Gasoline Prices Reflect Global Events--'Energy Independence' or Not

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Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Record-high retail gasoline prices in the U.S. account for the bulk of consumer inflation, spoiling the myth that a world leader in fossil fuels production can become isolated from global events.

Travel club AAA reported a national average retail price of $4.37 for a gallon of regular, unleaded gasoline for Tuesday, the highest ever. Diesel prices, too, reached a milestone at $5.55 per gallon.

Those prices are fueling consumer inflation. The U.S. federal government reported that the gasoline component of the consumer price index accounted for more than half of the monthly increase in overall prices in March.

The price for all categories of consumer goods increased 8.5% during the 12-month period ending in March. For just gasoline, the price is up 48% over the same 12-month period.

Gasoline prices, along with the price of most consumer goods, were accelerating on the back of the resurgent demand that greeted the post-vaccine stage of the COVID-19 pandemic. The Russian war in Ukraine only added to the pain.

Before the war, the gasoline component of the consumer price index turned negative. By the start of February, the national average price for a gallon of gas was around $3.54. It ended the month up nearly 5% to $3.70 per gallon.

Meanwhile, federal estimates show that U.S. crude oil production is on pace to set a record by next year. And if it's not already, the U.S. is also becoming a world leader in natural gas production and in exports of liquefied natural gas (LNG).

With few producers able or willing to fill the void, it is the U.S. that is working to address the global supply-side issues that were exacerbated by the war in Ukraine.

The U.S. could be primed for a leadership role in energy, which would lead to both political and economic incentives. The U.S. economy produced more oil than it consumed in 2020, and there have long been calls to seize the moment by embracing a theme of energy independence. No longer, the argument goes, should the domestic economy turn on the whims of the foreign few. Nor should it be as impacted by geopolitical events to the degree that it did during the Arab oil embargo in the 1970s.

Fast forward to 2022, and energy independence is a running theme for U.S. President Joe Biden, who in an upcoming speech on inflation is expected to discuss the issue as a means to lower the cost of goods for the voting public.

Independence in an interdependent world, however, is a fallacy. U.S. political scientists Robert Keohane and Joseph Nye have argued that military interdependence "has always existed" as nation states work to counter their adversaries through collective alliances. And at least since the U.S. rebuilt the European economy after World War II, tacitly creating a viable trading partner in the process, the global economy, too, has been interdependent.

Returning to fuel prices, the federal government notes the bulk of what consumers see at the pump is a reflection of the price of oil. The price of oil, in turn, is a reflection of global trends. The recent decision by Saudi Arabia to lower the official selling price of oil for Asian customers, for example, led to a 5.8% decline in the price for West Texas Intermediate (WTI), the U.S. benchmark for the price of oil.

That decision had nothing to do with U.S. policy or U.S. production. Keohane later goes on to explain that globalization is tantamount to the shrinking of distances on a world scale "through the emergence and thickening of networks of connections--environmental and social, as well as economic."

To achieve independence, then, means to break those networks. Capitalism, meanwhile, does not work without an economic outlet. Think of a steam turbine--as the pressure builds, the steam escapes and turns the turbine to create energy. For an economy, that energy is growth. Without a valve for which the steam to escape, therefore, there is no energy and there is no growth. And without a valve, the machinery itself would break.

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