To Boost Energy Security, Keep It Simple: Add Supply, Cut Demand

Presidents dread high gasoline prices. There is always pressure to “do something” when pump prices soar, but the White House has a limited toolkit. President Biden has called for a three-month holiday from the federal gasoline tax, and there are frequent reports of new policy ideas under consideration by the White House or Congress. Oil prices and gasoline prices are now beginning to drop, but energy costs are still a big political challenge. To its credit, the Biden administration wants to help consumers get through a challenging time, but some of the proposed interventions could backfire. To avoid unforced errors, policy moves should pass a simple litmus test: Will they encourage near-term oil supply or help cut oil demand? If not, these moves will likely be counterproductive.

It is misleading to blame the White House for current market conditions. Globally, oil demand came roaring back after Covid-19, as commuting ramped up and consumers desperately wanted to travel again. But the supply response has been sluggish. Shortages of labor and equipment are hindering production growth in the United States, and after years of poor financial performance, companies are under pressure to control spending and maximize investor returns. The Organization of the Petroleum Exporting Countries (OPEC) has struggled to meet its monthly output targets and has very limited spare capacity. Stronger demand has also exposed insufficient refining capacity, as some struggling refineries closed in recent years while others converted to produce biofuels. Aside from China, global spare refining capacity is limited. Both upstream and downstream factors are creating upward pressure on prices at the pump.

This is not just a supply problem, and the shale oil and gas boom has not insulated the United States from global oil shocks. The country is the world’s largest oil and gas producer, and following a steep drop after Covid-19, production is rising again. Nonetheless, “energy independence” remains a mirage. The United States is now a net exporter of petroleum (including both crude oil and refined products). But because it is a big country with demand centers often located far from producing areas, it both imports and exports crude oil and refined products like gasoline and diesel from various regions. The market has evolved this way for a reason: to maximize efficiency in delivering crude oil and petroleum products. Prices at the pump reflect these links to global market conditions.

The energy market challenges are daunting, but the White House response has been muddled. The Biden administration has pushed oil and gas companies to increase supply, but suggests that fossil fuels will only be required for a limited time—perhaps five to seven years—before a rapid energy transition kicks in. The White House criticizes companies for their dividends and share buybacks, but it has not engaged Houston and Wall Street to help reshape investor expectations and corporate drivers. Recent meetings between the Biden administration and the oil industry have been more constructive, including discussions about waiving Jones Act restrictions on shipping to lower prices. But the administration continues to blame gasoline retailers for price gouging. More consistent policy signals would be helpful.

Banning Oil Exports Would Backfire

One policy should certainly be avoided. In an effort to reduce prices at the pump, some lawmakers have called for a ban on crude oil or product exports. At first glance, it seems intuitive that keeping more crude oil at home would add supply and lower the price of gasoline—but this is not the case. If crude exports were banned, West Texas Intermediate (WTI) oil prices would fall, benefiting refineries that could access cheaper crude. But there are limits to how much light, sweet oil U.S. refiners can process. Gulf Coast refiners are generally optimized to run heavier crudes, while excess light, sweet oil produced in the region tends to be exported. Without an export option, some domestic crude production would be shut in. U.S. crude oil and refined product exports also add critical supplies to the global market. Eliminate those exports, and global prices will rise. Since refined products in the United States reflect global oil prices, gasoline prices for consumers would rise too. Energy autarky is impossible to achieve and trying to reverse engineer a complex market would almost certainly backfire. The Biden administration does not appear to be seriously considering an export ban, but the idea should be dismissed.  

To Tackle High Prices, Increase Supply and Reduce Demand

The dual priorities of expanding short-term fossil fuel production and pushing ahead with longer-term climate goals are hard to reconcile. But to manage the current market crunch and bolster future energy security, public policy should keep it simple: encourage oil and product supply and discourage demand. On the supply side, high crude oil and gasoline prices ensure that market forces will do most of the heavy lifting. The White House and Congress can speed this process along with targeted interventions but do not have to tip the scale too much. Demand-side policies can probably have the greatest impact.

Last week’s proposed program for offshore leasing by the Department of Interior is a good start. Interior has proposed up to 11 lease sales over the next five years, with up to 10 in the Gulf of Mexico and one in Alaska’s Cook Inlet. This is just an interim step, and it remains uncertain how many lease sales will be included in the final program. Holding offshore lease sales will, of course, do nothing to resolve the immediate market tightness. But allowing more leasing on public land is an important signal that the Biden administration is encouraging investment. As long as oil demand exists, there are economic, political, and strategic reasons to produce in the United States—and a new leasing program would add a dose of realism about the pace of the energy transition. Still, it is important to keep things in perspective. Oil and gas output depends much more on the oil price and corporate drivers than on White House policy. About 75 percent of oil and gas production in the United States occurs on private land, and the Biden administration has approved drilling permits on public lands at about the same pace as its predecessors.

Demand-side policies do not receive enough attention, but ultimately, cutting oil demand is the only way to reduce the country’s exposure to oil price shocks. This is uncomfortable territory for governments, evoking the ghosts of the 1970s. But with high energy prices, the rise of electric vehicles, and changing consumer preferences, it is a good time to have a mature conversation about demand policies.

First, it is important to avoid counterproductive moves. A federal or state gas tax holiday, for example, would do little to lower gasoline prices, since retailers would capture part of the upside. A gas tax holiday could encourage more consumption, making markets even tighter. Another poor policy would be to hand out “gas cards” to consumers—an idea that has been rejected by the Biden administration but enjoys some support at the state level. Gas cards would subsidize gasoline demand, while offering little to no economic relief for the millions of Americans who use public transportation, walk, or bike to work.

In the short term, there are practical ways to reduce oil demand. The White House and federal agencies can encourage more people to work from home. Cities and states can offer reduced fares or fare holidays for public transportation, incentivizing people to use energy-efficient transportation. Cities can invest more in ride-sharing and micromobility. More unpopular and politically challenging moves would be to increase taxes on business class airfares or gas-guzzling sport utility vehicles, or to lower speed limits on interstate highways.

The most essential move the White House and Congress can make is to pass policies that will cut oil demand over the medium term and beyond. The energy and climate policies in the long-stalled reconciliation bill are a good place to start, especially the proposed tax incentives for electric vehicle adoption. Other priorities could include better fuel economy standards for internal combustion engine vehicles, more funding for electric vehicle charging infrastructure, and continued research and development in hydrogen and low-carbon fuels for hard-to-decarbonize industries.

To use an industry cliché, the cure for high prices is high prices. Already there are signs that gasoline demand is softening, helping to bring the market back into balance. Market forces are unfeeling, and it is always tempting to blunt the immediate price impact. But the goal should be to respond to the needs of the moment in constructive ways, while laying the groundwork for a more energy-efficient future.

Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

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Ben Cahill
Senior Fellow, Energy Security and Climate Change Program