EnergyFederalStatewide NewsGas Prices Rise with Vaccine Distribution, Biden Administration’s Environmental Policies

The prices Texans pay at the pump have increased of late, but the cause is a complicated mix of policy and macro-economic factors.
March 24, 2021
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Prices at the pump are one of the most used barometers of economic health. Since President Joe Biden assumed office, ushering in an energy policy sea change compared with his predecessor, Texas’ average gas price jumped $0.52.

Texas is still $0.26 lower than the national average.

Higher gas prices mean higher costs to ship goods to the consumer. They also mean less traveling and therefore less commerce on a macro level.

In the throes of the recession, the statewide pump average nearly reached $4 per gallon — providing the most easily understandable example of a lame economy limping along to the beat of a busted housing bubble.

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Gas prices are generally a product of four cost components: crude oil, refinement, distribution, and taxes. Each of these costs fuels the ultimate dollar figure drivers shell out at the pump.

The first component, crude oil, made international headlines about a year ago when its price plunged to sub-zero record lows. Before the pandemic and parallel international supply fight, West Texas crude oil traded between $50 and $60 per barrel (bbl).

That sudden nosedive brought to an end multiple years of energy prosperity since the oil export ban was lifted during the Obama administration. It had continued and expanded during the Trump administration as gas prices were, on average, $0.44 less than during Obama’s second term.

Coronavirus had a hand in it, however, as the lowest price point came in the first week of May 2020. The virus’ downward pressure on prices stemmed from its near evaporation of travel whether by plane, train, or automobile.

The West Texas crude price has since recovered to its pre-pandemic levels after the system was able to adjust to the new consumption environment. The oil and gas industry overall began to stabilize last fall after the initial hit absorbed by the pandemic.

As demand cratered, a supply glut developed causing prices to drastically plummet. At the same time, refineries shuttered operations without enough consumption on the back end to justify processing the crude oil into a finished petrochemical product.

The third component — distribution — became stressed to the brink during the pandemic as precautions were instituted across the board both out of concern over spreading the virus and prioritizing certain “essential” goods like food supplies.

Every wrench thrown into a supply chain increases to some degree the overall cost of getting products from producer to consumer. And with motor fuel being the supply chain’s main juice, its price plays into that as well — ironically factoring into its own distribution and delivery costs, and therefore its own price.

The fourth component is taxes, explicit or regulatory, that contribute to the cost burden throughout the process.

Whether it be production taxes, sales taxes, environmental regulations surrounding the production, transportation, and consumption of crude oil or gasoline, or any others among the litany of contributors, it all feeds into that price per gallon paid.

This is where government and public policy most vigorously play a role.

Two such recent examples include Biden’s suspension of new permitting for drilling on federal lands and revocation of the Keystone XL pipeline’s construction permit.

Texas, proportionally, does not feature as wide a federal land drilling landscape as, for instance, Alaska. But a pro-oil and gas think tank analysis estimated the prohibition would cost Texas 120,000 jobs.

And the Keystone XL pipeline would not run through Texas, but it would have increased the amount of oil from Alberta that could be transported to Port Arthur refineries.

President Biden’s policies have undoubtedly contributed to the price increase, whether materially or in the market forecasting, but it also coincides with travel beginning to pick back up as coronavirus vaccinations are dispensed and Americans grow tired of idleness.

As demand rises, so, too, will the commodity’s value.

More cars on the road and more planes in the air mean upward pressure on fuel prices, and that cannot be overlooked in the gas price discussion.

Those forecasts affect real investment and production decisions by oil producers today that play into available supply tomorrow.

But Biden has made a concerted effort to push the U.S. economy more toward renewable resources and away from thermal generation. He aims to move the national grid to carbon-neutrality by 2035.

Both of those executive actions pose a mostly long-term effect, but they still impact the market and its forecasting in the short run. Many commodities, oil especially, are traded on futures markets. Buyers and sellers negotiate future transactions for set prices — in practice, known as “hedging.”

Hedging prices serves a useful function by protecting producers from volatility, such as a record-setting winter storm, in the market and profits the lender by making higher-than-market-value revenues.

Forecasts are used to evaluate the commodity’s direction before those transactions are negotiated. And so, anything increasing costs of supply — such as governmental regulations or weather events disrupting supply — affects one way or another those forecasts and hedges.

Economies, and sectors therein, are Newtonian phenomena made up of millions and billions of individual transactions of variable size and scope, each causing actions with accompanying equal and opposite reactions.

Put in this context, all that goes into the price paid for gas is far more complex than just one presidential administration. But administrations, and the policies they advance, do contribute to the economics felt by producers and consumers from the wellhead to the pump.

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Brad Johnson

Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.