Glenn Richey, the Raymond J. Harbert Eminent Scholar and chair of the Department of Supply Chain Management in Auburn University’s Harbert College of Business, comments on gas supply and demand and the expectations for future gas prices. He says the U.S. needs to allow more production and exploration, support innovation, assist in pipeline upgrades and fund alternative energy creation and supply.
What are the expectations for gas prices as summer-driving season kicks off around Memorial Day?
From a broad perspective, supply and demand are driving everything in the oil and gas business, but not directly, as this is a dynamic industry. It is an inelastic demand situation. Needs and perceptions allow companies to make more money per gallon/barrel. By inelastic, I mean that a 10-cent increase in price has very limited impact on demand.
Consumers complain, but keep on driving. A 50-cent increase sees some limited reduction in consumer usage, but industrial distribution must continue and people still need to drive to work, to school and to have fun on summer vacations. Industry and U.S. citizens can’t stop using fuel—even when gas prices rise substantially. Cars and boats will be in massive motion with enormous usage over the Memorial Day weekend. This will continue long into the summer because we are so very happy to no longer be stuck inside. We are a large country that thrives on travel and energy.
Recently, I’ve seen a large number of armchair economists making claims on TV and the internet. Most focus on the simple domestic supply and demand relationship. These groups seem to be defending either the Biden administration’s policy toward regulation on the fossil fuel industry or supporting the oil and gas industry as free enterprise. Both groups are politically motivated. That’s not the correct way to think about this situation.
Prices will be impacted by both investor and consumer sentiment. Supply and demand are dynamically complex and heavily influenced by government intervention. As people buy more and the government gets more involved … prices will rise (see von Mises, A Critique of Interventionism, 1976). They already have. The world is reopening, and demand will grow globally. U.S. oil and gas needs will increase along with seasonal usage and pent-up demand for travel. Price jumps may also be driven by supply disruption (government policy and natural disasters) and limited truck distribution.
The disappointing issue is that after becoming a net exporter of energy from 2017-20, the U.S. seems to again be headed toward needing non-free market (OPEC) sources of supply. Even Iran’s exports are on the rise. That is a dangerous game to play with limited alternative fuel options available for industrial distribution.
Most of us are fans of alternative and green energy, but we need to provide access to those options before we create policy that reduces fuel supply and drives our cost of living higher. In general, higher gas prices hit the poorest members of our society the hardest. Our energy policy needs to recognize these issues. We continue to develop policy that does not combine economic, environmental and social issues in a mindful way. We need to elect politicians who understand the importance of this triple bottom-line approach to governing business.
How much will prices decrease now that the Colonial Pipeline is operational again? Or are prices here to stay?
The Colonial Pipeline hack is only part of the increase in price. We should not simplify the situation by thinking that the hack alone is responsible. Prices increased after the U.S. national media and related social media triggered consumers to forward-buy gas. Consumers were shocked enough to fill up plastic containers (among other things).
I try to be very careful about what I say when discussing disaster-related supply situations, as I don’t want to contribute to issues like the ridiculous COVID-19 toilet paper stockouts. Unfortunately, our national media and “experts” on social media are more than happy to stir up U.S. consumers for enhanced viewership, impressions and likes.
Other options to distribute fuel to markets like Washington, D.C. (the hardest hit market), exist, and supply is returning to retailers, albeit again disrupted as Colonial works to become more responsive. Most markets are back to normal supply, but at higher prices due to inelasticity and uncertainly. I do believe higher prices will continue throughout the summer. I hope consumers will temper their actions with wisdom when it comes to social media-influenced panic buying.
Did the Keystone Pipeline cancellation affect prices?
Yes, but focusing on Keystone is only one issue. Government intervention increases prices. We have relevant research from all the way back to the 1920s that supports this hypothesis. It is especially true in these industries that have already seen major intervention. Michigan’s decision to attack Enbridge makes political sense given the Democratic party’s environmental platform, but makes no sense when fuel alternatives are not in reasonable supply. Such political moves put more emphasis on other supply systems like Colonial’s pipelines—making this hack a bigger issue.
The irony here is that we just went through a time period where politicians complained that companies were too lean. They pushed for safety stock supply of personal protective equipment (PPE), vaccines, pharmaceuticals, etc. During the election season, the same politicians said things like, “We need to bring the manufacturing of these products home.” Now they are actively putting stress on the domestic supply of oil and gas which impacts almost every U.S. industry. The strain makes cybersecurity a bigger issue, and the hackers know it. One mistake triggers speculation about supply disruption, and panic demand explodes, driving prices up. The increasing cost of gas drives the cost of bulk and parcel transportation up along with the price of every item is that is transported to your local store. E-commerce prices increase because of massive dependence on transportation. Throw in 4.2% inflation and things start to get really expensive.
What is the key to lower gas prices?
The U.S. needs to allow more production and exploration, support innovation, assist in pipeline upgrades (pipelines are the most efficient and effective way to more oil and gas) and fund alternative energy creation and supply. We need to go “all in” on all energy options until traditional and alternative supply outpaces demand from oil and gas. It is a simple answer.
Note: This article was originally published on Auburn University's website.
