The Hard Truth About Gas Prices

I’m not sure which I see more of in my social media feeds these days, memes meant to tell me just how much the poster stands with Ukraine or ones snarkily lamenting the rising cost of gasoline, the latter usually adding a dig on the Biden administration. Of course, all of these things are somewhat related, but the relationship between foreign and domestic policy and what you pay at the pump remains rather complex. Let’s take a closer look.

This is a subject that I’ve explored several times over the years. I remember writing a long time ago that, absent of some yet unknown technology, we’d never see cheap gasoline prices again. When the process of hydrofracturing shale oil was developed, it suggested a new technology had indeed appeared. However, as I pointed out in the early days of cheap oil courtesy of fracking, this was something of an illusion, as OPEC ramped up its production in direct response to competition from fracking, knowing that companies that were heavily leveraged by fracking investments would have to continue to extract and sell oil, even at a loss, in order to be liquid enough to make interest payments.

Yes, gas prices dropped to under $2 a gallon at one point, but only because one supplier was deliberately undercutting another. You see, oil has a few unique characteristics as a commodity. First, it is something that is always needed and, in most cases, cannot be substituted for with other products. It’s also sold on a global market, which means that regardless of how much is extracted from American lands, it goes into the same proverbial store, where fluctuating global demand sets a price. Hence, the term energy independent isn’t nearly as simple as it is most frequently used.

Just because you’re extracting more oil within your country than your people as using (which is referred to as a net oil exporter), doesn’t make you immune from price shocks driven by global events. If any of the large-scale oil-producing nations of the world significantly reduce their output (or suffer sanctions that prohibit them from bringing their normal amount to market), global supply is then reduced and a constant demand will mean higher prices for all. So, even though the U.S. gets relatively little of our total oil supplies from Russia, sanctions have reduced the amount of crude the country has been able to bring to market, making all oil–even that which we produce domestically–more expensive.

While all oil sells at market price, the cost of producing any particular barrel can vary wildly. Unfortunately, while many countries in the Middle East enjoy oil deposits that are relatively close to the surface and take less work to refine, much of the oil that remains in the U.S. is more difficult to get to and expensive to bring to market. As such, each time the price of a barrel of oil drops, more and more of our reserves become cost-prohibitive to extract. Oil is further complicated by the fact that much of it is bought in markets that speculate on its future price.

Some countries, such as Brazil and Saudi Arabia, have nationalized domestic oil markets in which the government uses profits from oil exports to subsidize a lower price for domestic consumers, relying on the economic growth that comes from reliable access to cheap energy to more than pay for itself. The downside to artificially-cheap oil is that it removes any incentive to conserve a finite resource, making it penny wise and pound foolish as a long-term strategy. Nonetheless, as oil prices begin to choke off other parts of our economy, some U.S. politicians are floating serious proposals for our government to get more directly involved in policies that can in fact impact pump prices.

Lucas Kunce, Democratic candidate for U.S. Senate in Missouri, recently proposed a relatively-simple, three-point plan aimed at doing just that. While not going so far as to nationalize oil, the Marine Corps vet wants to use regulation to insulate our economy from crippling price shocks. Kunce has proposed legislation that would prohibit any oil extracted on U.S. territories from being sold anywhere but domestic markets. He also wants to make oil companies invest any profit over 5 percent into nuclear and/or renewables. Most importantly, Kunce wants the penalties to be criminal and involve jail time for any executive found to be in violation.

If enacted, these sorts of regulations could have a significant impact on price stability. However, given the army of lobbyists employed by oil companies and the mountains of money they continue to stuff into the campaign coffers of politicians, it would be an uphill battle, to say the least, in terms of getting any such legislation passed, and therein lies the rub. In a pay-for-play pseudo-democracy like ours, he or she who drops the biggest bags on Washington tends to get their way.

Another major factor in all of this is Saudi Arabia. Even before sanctions against Russian oil were enacted, the U.S. was being challenged by the kingdom, which effectively controls the actions of OPEC. Mohammed bin Salman Al Saud, best known as MBS, is the son of King Salman bin Abdulaziz Al Saud. He holds the positions of crown prince, deputy prime minister, and minister of defense of Saudi Arabia. Though only 36, he has effectively (if not officially) become Saudi Arabia’s head of state since his father has gone into a quasi-retirement from affairs of the state.

MBS consolidated his grip on power after a brutal 2017 purge in which over 40 princes and government ministers were rounded up, beaten, and tortured for supposed corruption, in a country where such a charge is essentially akin to a NASCAR driver getting a speeding ticket during a race. The crown prince became better known in American media circles the next year when he oversaw the assassination of a dissident journalist Jamal Khashoggi, who was working for the Washington Post at the time. Khashoggi was reportedly hacked into pieces inside of the Saudi embassy in Turkey and carried out in duffle bags.

While running for office, President Biden criticized the Trump administration for remaining silent on the assassination and pledged to hold MBS to account. Since becoming president, he has refused MBS’s requests for official visits and has effectively ignored the crown prince, taking the position that the King is the official head of state and therefore the only Saudi official that an American President would need to address. MBS’s subsequent efforts to ramp down OPEC oil production have largely been seen as punishment for this affront. When President Biden recently reached out to the king to ask that the Saudis ramp up oil production, he was told that Saudi Arabia intended to honor its commitment to its OPEC partner countries, which was another way of saying, no.

The United States has invested much in its relationship with the Saudis, essentially picking the country as our preferred partner in an oil-rich part of the world filled with oppressive and murderous dictators. In exchange for keeping the spigots flowing and, even more importantly, selling all OPEC oil in U.S. dollars, the Saudis have enjoyed the protection of the U.S. military, as well as military support by way of the sale of U.S. arms to the kingdom, despite its horrific human rights record, which is arguably the worst in the world.

This uncomfortable reality in which the world sees the United States denouncing countries such as Iran, Iraq, North Korea, and China while supporting a theocracy that leads the world in public beheadings has left us wide open to accusations of hypocrisy. For example, right now there is a nation that has been invaded by a brutally oppressive neighboring country that has been bombing it indiscriminately. I’m not talking about Ukraine, for whom the corporate media has been steadily banging the drums of war. I'm speaking of Yemen. You see, Saudi Arabia has been decimating Yemen for years, but we don’t hear much about that over here, probably since we’re the ones who’ve been selling them the bombs they’ve been dropping (with our support), which doesn’t play as sympathetically on a news broadcast.

What’s worse, there’s evidence that despite our scuffed knees and puckered lips, Saudi Arabia will continue to move further from our orbit under the crown prince. The Wall Street Journal reported this week that both Saudi Arabia and the United Arab Emirates are not even taking President Biden’s phone calls at this point. All of this is much to the pleasure of China, which has been successfully cozying up to the kingdom for years.

MBS even floated the idea that he might end the petrodollar agreement, selling oil in Chinese currency instead. The fact that other countries have to either convert their currency to dollars to buy oil from OPEC, or spend their reserves, has been a great boon for the strength of the dollar, while also giving China (which essentially produces no oil of its own) a useful way to spend all of those dollars it is left with by way of our trade deficit.

It should therefore be no surprise that the U.S. is now looking to countries like Venezuela and Iran as potential suitors. However, when you hear talking heads scoff at the idea of doing business with such despots, just remember whose slice of the pie they’d be making up for and ask yourself how it could possibly be worse than doing business with the Saudis.

The U.S. has resisted any sort of real call to arms in terms of achieving true energy independence because it’s been easier to attempt to meddle in the politics of oil-rich nations in the Middle East, but while I would argue that it was always a short-sided approach, it is clearly no longer a viable option. And the solution lies in neither pipelines nor renewables but an all-hands-on-deck approach that includes investing in next-gen nuclear, as well as asking Americans to make some sacrifices that go beyond paying a little more at the pump.

There is no easy solution in which we simply ramp up domestic production and go about squandering energy in the manner we do today. We must use the carrots and sticks of taxes and regulation to incentivize a society in which energy conservation comes to be viewed as a prized virtue. Suppose we were to build a society in which smaller, less powerful vehicles that deliver high-fuel efficiency above all else becomes the norm; one in which smaller, more energy-efficient homes are viewed as a moral imperative, and our recreation is approached in terms of energy responsibility. In that case,we could, over just a couple of decades, end our incessant need to manage relationships with despotic regimes in the most historically-unstable parts of the world. If not, we’ll continue to either be on our knees to them or at war with them. There is no middle ground.

Dennis "Mitch" Maley is an editor and columnist for The Bradenton Times and the host of ourweekly podcast. With over two decades of experience as a journalist, he has covered Manatee County governmentsince 2010. He is a graduate of Shippensburg University and later served as a Captain in the U.S. Army. Clickherefor his bio. His 2016 short story collection, Casting Shadows, was recently reissued and is availablehere.