Oil Execs Blame Wall Street, Not Biden, for High Gas Prices

April 2022 - As the world recovers from the 2020 economic downturn, it isn't surprising that the global economy is experiencing a temporary increase in inflation. The price of gasoline/fuel is one area that has been affected, in part due to increased consumer demand for oil and gas and in part due to the war in Ukraine. Other factors unique to the oil industry also have played a big role in the recent rise in fuel prices. These other factors are what we will delve into below.

First, though, let's just say it's unfortunate that rather than trying to understand why gas prices have jumped sharply, the conversation seems to have devolved to where too many people just want to blame their favorite scapegoat: some Democrats are blaming the major Western oil companies (Big Oil), most Republicans are trying to blame President Biden.

(See below for why gas prices are high)

So, to help you better understand what is happening with oil prices, here are three basic facts you probably aren't hearing in this debate, but ones that you need to remember. The last of these three facts gets us back to the headline of this article, where we'll explain in more detail how Big Oil has identified Wall Street as a major contributor to why gasoline prices are not coming down:

1) Crude oil (from which gasoline and other fuels are derived) is bought and sold in a market that encompasses the entire world, not just America.


This means that the prices you see quoted for crude oil depend on worldwide supply, demand, and refining factors, not just what is happening in the United States. (You might be surprised to know that much of the oil produced in the U.S. and Canada is shipped overseas because it isn't compatible with U.S. refineries.)




(image of OPEC meeting from nbcnews.com)
2) Although there is a worldwide market for crude oil, that market is not a competitive market and prices are impacted by what the OPEC monopoly does.


The thirteen members of the Organization of Petroleum Exporting Countries (OPEC) control over 80% of the world's proven oil reserves. At any time, this virtual monopoly can control the world's supply of oil based entirely on the amount they agree to pump, regardless of the world's demand for oil. When OPEC nations decide to cut back production, which most of them have done since late last year, prices go up. In the short term, western oil companies usually can't make up those cutbacks rapidly enough to bring prices back down quickly.


But, historically, when prices do get higher, western oil companies have been willing to spend their higher profits to drill for more oil, which eventually increases the oil supply and drives down its price. Unfortunately, that activity typically has been followed by OPEC re-opening their spigots, which drives down prices even further until smaller oil companies are driven out of business and Big Oil stops new exploration and drilling. At which point, OPEC reduces their oil production again, prices go back up, and OPEC makes a killing.


3) Western oil companies, whether traditional drillers or shale drillers, have gotten gun-shy about new drilling due to pressure from Wall Street investors.


Oil's boom and bust cycle, as we described it above, has gone on for decades. But things are different this time around. Despite today's higher crude oil prices, oil companies are not drilling more. And it isn't because of pipeline issues, green energy, or any of the other excuses you hear coming from right wing politicians and media personalities. The actual reasons were explained last month when western oil companies were surveyed by the Dallas branch of the Federal Reserve and when oil company executives testified to a Congressional committee investigating higher oil prices.


Here is some of what those members of the oil industry had to say:




• Fifty-nine percent of oil executives said investor pressure to maintain capital discipline is the primary reason publicly traded oil producers are limiting new production.

  
  

• Less than 10% of those surveyed blamed government regulation.

  
  

• One executive elaborated: "Investors dumped huge funds into shale drilling only to discover that when oil prices dropped, very little value existed at the end of the day…Investors {i.e., Wall Street} have demanded restraint and capital discipline of their client companies."

  
  

• "Discipline continues to dominate the industry," another executive responded. "Shareholders and lenders continue to demand a return on capital, and until it becomes unavoidably obvious that high energy prices will sustain, there will be no exploration spending."

  
  

• As to the frequent Republican talking point that President Biden's early 2021 pause in federal leasing is to blame, Colette Hirstius, senior vice president of Shell Oil, was asked that question and she responded, "I do not think that not having lease sales has raised the costs to consumers." {By the way, 1) leasing under President Biden is comparable to that of the early Trump administration and 2) oil companies own over 9,000 U.S. permits to drill on federal land that they have not yet used.}

  
  

(image from ap.com)
So what does all this mean? Said another way, stockholders and investors in oil companies (which includes the banks who also lend money to oil companies) like the higher prices we currently have because those higher prices increase oil company profits. But these investors no longer want our oil companies to use those profits and drill for more oil, even though today's higher prices can support the cost of that new drilling.


Rather, these various investors are pressuring oil companies to return their excess profits to the investors in the form of dividends and stock buybacks. They don't want those profits reinvested in exploration and drilling because that would increase production, which then will cause oil prices to fall and dividends to be reduced.

The next time one of your friends tries to tell you that President Biden is to blame for higher gas prices, give them the facts, including those right from the oil industry itself:

Today's higher oil prices were caused mostly by OPEC cutting production at the same time that worldwide demand increased and those higher prices were exacerbated by the war in the Ukraine. They're staying high because Wall Street investors are calling the shots today and those investors are just fine right now with higher fuel prices, bigger dividends and buybacks, and no additional spending for more drilling.