The Russian Invasion of Ukraine And Energy Prices: Myth vs. Fact

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Candidate Joe Biden repeatedly promised to aggressively target new domestic oil and natural gas projects in the U.S. as part of his climate change plan, and as president he has kept that promise. His Inauguration Day rejection of the Keystone XL pipeline project, moratorium on Arctic National Wildlife Refuge oil leasing, reentry into the 2015 Paris Climate Agreement, and other measures to “confront the climate crisis” sent an immediate and powerful signal that has been followed up by a long list of other actions undoing his predecessor’s “energy dominance” agenda.

These actions help explain why prices for oil and natural gas have been on the rise throughout his first year and into his second. It is from this high floor that prices are now skyrocketing further in response to the Russian invasion of Ukraine.

Now that high energy prices are a serious burden for consumers, businesses, and the economy as a whole, the Biden administration is disavowing any responsibility. However, these denials can be easily refuted by events since January of 2021.

Myth: High energy prices are driven by Russia’s invasion of Ukraine.

Fact: Energy prices had been rising for more than a year prior to the invasion. The Bureau of Labor Statistics found energy price inflation of 27 percent between January 2021 and January 2022. At the time of the invasion, gasoline prices were already above $1 per gallon from a year ago. The energy sources used for winter heating, including natural gas, electricity, propane, and heating oil, were all up as well.

Last October, the Energy Information Administration predicted higher home heating costs for the winter of 2021-2022 over the previous one for all of these energy sources, and the winter turned out to be even costlier than predicted. By one estimate, total energy costs for an average household were $1,000 higher in 2021 than in 2020, and 2022 was off to a yet-costlier start even before the invasion. These trends rendered American energy markets more vulnerable to the impacts of the invasion.

Myth: Biden administration climate change policies have admittedly targeted domestic oil and natural gas projects, but they only have a long-term impact and are not contributing to today’s high prices.

Fact: The Biden administration’s attack on domestic oil and natural gas began on day one and has had a noticeable impact since. While it is true that a rejected pipeline would have taken years to build or that an unissued lease would have taken years to develop, administration opposition to these things sent an immediate signal that is impacting current prices. Furthermore, other administration’s policies do have a direct and immediate impact, especially pressuring banks to not lend money to oil and gas companies, including activities that could increase output in the near term.

Myth: American energy companies are deliberately holding back output in order to raise prices.

Fact: These companies face very real roadblocks put up by the Biden administration, including refusals to conduct the required oil and gas lease sales on federal lands, opposition to pipelines, and reversals of Trump administration measures streamlining permitting under the National Environmental Policy Act. Perhaps most damaging of all are efforts to pressure banks not to lend money for new fossil fuel projects. The administration has not announced any post-Ukraine invasion reconsideration of these efforts, and in fact a new regulatory announcement from the Securities and Exchange Commission suggests things are likely to get worse.            

Much has been made of the 9,000 federal oil and gas leases currently not being pursued, but that is largely because of post-lease impediments created by the administration, including delays in getting the required federal permits, lengthy environmental reviews, lack of approvals for pipelines without which drilling cannot commence, or the need to acquire adjacent leases that are not being made available. The president has also levelled allegations of industry price gouging and demanded a Federal Trade Commission (FTC) investigation, even though all such previous FTC investigations have come up empty handed, and there is no reason to think this time would be any different.

Myth: The Biden administration has actually increased federal leasing activity.

Fact: One week into his Presidency, Biden announced a moratorium on all oil and natural gas leasing on federal lands in order to pursue the administration’s climate goals. That moratorium was challenged by 13 energy-producing states—the law clearly requires quarterly lease sales—and was struck down by a federal court. Despite the court order, the administration has yet to conduct its first onshore lease sale. It did complete a very large offshore lease sale in 2021, which was immediately challenged in court by a number of environmental groups. The administration admitted that it conducted the lease sale reluctantly, put up a weak defense of it, lost, and last month opted not to appeal the decision. And, just days before the Ukraine invasion, the administration imposed a new leasing moratorium, this time claiming that a recent court ruling on the social cost of carbon necessitated a halt to the program.

Myth: High gasoline prices prove that the Biden administration is right about the benefits of electric vehicles.

Fact: Even with gasoline prices made artificially high through restrictions on domestic oil production, electric vehicles (EVs) still have serious economic and performance drawbacks that limit their popularity. These include high sticker prices (typically at least $15,000  above a comparable gasoline-powered vehicle), limited range, and long charging times. For years, EV purchasers have enjoyed generous federal (and in some cases state) tax incentives, yet they still comprise less than 5 percent of the new vehicles market.

In addition, the same climate policies that are putting upward pressure on gasoline prices are doing the same for electricity prices. Thus, the fueling cost advantage of EVs may not prove to be as significant as claimed. There are also concerns about electric reliability, as the added load from more EVs will place greater strain on a grid already struggling with coal retirements, constraints on natural gas and nuclear generation, and the challenge of incorporating intermittent wind and solar power.

Moreover, a wholesale switch to EVs is in no way a solution to reliance on resources from unfriendly nations. Thanks to fracking, America has substantially reduced oil imports and could reduce them further if the administration were to reverse its anti-domestic oil agenda. In contrast, America is considerably more reliant on problematic trading partners like China and Russia for the critical minerals necessary to make EV batteries.

Furthermore, even if EVs rapidly improve and prices come down enough so that many more people choose them, it would still take decades for the current fleet of mostly gasoline and diesel-powered vehicles to turn over—considerably longer than needed to get gasoline prices back down to pre-2021 levels through increased domestic oil production.

Myth: Tapping the Strategic Petroleum Reserve will make a substantive difference at the pump.

Fact: The Strategic Petroleum Reserve was created as a short-term emergency supply should foreign sources be substantially disrupted for any reason, but it is not nearly enough to flood the market and end high prices. The 30 million barrels that President Biden has authorized to withdraw is equal to less than two days’ supply. A similar withdrawal of 50 million barrels, authorized by Biden last November, had virtually no impact on prices. By comparison, America’s untapped oil potential may be one or two orders of magnitude larger than the entire Strategic Petroleum Reserve. Drilling in the Arctic National Wildlife Refuge alone, which is currently being blocked by the administration, would provide up to 1.45 million barrels per day for decades, and an estimated 10.4 billion barrels in total. If tapping the Strategic Petroleum is a good idea, then making full use of American oil is a fantastic idea.