There's no economic recovery without an oil production recovery
rooftop solar producing high year-over-year increases in self-congratulation and schadenfreude, or what economists call "smugflation."
Seems like the logic of the Saudi relationship is still intact: they do whatever they want, fund some think tanks, and our executive just acts paralyzed. Is it supposed to work another way?
Crude oil prices only partially explain the high gasoline prices. Another major issue is insufficient refinery capacity to convert crude oil into refined products like gasoline, diesel, and jet fuel. As a result, these refined products are trading at much higher prices than would be expected from current crude prices. Javier Blas covered this issue in his May 9th article, “Sorry, But for You, Oil Trades at $250 a Barrel”. 
> If you are the owner of an oil refinery, then crude is trading happily just a little above $110 a barrel — expensive, but not extortionate. If you aren’t an oil baron, I have bad news: it's as if oil is trading somewhere between $150 and $275 a barrel.
> From 1985 to 2021, the crack spread averaged about $10.50 a barrel. Even between 2004 and 2008, during the so-called golden age of refining, the crack spread never surpassed $30. It rarely spent more than a few weeks above $20. Last week, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher.
> Third, and perhaps most importantly, refining capacity has declined where it matters for the market now, and the plants that are operating are struggling to process enough crude to satisfy the demand for fuel. Martijn Rats, an oil analyst at Morgan Stanley, estimates that outside China and the Middle East, oil distillation capacity fell by 1.9 million barrels a day from the end of 2019 to today — that’s the largest decline in 30 years.
> The downward trend started well before the pandemic hit, as old Western refineries struggled to compete, environmental regulations increased costs and the unfounded fear of peak oil demand amid the energy transition prompted some companies to close plants. The fuel-demand collapse triggered by Covid-19 only turbo-charged the trend, resulting in dozens of refinery operations shutting down for good in Europe and the U.S. in 2020 and 2021.
Perhaps neither here nor there in the greater scheme of things but one thing that it seems very obvious in this context would NOT be helpful is picking a trade battle with China and threatening new tariffs because someone has decided that they have made solar panels too good and too cheap!
Disclosure: I am a Chevron shareholder and have owned Exxon in the past in a family portfolio. As long as there is a world price for oil and a cartel that manages a good portion of the world oil supplies, things won't get much better. Companies need to assess whether it is profitable to explore new areas. I don't think this is a big secret at all.
The fundamental error made by the US was not increasing the nuclear portion of the power grid. Germany is now seeing what happens when nuclear is abandoned. A lot of research has gone into the design of safer small flexible reactors but I have grave doubts that any will be deployed in the US.
Lost investment in things like years of studies and approvals for a major project like Keystone XL where it was denied, approved, denied (for varying reasons and with little real rule following, all political machinations that you can’t respond to by tweaking the project design) does not incline investors to put more money in oil projects. Similarly, for reasons that have been well spelled out elsewhere, saying that “oil companies are not drilling on every lease” is not a complete picture -- lots of leases wouldn’t produce enough to be profitable even at current prices, and they don’t know all of that at lease auction time, much of the studying is done later. In general the administrations actions would curb investment without regulator support for stranded investment theory *and we’re getting that too.*
There are some unique factors that impede adjusting to higher energy prices
- Energy prices jumped due to a war, whose instigator seems to be losing. That makes for a tough investment case for multi-year projects to increase supply.
- The biggest thing consumers could do to reduce gas bills is buy an EV or simply a more efficient ICE car. But car production is being disrupted by other shortages, so the vehicle fleet is actually turning over more slowly than usual, instead of faster.
Thank you for this article - very rarely is there writing that considers both 1. Global warming is a real threat with 2. Our energy transition isn’t going to happen overnight. Energy prices seem to be the #1 thing voters judge politicians on, so in my opinion is better to have more carbon produced short-term while implementing a long-term vision of switching to renewables (via EV subsidies, repeal of solar tariffs, investments in charging infrastructure and R&D etc.) than to have the democrats be the “party of high gas prices” and be unable to make consistent progress towards the goal.
My mental model here is that coal use didn’t production didn’t plummet because of taxes or restrictions of mining grants, it plummeted because clean natural gas got much much cheaper. I imagine that due to American’s general allergy to raising prices on themselves this will be true for oil as well.
It makes sense for producers to be cautious. Putin is obviously suffering from some pretty serious health problems. If he dies tomorrow and his replacement wisely pulls a Khrushchev and blames all the bad things that have happened on the late Putin, withdraws troops and makes amends with the west, oil prices will plummet.
"While energy consumption scales with income to some extent, it’s not like millionaires drive three times as much as the median American."
What's the fuel usage of a corporate jet?
As a landlord in New England with a building with oil heating I can confirm I got absolutely murdered on heating costs this past year…
How did you calculate the counterfactual inflation rates for Shelter, Medical care services, Apparel, and New cars?
Overall a good article - my issue is you didn’t seem to account for the US being the world’s largest producer of oil and gas. That money is still in the economy it’s just in the hands of different people.
To your larger point, I’d be 100% a price guarantee for frackers to ensure the Saudi’s don’t kneecap them again.
People use “unbelievable” too liberally, but my brain is truly refusing to process the fact that we are likely to get 4 more years of Trump. It is shocking how quickly things went sideways for the administration.
Also, with so many folks still working from home where is all this demand coming from? You look at vehicle miles traveled and it’s at a record high. Where the f—k is everyone going?
From my understanding, it's not the oil production that's the issue, as the oil price and the price of its constituents are now having something of a discontinuity, i.e gas is much more expensive that oil prices would necessarily reflect. It's that Democratic interest in sending signals to energy companies that the era of oil was over and the COVID pandemic drop in demand indicated to the oil companies that they had excess refining capacity and they moved to mothball their least efficient refining capacity. And now here we are.