White House Blame Game Redux on Gasoline Prices

Frank Macchiarola
Posted September 29, 2022

President Biden is talking gasoline prices again – and again, he’s unhappy and blaming oil companies.

We understand the implications for the White House of fuel prices that affect virtually every American household and most businesses. But as was the case earlier this year when Mr. Biden attacked producers on prices, his criticisms are off the mark.

Instead of attacking the industry, President Biden should be supporting it through policy and the bully pulpit as the best way to address the key factor driving prices affecting families and businesses – the continued imbalance between global oil demand and supply. Let’s dive into what the president has said.

Markets, Not Oil Companies, Set Gasoline Prices

President Biden this week challenged companies running gasoline stations and “setting those prices at the pump” to reduce retail prices.

Yet, the Dallas Federal Reserve Bank’s Garrett Golding, senior business economist, and Lutz Kilian, senior economic policy adviser, wrote earlier this year that only 1% of U.S. service stations are owned by companies that also produce oil. NACS, the trade association representing convenience and fuel retailing, says that less than 0.2% of all convenience stores that sell gasoline are owned by major oil companies. Regardless of their brand, 95% of convenience stores are owned by independent companies, whether one-store operators or regional chains. 

Contrary to the president’s suggestion, Golding and Kilian wrote that crude oil is sold in competitive markets that reflect global supply and demand, then refined into gasoline, diesel and other fuels whose prices are similarly set in competitive markets.

There is no central authority or group of people or companies who decide each day what gasoline is going to cost. The process that influences the cost of a gallon of gasoline at a particular station on any given day is dependent on decisions made by thousands of independent suppliers, refiners, wholesalers and marketers who supply the different grades of gasolines to retailers and the consumer response.

Gasoline Prices’ Response to Crude Oil Prices Often is Asymmetric

In other words, gasoline prices do not necessarily decrease in a direct correlation to decreases in crude oil prices. Dr. Dean Foreman, API chief economist, addressed the point earlier in the year.

Golding and Kilian pointed out that the asymmetrical response of gasoline prices isn’t necessarily evidence of price gouging. As we’ve noted, repeated federal investigations have shown that changes in gasoline prices are market-based, not due to illegal behavior.

Golding and Kilian offered explanations:

One potential explanation is that station operators are recapturing margins lost during the upswing, when gas stations were initially slow to increase pump prices. The reluctance to lower retail prices also likely reflects concerns that oil prices – and hence, wholesale gasoline prices – may quickly rebound, eating into station profit margins. Another possible reason for this asymmetry is consumers’ tendency to more intensively search for lower pump prices as gasoline prices rise than when they decline. This diminished search effort provides further pricing power to gas stations, causing prices to fall more slowly than they rose.

 NACS:

No matter the pricing strategy, retailers tend to reduce their markup to remain competitive with nearby stores when their wholesale gas prices increase. This can lead to a several-day lag from the time wholesale prices rise until retail prices rise. Likewise, when wholesale gas prices decrease, retailers may be able to extend their markup and recover lost profits, with retail gas prices dropping slower than wholesale prices.

The Myth of Oil Producers as Opportunists

President Biden warned oil company executives not to use Hurricane Ian as an “excuse” to raise gasoline prices. See the Point #1 above. API statement to Rigzone:

“Americans are looking for solutions, not political posturing. This is an industry of price takers, not price makers, and repeated in-depth investigations by the FTC have shown that changes in gasoline prices are based on market factors and not due to illegal behavior. The price at the pump that Americans are currently paying is a function of increased demand and lagging supply combined with geopolitical turmoil and policy uncertainty from Washington.”

Unlike so many of the factors affect markets, Washington’s policy uncertainty can be addressed directly. Again, start by stopping the attacks on the American industry that can help change the global demand/supply imbalance. Instead, Washington should make clear it supports American oil and natural gas development now and decades into the future. 

Then follow with actions detailed in API’s “10 in 2022” plan for unleashing American energy. Americans are indeed looking for answers to the energy situation, not more political gestures. America has the resources to help tackle the ongoing global energy crisis. Needed are bipartisan policies and approaches to make it happen.