By Mark Mansuis and Bill Sargent
During 2022 under the Biden Administration, the price of crude oil and petroleum products skyrocketed. The Gulf Coast average wholesale price for gasoline was over $4.00 a gallon. In other parts of the country – in some blue states —prices spiked to over $6.50 Biden and blue state governors declared “war” on crude oil production, attempting to force Americans to switch to higher-cost and less reliable renewable energy.
For first half of 2022 crude oil was above $100 per barrel. Government interfered with the private sector, leaving consumers paying dearly. An economy recovering from the Chinese-initiated COVID pandemic resultant shutdowns and extreme levels in government non-GDP-linked spending fueled the worse inflation in decades. We have now discovered that trillions of dollars were frittered away by massive fraudulent schemes using these funds. Back in 2022 inflation was higher than its peak in the late 1970s when calculated using the same formula. Its impact was brutal on ordinary and fixed income folks. Although the rate of inflation has been brought way down by the Trump Administration policies, it takes time for wages to catch up.
Fast forward to 2026. Failed negotiations with Iran to no longer seek a nuclear weapon — and the realization that even if you have an agreement with them the radicals who control the country cannot be trusted to live up to them – left President Trump with little choice but to take military action. The American and Israel armed forces took out Iranian leadership and most of its military assets. But it’s like playing “Whac-A-Mole”. When you knock them down here, they pop up there!
With Iran located on the Strait of Hormuz – a major crude oil seaway and choke point — their radicals used the limited military assets they have remaining in attempts to shutdown crude oil transshipments. About 20 million barrels p/day of world usage were impacted. This caused prices to spike at $110 p/barrel before quickly falling. The price of products also spiked. Since then, crude oil prices have fallen into the $60-$80 range, and gas and diesel prices have started to mediate but not to the same extent. Today, the Gulf Coast wholesale gasoline price is closer to $3, about a dollar higher than before hostilities began.
The big issue today is the difference between the cost of crude oil and the selling price of gasoline and diesel fuel – the “Crack Spread.” We are experiencing a shortage of refining capacity vs. demand. Our refineries now operate at nearly 100% capacity during summer months. The rest of the year it’s closer to 90% capacity. It’s pure economics! When demand exceeds capacity; prices dramatically rise. We have raw material in abundance. We don’t have enough refining capacity.
Between 1985 and 1995 California purposely shuttered its refining capacity by 20% because of pressures from environmental groups and actions by the state’s Democrat leadership who listened to them — having a crippling effect. More refining is needed, not less. In past two years, California shuttered another significant percentage of its refining capacity, continuing this trend. The last U.S. refinery was built in 1977. Efforts to expand existing plants is in process, but it takes time; five years or more.
Keep in mind that fossil fuel markets aren’t just US-based, it’s a global marketplace. In the past six months, Ukraine launched drones and missiles deep inside of Russia forcing the shutdown of up to 50% of Russian refining capacity. The Iranian attacks against its neighbors have also shut down, at least temporarily, a percentage of Middle East refining. Although we are energy independent, we are still impacted by the global marketplace and worldwide refining capacity.
In this world of instant gratification, patience is needed. After decades of the Biden/Obama Administrations targeting production and refining of fossil fuels, it will take time to fix. Relief will occur when the Middle East operation normalizes. Storage during lighter demand periods will also help. Conservation and more efficient use is a necessity. Future investment in other forms of energy, like natural gas and small nuclear power sources for data centers should be included in the mix.
Lessons:
As the Mid-Term elections loom, all of us need to learn some valuable lessons:
(1) Instant gratification may feel good in the short term but it will bury us in the long-run. And
(2) hard work, determination, and long-term solutions are the answers that will take our country successfully into the future.
