There Are Few Tools to Arrest High Oil Prices

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--With few options at its disposal to control the price of oil or road fuels, the U.S. government is struggling to arrest the runaway inflation that many analysts say will inevitably trigger another recession.

On Friday, the federal government reported that inflation over the 12-month period ending in May hit 8.6%, its sharpest rise in about 40 years. Motor club American Automobile Association (AAA) on Monday listed a national average retail price of $5.01 for a gallon of regular unleaded gasoline, helping to drive much of the inflationary pressures on everyday consumers.

Crude oil prices account for the bulk of what those consumers see at the pump and few forecasters are pointing to signs of relief. A return to pandemic-related lockdowns in China helped take some of the steam out of the current rally, but at $120 Brent, oil is still expensive.

President Joe Biden on Friday lashed out at oil companies for not drilling more. Some of them claim to have thousands of permits for drilling on hand, but aren't tapping wells. Instead, Biden said, they're returning value to shareholders rather than investing in upstream activity.

"Why aren't they drilling? Because they make more money not producing more oil," the president said. "The price goes up, number one. And, number two, the reason they're not drilling is they're buying back their own stock -- which should be taxed, quite frankly -- buying back their own stock and making no new investments."

Energy consultant group Wood Mackenzie estimated that oil companies returned about $9.5 billion to investors during the first quarter. And according to Biden, Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) "made more money than God this year."

Milton Friedman, a Nobel-winning economist, wrote that the only responsibility of a private company, however, is to return capital to its shareholders. Any notion of social responsibility, he argued, is window dressing for the sake of image. ExxonMobil, the target of Biden's criticism, by that logic shouldn't care about $5.00 gasoline and 40-year inflation so long as their shareholders are satisfied.

But gasoline, and subsequently crude oil, are near-essential commodities, and presumably Big Oil executives buy gasoline just like everyone else. Gasoline, natural gas-fired heating and cooling and many other refined petroleum products are not luxury items. And unlike oil prices, gasoline is a price that nearly every consumer knows because it's ubiquitous.

And there are few signs that things will get better. At the high end, Trafigura expects Brent to reach $150 per barrel this summer, while Morgan Stanley is at the low end with $130 per barrel by the third quarter. Relief could materialize by next year, but the U.S. government still puts Brent at close to $100 per barrel for 2023.

There's not much the U.S. government can do to arrest crude oil prices and govern private-sector behavior apart from taking a page from the U.K.'s script with a hefty windfall tax on oil companies, as Biden has suggested. "Money collected from such a levy would fund rebates to taxpayers, to ease their economic pain in a time of rising inflation," correspondent Paul Wiseman wrote for Industrial Info Resources last week. For more information, see June 9, 2022, article - Shades of Windfall Profit Tax Again Stalk Energy Industry.

But producers argue that taxation isn't the answer either because that means there will be even less money to invest upstream. If you want more of something, the last thing you want to do is make it more expensive by way of an additional tax burden, the argument goes.

Bob McNally, a storied energy expert and president of The Rapidan Group (Washington, D.C.), said that, despite criticism that Biden's energy policies are not all that well-honed, it could be a lot worse.

"The White House has two options: They can do symbolic things that don't really lower prices, and they can do really dumb things that are counterproductive," he told the Washington Post. "Despite my many reservations about the president's energy policies, it is nonetheless impressive that he has so far resisted reaching into the dumb basket."

The outlook then does not look good. But in relative terms, this is not the worst it's been. Adjusting for inflation, the current price of oil is not at all-time highs -- that came during the Great Recession in the middle aughts. Consumers made it through the Arab oil embargo and the oil industry made it through the BP (NYSE:BP) (London, England) oil spill and countless hurricanes.

Eventually, prices will reverse once consumers run out of savings and demand destruction sets in. But that may come in the form of recession.

Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.