The King’s College business and economics professor Brian Brenberg argues the U.S. could combat soaring gas prices if the Biden administration boosts oil production in America.
President Biden is attacking oil companies for failing to do exactly what his administration has been aggressively preventing them from doing since he took office – increase oil production.
At his press conference announcing the release of oil from the Strategic Petroleum Reserve, Biden claimed oil companies are sitting “on record profits” and “don’t want to increase supply because Putin’s price hike means higher profits.”
You really have to ignore a lot of recent history and economic reality to come to that conclusion.
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First, if oil companies controlled oil prices, prices would rarely decline. But they declined during the Trump era as the supply of oil surged and prices at the pump hit lows not seen in years. There are simple reasons why.
To try and help Biden and his economic team understand how this works, let’s use a business that has fewer political overtones than oil – like peanut farming. Let’s say you’re a peanut farmer and worldwide demand for peanuts suddenly surges beyond the available supply. Maybe climate activists concerned about cows and methane emissions convince people to switch from meat to peanut butter for protein.
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Suddenly there’s huge demand for your product and there just aren’t enough peanuts to meet it. So, while you’ve been selling your peanuts at $1 a pound, the three wholesale purchasers you normally sell to now offer you far more. One bids $2 a pound, another $2.25 and the third comes in at $2.75.
As much fun as peanut growing is, you are actually in business to make a profit. So, you sell for $2.75 a pound. But even if you foolishly sold your peanuts to the buyer who offered you $2 a pound, it would not impact retail peanut butter prices. The person to whom you sold your product for an under-market price would simply turn around and sell your peanuts to the purchaser willing to pay $2.75 a pound and make the extra profit himself.
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In any event, by the time these peanuts reach grocery store shelves, whether you or someone else rakes in the profits, the price of peanut butter will reflect the increase in the market price no matter the price at which you sold your peanuts. This is because demand is setting the price, not the peanut farmer. Just let that sink in.
On the positive side, since none of this impacts your costs to produce peanuts, your profits will increase as consumer demand drives up prices. With all the extra cash coming in, you now need to think about the future. You could just sit on your record profits. But the increased profitability of peanut growing would attract new competitors that start growing and competitively selling peanuts threatening your business. You know that sitting on your laurels is a bad long-term move.
So you consider leasing or purchasing more land and growing more peanuts yourself. That way, even when the supply increases and prices decline, you would have higher total sales and even at your former profit margin make more money than you were before the demand surge. Positioning yourself for future growth is a good long-term plan, assuming you have faith in the future of your business.
If our president could face that reality and walk away from the politics for just a bit, this problem really isn’t that hard to solve.
But let’s say the government decides peanut farming is a bad thing. The president of the United States actually campaigns for office on a promise to cripple the peanut sector and have net-zero peanut consumption within 30 years. Following the election, his administration slow walks the permits required to grow more peanuts. It discourages banks from lending peanut producers the money they need to increase production. It makes transporting peanuts more difficult and enacts various regulations designed to cripple the peanut sector.
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All of a sudden, the future for your business doesn’t look so bright. Taking your profits and investing them in an expanded peanut growing operation looks pretty risky. Better to just keep your peanut profits and see what happens.
This adverse government action actually helps your business. With the government now artificially limiting production, peanut prices – and your peanut profits – surge at an unheard of pace. In fact, you’re doing so well that the president blames you for causing the surge in peanut prices by failing to expand the very peanut-growing business he is committed to crippling!
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Of course, the president is simply frustrated. It turns out that people really like peanut butter, and he’s paying a political price for the surge in peanut prices. Flummoxed, you wonder why he doesn’t just encourage your business to grow. You watch befuddled as he releases the Strategic Peanut Reserves, knowing full well that when they are exhausted, demand for your peanuts will once again surge. Releasing the strategic reserves is like living on your savings account rather than working. It’s a great idea – until it isn’t.
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Well, oil and peanuts are not the same thing. But business reality is business reality, no matter the commodity. If our president could face that reality and walk away from the politics for just a bit, this problem really isn’t that hard to solve. We need more oil. We have more oil. Just get out of the way and let America’s entrepreneurs produce more oil.
