Column: White House misses mark with call for oil and gas investigation: Kemp

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US President Joe Biden speaks at an Infrastructure Investment and Jobs Act signing ceremony on the South Lawn of the White House in Washington, United States, November 15, 2021. REUTERS / Jonathan Ernst

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LONDON, Nov. 18 (Reuters) – President Joe Biden’s request for an investigation into anti-competitive behavior in the oil and gas markets may be smart policy in response to rising fuel prices, but it has failed presented evidence of collusion in this case.

“I am writing to draw your attention to the growing evidence of anti-consumer behavior on the part of oil and gas companies,” Biden wrote to the Federal Trade Commission (FTC) in a letter released by the White House on Wednesday.

“The Federal Trade Commission has the power to review whether illegal driving costs families at the pump,” the president wrote. “I think you should do it immediately. “

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At the heart of the president’s complaint is the fact that gasoline prices at the pump remain high, even as costs for oil and gas companies are falling.

“Prices at the pump have continued to rise, even as refined fuel costs fall and industry profits rise,” he observed.

“Over the past month, the price of unfinished gasoline has fallen by more than 5% while gasoline prices at the pump have increased by 3% over the same period.

“The large unexplained gap between the price of unfinished gasoline and the average price at the pump is well above the pre-pandemic average.”

The letter goes on to complain that the profits of some oil and gas companies have almost doubled from 2019 and that they are using the proceeds to fund share buybacks and increase dividends.

“I don’t accept that hardworking Americans pay more for gasoline because of anti-competitive or potentially illegal behavior. I therefore ask the Commission to take a closer look at what is happening with the oil and gas markets, and that you use all the tools of the Commission if you discover wrongdoing. ”

But the president’s advisers confuse different markets and different timescales to present a confusing and confusing price and profitability argument that does not provide a compelling rationale for intervention.

There are undoubtedly areas of the oil and gas industry where anti-competitive behavior and attempts to support prices have been common (“Crude volatility: the history and the future of boom-bust oilprices”, McNally, 2017).

Essentially, the story of the petroleum industry is the story of producers trying to coordinate investment and production to keep prices above the level that would prevail with full competition.

The FTC and the US Department of Justice may have reason to investigate elements of the oil and gas industry for anti-competitive behavior, but the White House did not do so in this letter.

CONFUSION

The letter is a heartfelt appeal from a president under political pressure due to rising fuel prices and a sudden acceleration in inflation.

Unfortunately, the letter brings together up to four different industries: crude oil production, petroleum refining, retail fuel, and possibly natural gas production as well.

Each of these industries is cyclical, with violent fluctuations in price and profitability, subject to its own dynamics, which makes comparisons between them less relevant.

The letter also confuses short-term price movements over the past month with longer-term comparisons to conditions before the pandemic.

It ignores the fact that the margins between retail and wholesale gasoline costs are extremely volatile in the short term, ensuring that a month’s price data is not enough to draw even tentative conclusions.

And it presents a selection of metrics on costs, wholesale and retail prices, margins, net income and payments to shareholders to imply that the industry is making excess profits.

In this, it appears to amalgamate upstream profits from exploration and production with downstream profits from refining and retailing, as well as profits made in the domestic market with those from overseas operations.

Nowhere does it specify the mechanism by which oil and gas companies are supposed to make excess profits at the expense of customers in the United States.

EVIDENCE

The heart of the President’s argument is an empirical observation that the margins between the wholesale price of unfinished gasoline and the retail price of fuel at the pump have widened over the past month.

It is true that the gap between retail prices (including tax) and the various measures of wholesale prices has widened in recent weeks (https://tmsnrt.rs/3Cp3HFz).

But the margin has always been volatile in the short term and is currently not abnormal. There is nothing in the data to support the claim that retail prices are somehow manipulated relative to wholesale costs.

Wholesale-level gasoline inventories are low for the time of year, which is likely to explain part of the recent upward pressure on margins and retail prices.

Gasoline inventories held by refiners, tank farms, pipelines and fuel mixers have declined by a total of 13 million barrels in each of the past six weeks.

Inventories stand at just 212 million barrels, the lowest for the time of year since 2017 and before 2014, according to data from the US Energy Information Administration.

They have been reduced due to strong demand as the economy reopens, commuting is resuming, but many employees continue to avoid public transport due to the pandemic.

The volume of gasoline supplied to the domestic market, an indicator of consumption, has returned to pre-pandemic levels (“Weekly Petrol Status Report”, EIA, November 17).

High retail gasoline prices and margins can be explained by high demand without the need to invoke anti-competitive behavior among suppliers.

Associated columns:

– US oil drilling is expected to accelerate in 2022 (Reuters, November 17) read more

– The depletion of oil stocks in the United States leaves the market vulnerable to shocks (Reuters, November 4) read more

– US oil futures rally fueled by Cushing stock draws (Reuters, October 28) read more

– OPEC + is comfortable with the upward trend in prices (Reuters, October 26) read more

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Editing by Elaine Hardcastle

Our Standards: Thomson Reuters Trust Principles.


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