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  • Jonah Causin

Gas or Pass?: Why Prices at the Pump Are on the Rise

Gas prices are on an upward trend, and questions of why this might be, who is responsible, and what we can do are among the most salient in today’s political discourse. With gas prices reaching nominal record highs, Americans wonder what the Biden administration will do to alleviate these economic burdens.

Critics of President Biden blame his economic policies, such as shutting down the Keystone XL Pipeline and his more recent ban on Russian oil, gas, and coal imports, which received widespread bipartisan support. Others point to the bogged-down supply chain and post-pandemic boom in demand for gas as the nation opens back up. Nonetheless, considerable public debate remains over the direct cause of the increase and possible remedies for the situation.

Why Are Gas Prices So High?

As of March 26, the national average for gas prices reached a staggering $4.23 per gallon– a 47% increase from last year, according to the American Automobile Association (AAA). States on the east and west coasts were hit hardest, with the average cost for California gas reaching $5.91 per gallon. However, these numbers do not account for inflation and do not measure changes in real GDP.

When the country shut down in the spring of 2020, the gasoline demand plummeted as Americans nationwide spent most of their time in their homes. A survey by the AAA found drivers cut their driving habits in half during the early stage of the pandemic. But as state and federal restrictions began being lifted and vaccines rolled out, most Americans soon returned to their normal routine.

Although demand returned to pre-pandemic levels, supply did not. In April 2020, OPEC and other oil-producing nations agreed to cut production by 10 million barrels, or 10% of the global oil supply, to combat crashing oil prices. Though the U.S. has ramped up production since then, the trickling oil supply has lagged behind the increase in demand.

“Since the initial economic wallop from the coronavirus in 2020, oil demand has risen steadily as business activity has increased,” said Jon Greenberg and Louis Jacobson from PolitiFact. “Yet supply hasn’t been able to recover as quickly, due to delays in restoring drilling capacity, higher transportation costs, and sluggish production increases.”

Is Biden to Blame?

The actions of the Biden administration have drawn much criticism from the right, claiming the president is partially, if not directly, responsible for the surge in prices.

One of the most widely circulating criticisms is Biden’s cancellation of the Keystone XL Pipeline, one of his first executive orders as part of his economic and climate change initiatives. However, this reason for high gas prices has largely been debunked, as the pipeline was under construction and not scheduled for operation until 2023. Even if the pipeline had been completed earlier than anticipated, it would have only contributed to less than 1% of the oil supply worldwide. The U.S. consumes 20 million barrels of oil daily, or one-fifth of global consumption, meaning the pipeline’s effect would have been essentially negligible.

Another criticism blames Biden’s executive order to halt oil and gas leases and drilling permits on federal lands, with some exceptions, in late January 2021. Though a Louisiana federal judge later blocked the order, the drilling on existing leases did not stop during the temporary halt. During Trump’s last months in office, oil companies began stockpiling leases in response to Biden’s proposal to curtail drilling on federal lands, enabling them to drill for years to come. Out of the 3,000 applications submitted during these last months, the U.S. Bureau of Land Management under Trump approved almost 1,400 of these applications - the highest number of approvals in all four years of Trump’s term in office. The temporary ban’s effect was also not as drastic as it may seem, as 90% of the U.S. oil and gas supply comes from private and state lands.

Frustrated with the slow oil production amid rising gas prices, Biden condemned drilling companies in a recent speech in early March, asserting, “They have 9,000 permits to drill now. They could be drilling right now, yesterday, last week, last year.” The situation, however, is much more complex.

The latest data from the U.S. Energy Administration Information Administration show the U.S is producing 11.6 million barrels of crude oil daily, in contrast to 13 million barrels produced in March of 2020. There are also 9,137 approved drilling permits on federal and Native American lands. Yet, approximately 60% of the acreage leased is unused, which is not uncharacteristic of the industry as Biden seems to imply. Companies may choose not to drill when they seek to raise their market valuation or, in some cases, when those leases contain no producible oil and gas, says Hugh Daigle, an associate professor at the University of Texas Hildebrand Department of Petroleum and Geosystems Engineering.

Drilling companies cannot boost supply with the flip of a switch. As Farzin Mou, vice president of intelligence at Enverus, explains, "The point from which you drill a rig to the point that you can turn it online, it takes about six to eight months typically.” The loss of 12,400 workers caused by the pandemic is an additional factor deterring these companies from drilling.

When Will Prices Return to Normal?

Though the profitability of crude oil has skyrocketed, many oil and gas executives are hesitant to capitalize. A recent survey conducted by the Federal Reserve Bank of Dallas found that among oil executives, almost 60% of respondents cited “investor pressure to maintain capital discipline is the primary reason that publicly traded oil producers are restraining growth despite high oil prices.”

“Investors in energy stocks have been a bit thrown off by the volatility,” said Paul Ashworth, chief North America economist for Capital Economics, “so they’re looking more for energy firms to pay back down their debt or return money to shareholders, rather than going and investing in new wells — even if those new wells would be profitable."

Biden’s recent ban on Russian gas and oil imports is expected to exacerbate pump prices further. Though approximately 8% of U.S. oil imports came from Russia last year, the ban's effects are largely felt globally.

“When the U.S. issues sanctions, that has wide ramifications on the ability of Russia to export oil," said Patrick De Haan, GasBuddy's head of petroleum analysis. "We don't import a lot, but somebody else does, and we are making it difficult for Russian oil to flow to the global market, and prices are reacting to that."

In a speech announcing his ban on Russian oil and gas imports, Biden made clear he stands firm in his decision, stating, “Defending freedom is going to cost us as well.” In the same speech, Biden also announced the Strategic Petroleum Reserve will release 30 million barrels of crude oil to minimize the ban’s impact.

Prices are expected to rise before improving, though uncertain by how much, given the gap left by the ban on Russian oil and gas and the lingering uncertainty of domestic production.


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