to adapt to the first problem. The second problem—political and regulatory risk—is out of their hands, and is the one thing Biden and his gang refuse to acknowledge or consider changing.
There’s an old adage that the solution to high oil prices is high oil prices (and vice versa), and ever since the first oil shocks of the 1970s we’ve seen several epicycles of world oil markets in which the price soars, slowly collapses, and then slowly soars again, drawing oil entrepreneurs into the market with some inevitable bankruptcies among the weaker firms later on. We saw this cycle with a vengeance over the last decade, as rising oil prices in the “oughts” (2000-2009 or so) combined with technology leaps to produce America’s wonderful domestic oil and gas boom.
Opening new or expanding existing resources requires considerable up-front capital investment. Both the industry and its investors have become more disciplined over the last decade to avoid the boom-and-bust cycle, and it is now largely oriented to developing oil and gas assets that can remain profitable at any reasonable price point in a typical epicycle, instead of chasing after large profits during price spikes.
A bigger problem for the industry is political risk. After years of open hostility to the industry from Democrats, why would the industry now put its neck on the line to rush new production when it is certain that Democrats will resume their old hostility to the industry once prices and profits start to come back down? In the 2020 campaign Biden said he’d halt further oil and gas production on public land, while encouraging Wall Street to cut off capital to the industry. He’s more than made good on that promise—until just the last few weeks—and the increasingly woke capitalists on Wall Street were happy to go along. (In a nod to reality, several of the big Wall Street banks have recently reversed their position and say they will now provide financing for fossil fuel companies.)
If Biden wanted to secure a robust and consistent supply of domestic hydrocarbons that his own Energy Department says we will need to use for decades to come, he’d call off the left’s political war on the sector. But fossil fuels are the primary Emmanuel Goldstein of the left, a main target of their daily two minutes of hate.
Beneath these endless confusions and contradictions is the cognitive dissonance of Biden’s variety of leftism. Over the years the left has considered high gasoline prices the acme of enlightenment, because it would force people to switch to “renewable” energy and electric cars. A whole volume of the Encyclopedia of Leftist Errors could be filled with statements of envy over Europe’s tax-driven high fuel prices, along with the open wish that we should follow their example. The aforementioned Stephen Chu said during the Obama years, “somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”
And yet when market conditions deliver price spikes, as happens on a regular basis, Democrats explode: Price gouging! Collusion! Greedy oil companies! We must investigate! Every government investigation of high gas prices since the 1970s has failed to find any evidence of price fixing or collusion in the oil industry, because there isn’t any. The lesson here is plain: for the left, high gasoline prices are only good when it comes about through a government tax rather than market forces. Actually the U.S. government already makes more on each gallon of gas than oil companies and refiners do, but you never hear that inconvenient fact reported, because apparently the government can never be “greedy.”
The dramatic revolution in domestic oil and gas production that began about 15 years ago falsified two of liberalism’s most persistent clichés—that we had reached “peak oil,” and that the U.S. couldn’t “drill our way” to energy independence. One politician who quietly figured this out a decade ago was Barack Obama. By degrees during his second term, Obama started endorsing an “all of the above” energy policy, which represented a de facto truce with domestic oil and gas. It is telling that Biden can’t even bring himself to say “all of the above,” and this silence is all the industry needs to know as it weighs the enduring problem of political risk so long as the left is in power.