In March, year-over-year consumer price increases exceeded 8.5%, leading to the largest inflationary increase in 40 years. One of the main drivers has been skyrocketing energy costs, which impact virtually every sector of the economy.
While the war in Ukraine and the supply chain impacts of Russian sanctions have exacerbated price pressures, energy prices were already skyrocketing long before the conflict. Gasoline prices have more than doubled since their pandemic low and now average $4.21 a gallon nationally. In the year before Russia invaded Ukraine, prices had risen about 40% (more than a dollar a gallon). Natural gas and electricity prices also play an important role. This is clearly seen in the Global Energy Institute study Electricity price map 2021which saw a record 5.6% increase in electricity prices last year alone – a number that only increased in 2022.
What’s behind high energy prices?
Supply and demand.
- Like other commodities, energy prices are driven by basic supply and demand. With the resumption of business and leisure travel and the return of manufacturing, demand has increased, but energy supply remains limited by various factors.
- The current administration took office with an agenda that includes phasing out fossil fuels like oil and natural gas on an aggressive schedule. The exploration and production of oil and natural gas is extremely capital intensive and requires significant up-front investment and planning. Investors pay close attention to these kinds of signals, and fear of regulatory hurdles affecting returns has held back investment. Some politicians insist on blaming oil and gas companies for the current situation, accusing them of price gouging and making denial arguments about unused leases. This sends the wrong signal to the market. Partly to balance this headwind, companies are now returning a higher percentage of profits to investors and investing less in new exploration and production.
Supply chain and workforce.
- Like every other sector, energy companies are still recovering from pandemic-related lockdowns and struggling to source the materials and workers needed to expand production. Global shortages and transportation bottlenecks have pushed inputs like tubular steel and sand to historically high prices, and are often not available at all. This limits new exploration globally and prevents supply from keeping up with demand.
- The United States does not have the infrastructure to support increased production. Well-funded and coordinated campaigns have frustrated major projects like the oil and gas pipelines that are needed to transport products. New York and New England lack the pipeline capacity to take advantage of the nearby Marcellus Shale formation in Pennsylvania and therefore have some of the highest energy prices in the country. In fact, they import oil and natural gas from overseas – until recently, even from Russia. After years of bipartisan efforts to streamline permitting for much-needed projects that culminated in reforms during the previous administration, the Biden administration has now moved to an aggressive approach. push them backthrowing us back to a 1970s environmental review process that will slow down projects of all types, especially renewables.
Lack of action.
- While the Biden administration has expressed support for increasing domestic production, its rhetoric has not been followed through. The administration still appears to be suspending some, if not all, new leases and permits on federal lands and waters (which accounted for 22% of oil production and 12% of natural gas). He failed to come up with a new five-year plan for offshore oil and gas development, even though the current one expires this summer. The absence of a new five-year lease program will shut down any new exploration and ultimately hamper production in the resource-rich Gulf of Mexico. The situation onshore is much the same, with the Biden administration failing to stage new lease sales to increase activity despite federal law clearly requiring them.
- Oil, in particular, is a global commodity traded on a global market. Different types of petroleum products are produced at different locations, depending on the configuration of refineries, and shipped around the world. The price consumers pay at the pump reflects the cost of crude oil, refining, transportation, distribution and taxes.
In terms of energy inflation, the United States has a major advantage: it is the world’s leading producer of oil and natural gas. This has helped to dampen volatility in markets such as natural gas, especially relative to import-dependent Europe and Asia. For example, Europe now spends more than 9% of its GDP on energy, the highest share since 1981 (the US is around 6%).
What should we do about it?
Rising energy prices act like a tax on the economy and increase inflationary pressures throughout the supply chain. The administration should therefore be clear and consistent in its support for the expansion of energy production in the United States, which will send important signals to the markets and help limit the impact of energy on inflation. . This includes holding full lease sales on federal lands and waters, quickly enacting a new OCS National Oil and Gas Leasing Program for offshore oil and gas development, avoiding the imposition of new regulatory burdens and supporting the licensing reforms needed to build energy infrastructure.
At the end of the line : Fixing these issues will not instantly increase supplies. Power generation takes a long time. However, the current lack of support for energy production policies will ensure that they remain well below what they could be and will keep investment on the sidelines, making us more dependent on foreign sources and ensuring that prices are higher. high are here to stay. This does not bode well for economy-wide inflation.
Story by Matt Letourneau, U.S. Chamber of Commerce
Matt Letourneau is managing director of communications at the Global Energy Institute (GEI) of the United States Chamber of Commerce. He coordinates external communication and strategy and is spokesperson with the media on energy and environmental issues for the Chamber.