Rising gas prices are one of the most visible symbols of inflation. While the cost of food is often hidden away in smaller, distributed increments, and through tricks such as shrinking portions, the weekly visit to the pump presents a painful and unavoidable picture of price misery, these days even more likely to circulate via social media.
The current surge in gas prices has generated a wide range of explanatory theories. One explanation seized upon by the American right, including so-called heterodox liberals, is that green dogmatism is to blame for keeping domestic oil industries shackled and unable to produce higher supply to meet demand. The green-skeptical writer and would-be governor of California Michael Shellenberger has penned several pieces exploring this thesis on his popular Substack. The GOP has gone as far as to accuse the Biden administration of deliberately boosting oil prices in order to advance a green agenda. For his part, President Biden has sought to shift the blame to the oil industry, berating the supermajors for capturing record profits while neglecting to invest in production to maintain high prices.
“The real takeaway is how an intrinsically competitive system doesn’t yield rational results.”
As is usual when it comes to politically charged issues, reality is obscured by the noise and smoke of an aggressive communications war. But the reason why oil prices are so high finds its root not in ideology, but in the intrinsically anarchic functioning of capitalism and the decline in US imperial power.
Judging from the climate alarmism fanned by G7 leaders, you would think the oil industry was on its last leg. It’s true that various bureaucracies and civil-society organizations have sprung up to address a perceived climate “emergency” by shrinking the fossil-fuel industry. Even so, the oil business remains one of the most subsidized in the world.
In the United States alone, the energy industry benefits from tens of billions of dollars in subsidies through tax breaks and credits. Biden called on Congress to end oil subsidies, some more than a century old, following his election, but the legislature hasn’t moved far on this issue more than two years later. Biden’s much-touted executive order implementing a federal leasing moratorium has been mostly smoke and mirrors. While new leases aren’t being granted, permits to drill and extract oil on existing leases are being granted at a record rate, higher than under Donald Trump, and at the highest level since George W. Bush.
State support for the oil industry will never be withdrawn. The oil business can’t operate without heavy state support; it never has been able to do so. Oil extraction, refinement, and transportation are very capital-intensive. Therefore, oil supply is kept at a high level regardless of the market price, as long as variable costs (namely, labor) are covered by revenues.
Before the American state stepped into regulating the oil industry in an important way in the 1930s, the industry’s high upfront investments would regularly get destroyed in boom and bust cycles as a lack of coordination among individual capitalists generated sudden supply gluts. State support was preceded by an ultimately failed attempt at coordination among oil capitalists via monopolization of the industry, led by John D. Rockefeller and his Standard Oil. The American government was moved by the need to ensure low prices for a commodity whose consumer and industrial demand had become inelastic; to this day, there are no viable alternatives to oil when it comes to the vast majority of its uses.
A strict supply-management system kept oil prices stable for the decades between 1934 to 1973, after which things started changing with the rise of anticolonial nationalisms in the Middle East and the strengthening of OPEC. The 1973 Yom Kippur War and the Arab oil embargo led to a gradual loosening of oil price and supply management in the United States. Ronald Reagan fully deregulated crude prices in 1981, allowing US producers to raise prices to market levels. When the US oil industry finally succeeded in 2015 in gaining permission to export oil to the highest international bidders, the link between domestic prices and international-price volatility was cemented. Indeed, even as prices have surged, US oil companies have continued to export oil, instead of alleviating domestic supply shortages.
So, yes, it’s silly of Biden to demand that US oil companies produce more to put downward pressure on prices. Apart from dislocations during the pandemic, American refineries have been operating at close-to-maximum capacity for a decade. Even so, Biden is correct that oil companies have been seeing some of the best profits in years but have done nothing to alleviate domestic prices. So where have the profits been going?
Reporting in the Financial Times suggests US oil companies have dealt with exposure to the heightened volatility in international markets by cutting spending on research and development. Namely, exploration spending has shrunk in real terms since 1998, and revenues from boom periods have instead gone toward share buybacks and dividend payments—the typical pattern of financial-industry value-extraction out of the real economy.
Oil-industry chiefs have called on Wall Street to permit greater investment aimed at creating new supply capacity. Investors, however, are responding to a decade of poor business management by oil executives, who drove companies into deep debt. Investors have insisted—rationally, from their point of view—that revenue continue to be prioritized toward dividends.
While blaming the “banksters” is tempting, there is no one character to condemn. Since the 1970s, all states have been increasingly subsumed under the anarchic diktats of the rule of money, as deregulation and the slow decline of American imperialism have slowly eroded international capitalist coordination. The rate of profit across the G20 economies declined precipitously around 1974 and has continued a slow hemorrhage ever since. In response, the US-led hegemonic order has started to slowly crack, and nation-states have sought to insulate their domestic capitals from the profitability crisis. However, these domestic capitals still require access and integration within an increasingly competitive international market to remain profitable. The result is more geopolitical rivalry and aggression, as protectionism rises. Indeed, in 1970, international oil companies controlled 85 percent of the world’s oil reserves—now, state-owned oil companies control 80 percent.
In a world of heightened geopolitical competition and international market integration, long-term planning is very difficult. OPEC’s monthly report last week predicted that, overall, demand would rise in 2023, but at a slower pace than 2022. But the report is rife with uncertainties. For example, OPEC’s analysis assumes that the Ukraine war won’t escalate further, meaning that Russian oil output won’t decrease by too large an amount. It also assumes that inflation won’t trigger severe economic damage, causing a sudden downturn in demand.
OPEC and its allies are aware of the high uncertainty inherent in such analysis, and the cartel remains wary of increasing supply after getting severely burned by a sudden decline in demand during the initial stages of the Covid lockdowns. But American imperialism is still a veritable force on the world stage, with military and financial might that far outstrips any competitor. As such, pressure from Biden was successful in “encouraging” OPEC and its allies (including Russia) to boost supply. Biden has now returned to Saudi Arabia to push for a further increase. However, in a contradictory move, the West has recently announced a push to place a cap on Russian crude prices, which would likely have the effect of reducing supply. Such are the contradictions of maintaining an empire during the latter stages of imperial domination.
One final point: Oil prices as seen at the pump are only loosely correlated to actual supply and demand, whose nexus is something of a mystery box. The prices are set through oil futures, which represent educated guesses as to where the global economy, geopolitical rivalries, and supply and demand might be going. You can judge the firmness of the information on which these are based by taking a look at OPEC’s latest analysis. Prepare to get queasy.
In the event, high gas prices will become a moot issue, as demand precipitously declines with a recession that was suspended via Covid-era monetary and fiscal policy. Now that these monetary and fiscal tools are being re-boxed in an attempt to rein in inflation, the recession brought on by overproduction will express itself.
The real takeaway is how an intrinsically competitive system doesn’t yield rational results. The oil industry, better than others, demonstrates how much state support and monopolization are required to keep prices stable. The free market can’t and has never been able to achieve this with oil in the United States or internationally. The additional element of heightened geopolitical tension that has emerged since the ’70s has added a huge element of danger to the intrinsic irrationality of the capitalist system, as nuclear-armed states come head-to-head in increasingly acrimonious conflicts to protect their profit shares.