New data reveal how the administration’s policy has undermined the U.S. energy industry, which was once the most innovative in the world.
New data reveal how the administration’s policy has undermined the U.S. energy industry, which was once the most innovative in the world.
A range of recent public policies raise the costs of extracting and processing fossil fuels in the United States. The result has been to squander historic export opportunities for domestic industries while also adding to pain at the pump.
Although the Biden administration asserts that U.S. oil production is near record levels, Department of Energy data (Figure 1) clearly show that we are well short of the production levels and trends that were occurring just three to four years ago.
And Figure 1 masks much of the problem because oil prices are not constant during the years shown. The average inflation-adjusted oil price has been 40 percent higher since January 2021 than it was in the prior four years. Based on Department of Energy data, I estimated that the high prices alone should have increased production by roughly 20 percent simply by making more oil and gas projects profitable, which would result in at least another 2 million barrels per day.
The problem is that oil- and gas-industry costs have also increased more than inflation, especially the costs incurred by the smaller producers pursing new extraction and delivery opportunities. Altogether, Stephen Moore and I estimate that these additional costs have reduced daily oil production by 2–3 million barrels and daily natural-gas production by more than 20 million cubic feet.
Sweeping new federal environment and energy regulations from the Environmental Protection Agency (EPA), the Department of Energy (DoE), and the Department of the Interior (DoI) have added much to oil-, gas-, and coal-exploration costs. These include new taxes (subtly called “royalties” and “charges”) on various aspects of fossil-fuel production. Some new regulations, for example, serve as barriers to leasing and permitting energy projects on federal lands. Dozens of other anti-fossil-fuel regulations from EPA, DoE, and DoI are cited here.
The cost of capital has also increased for fossil-fuel producers because federal financial regulators increasingly encourage woke investing, euphemistically known as “Environmental, Social, and Governance” or ESG, which declines to invest in fossil-fuel companies regardless of their financial promise. And this will be made worse if proposed new SEC regulations that include requirements for even small companies to track and report the climate impact of their activities come into effect.
As a capital-intensive business, mineral-extraction profitability is particularly sensitive to business-tax policy. The 2017 Tax Cut and Jobs Act’s reduction in business-income tax rates helped the industry, bringing U.S. rates in line with the rest of the world’s. But those provisions are beginning to expire, leaving U.S. companies with higher tax rates on their profits.
Of course, the pandemic itself, no doubt assisted by disruptive unemployment benefits and vaccine mandates, has made it difficult for all industries to find qualified workers. Oil, gas, and coal companies are no exception. However, the U.S. was not the only country to endure a pandemic and yet it stands out in terms of its failure to respond to the oil-extraction opportunities of the past 12–18 months, as Figure 2, which is reproduced from the study with Moore, demonstrates below.
Three episodes are shown in the chart: a price increase from 2016–17 to 2018–19 as world demand increased while OPEC reduced production; a price decrease from 2018–19 to 2020 as demand collapsed during the pandemic; and a price increase from 2020 through the Biden administration, which Moore and I measured from February 2021 through the latest available interval of international production (most of which predated the 2022 Ukraine invasion). Normally, a functioning industry would respond by moving production in the same direction as world prices, which the chart shows to be the case in most circumstances by calculating the elasticity of response: a 0.5 elasticity means that the country increases its production 1 percent for every 2 percent that the inflation-adjusted world oil price increases.
On this score, the chart shows the U.S. leading the charge toward more production when oil prices were high in 2018 and 2019, with a percentage production increase almost double Canada’s and far greater than Russia’s and China’s combined increase. The upward bars in the middle period show those countries that reduced oil production going into the pandemic as world prices fell (that is, a negative price change is associated with a negative production change). In this case, the U.S. stands out under Biden, but in the opposite direction. Russia, Canada, China, and even Norway managed to produce more in 2021.
Handicapping our industry — formerly known for its elastic response to world oil prices — has also enabled OPEC to gain more control over the world oil market. With that extra control, OPEC can now profit by cutting its production. In other words, Biden-administration policies raising production costs in the U.S. have reduced OPEC’s production at the same time as they’ve reduced our own.
To combat this low production, Biden claims that he is reducing retail gasoline prices by 38 cents per gallon by selling 180 million barrels from the Strategic Petroleum Reserve (SPR) between April and December 2022. Due to the fact that the SPR sales necessitate repurchases in the near future, however, this conclusion is dubious at best. As such, SPR policies have a greater effect on where oil is stored than on retail gasoline prices. But, for the sake of argument, let’s take their 38-cent estimate for granted. Even in that case, a less encumbered market would still be far more effective than the state at boosting production and lowering prices. Indeed, if U.S. producers had reacted to the higher prices we are seeing now in the same way that they did in 2019, the oil supply would have already increased by 715 million barrels. According to the Biden administration’s SPR arithmetic, that would have reduced gas prices by $1.51 per gallon. Perhaps if the Biden administration would stop imposing unnecessary red tape on producers, the price at the pump and his poll numbers would both improve.