Fuel For Thought

I had to fill up my car last week. I had been reading about pain at the pump, but experiencing it first hand was excruciating. The terminal shared a tissue instead of a receipt at the end, the better to dry my tears.

As I drove away much the poorer, I wondered why this was happening. The United States is one of the largest producers of petroleum in the world; the ability to cover our own needs has been a buffer against price shocks. (In fact, America became a net exporter of oil products in late 2019.) World supply has been roiled by the move to cut off imports from Russia, but the U.S. has not been directly affected by the ban.

The answer to my question, as it is for so many current economic questions today, is the pandemic. Transportation was steeply curtailed during the early months of COVID-19, causing oil prices to plunge by two-thirds. This put substantial financial stress on producers; some were able to withstand the pressure, but some American firms in the sector were not. Refining has also been impaired during the past two years; capacity to turn oil into fuel is at its lowest level in eight years.

The consequent loss of U.S. refining capacity has limited output, which remains more than 10% below pre-pandemic levels. Even the lure of prices which are double what they were in late 2019 has not been enough to bring more capacity back online.

Producers in the Organization of Petroleum Exporting Countries (OPEC) have held output below potential for many months, refilling their coffers after they were depleted in 2020. It is important to note that oil prices were increasing long before the invasion of Ukraine, which confirms that the war alone does not bear much responsibility for high U.S. fuel prices. President Biden is scheduled to make a visit to the Middle East later this month in the hope of securing additional supplies.