Jul 11, 2022 6 min read

When the average U.S. gas price recently broke $5 per gallon it garnered a lot of headlines, and has taken on political significance. Since many people drive to work, demand for gas is relatively inelastic and is often purchased weekly; with the gas prices advertised prominently, rising prices hurt any politicians associated with them.

Unfortunately for President Biden, there is little the president can do about the price of gas. Oil is a global commodity, so prices are set on the world market. Gas may seem expensive at $5 a gallon, but it’s in the middle of the pack on the world market. In most European countries it’s more than $7.50 a gallon (due to taxes). On the other hand, Maduro’s leftist government in Venezuela subsidizes the price at only 8 cents a gallon, but it can be difficult to get. While people like low gas prices, I’m not sure Venezuela should be the model we emulate.

While gas prices had risen gradually from their pandemic low ($1.84/gallon) to $3.32/gallon just prior to the invasion, the embargo on Russian oil imposed after Russia’s invasion of Ukraine dramatically pushed up gas prices. Most people support Biden’s efforts to help Ukraine, but that does have a cost.

That’s actually supposed to be the way the free market works. One of capitalism’s strengths is that managing the economy is not left to a few experts, but rather is the sum total of the decisions of all the economic actors. In this case, because of the uncertainty of supply, buyers of oil futures were willing to pay a high price to secure that supply in a time of uncertainty, so even though the costs of drilling and shipping oil may remain unchanged, the price goes up. While this hurts individuals who purchase gas in the short term (and seems like profiteering by the oil companies), it helps society adjust to the more limited supply. The alternative is for prices to remain low, but we run out of gas. High prices encourage consumers to use less, preserving the supply.

High prices might also encourage more supply, but given that oil field development is an expensive, long-term investment, oil companies will not invest if they think the price rise is temporary. Drillers who expanded during the fracking boom still remember the rash of bankruptcies caused by the price drops increased supply had created, so they are wary of making an investment that might destroy their business. And given that we need to move away from fossil fuels, it makes much more sense to reduce demand than to develop more oil wells that will lock us into high fossil fuel consumption for decades.

Republican critics blame Biden for the increase, citing the cancellation of the Keystone Pipeline and Biden’s suspension of drilling on public lands. But these things have little to do with the current price of gas; the unbuilt portion of the Keystone Pipeline would not be transporting any oil for years even if Biden had not stopped it, and the tar sands oil it was carrying was destined for export anyway.

When Biden first took office, he fulfilled a campaign promise by suspending leasing on public lands, but public lands only make up 10% of the domestic lands available for drilling, and there are currently 9,000 permits to drill not being used, so a temporary suspension of drilling on those lands had no impact on the current price of gas.

U.S. oil production in 2021 was almost its highest ever, and the U.S. extracts more oil than any other country in the world, so if Biden’s goal is to destroy the fossil fuel industry, he’s doing a lousy job. In fact, in spite of promises to move the U.S. away from fossil fuels, Biden just proposed allowing 10 leases in the Gulf of Mexico and one in Alaska, which frustrated environmentalists.

Biden has tried to ease the economic burden of high gas prices. First, he authorized the release of 30 million barrels of oil from the government’s emergency reserves. Since U.S. consumption is on the order of 15 million to 20 million barrels of oil a day, the oil release will have only a marginal impact on the price of gas, but it sends an important political message.

Biden has also proposed a federal gas tax holiday. The 18-cent gas tax has remained the same since 1993 (while inflation has eroded the value of the tax revenue by more than half). Biden’s gas tax holiday will theoretically reduce the price paid at the pump by up to 18 cents (if the tax reduction was completely passed through to the consumer). But there is nothing that guarantees the savings would be passed on, so they might just go to the oil companies, padding their already healthy bottom line (studies on the impact of state gas tax holidays in Maryland and Connecticut showed that 30 to 40% of the savings were pocketed by the oil companies).

Progressives in the Democratic Party, led by Elizabeth Warren, blame the price hikes on greedy oil companies who want to maximize their profits. While profit reports demonstrate that this is true, that’s what corporations are supposed to do, so it’s like criticizing a lion for eating a gazelle. But Warren does suggest an appropriate policy that would alleviate some of the burden of high prices: an excess profits tax on the oil companies. This would allow society to recoup some of the extraordinary profits being made by the oil companies. The revenue from this tax would be rebated to taxpayers, with individuals getting approximately $240 per year while joint filers would get about $360 a year. But significantly, in contrast to the gas tax holiday, it would still allow the market to discourage gas consumption, so it would not interfere with that important message (and unlike the holiday, the oil companies would not be keeping a third of the savings). Under the gas tax holiday, only people who used gas would get assistance, while under the rebate, those who cut their gas use would also benefit.

We should not use a temporary crisis to lock in bad policies for decades.

Kent James has a doctorate in History and Policy from Carnegie Mellon University and is an adjunct in the History Department at Washington & Jefferson College.