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Lordie, there is so much wrong with Biden dispatching the FTC to try to intimidate oil and gas companies into lowering prices at the pump that it’s hard to know where to begin.
This move is an admission of weakness. First, it does not look presidential. In the bad old days of say LBJ or Nixon, CEOs would have been jawboned. They would have been told to come to the White House to get a tongue-lashing. Even though that probably wouldn’t have worked or not worked much (the perps might make some eyewash level concessions), the spectacle of the President calling miscreant executives in to ‘splain themselves is good optics. The President is arm-wrestling mano-a-mano with big bad business! Godzilla v. Mothra!
I assume one reason Presidents no longer go this route is that the CEOs might not show up. That’s the cost of the country moving to the right is that Corporate America gets way more deference than it deserves.
Second, sending the FTC after Big Energy not only almost certainly won’t work, it’s also unlikely to generate much in the way of helpful press coverage after this opening salvo. The beef as presented in the White House letter and in press summaries is that oil prices have dropped 5% in the past month while gas prices at the pump have gone up 3%. The Administration is alleging “potential illegal activity” and demanding that the FTC investigate.
President Biden has asked the FTC to examine why prices at the pump aren’t going down, despite declining oil and gas prices.
— The White House (@WhiteHouse) November 17, 2021
Biden’s approval ratings suck. One contributing factor is that consumers are seeing pretty hefty price increases on things they buy most often, food and gas. But just because prices have gone up does not mean the increases are not defensible. The big reason for the increase is the jump in oil prices due to Covid-lockdown-induced price plunges unwinding themselves and then some. Muhamed bin Salman has also given up on his bright idea of trying to punish Russia by flooding the market with oil. So OPEC’s improved price discipline is also playing a role.
Another factor at the margin is that US oil production is about 12% below its pre-Covid peak.
Biden’s case, to the extent he has one, seems to be that oil companies, particularly his named baddies Exxon and Chevron, are making lots of money and buying back stock rather than being nice to consumers and not charging what the market will bear.
So why has Biden not sent the FTC after drug companies who have spent more on buybacks (and marketing) than R&D, and keep jacking prices to the moon, yet whinge that they need to charge high prices for all that R&D that they are mainly not doing (recall that the NIH and other government agencies pay for a ton of basic research as well as applied research, yet demand pretty much nothing back for all these subsidies). Is it that drugs are patent protected? Or that the health care players have long spent more on lobbying than any other industry?
Some of the reasons why any FTC action is likely to go nowhere:
Apparent lack of a viable legal theory. The White House letter harrumphs about anti-competitive behavior. The bar for that in FTC is very high, and it means egregious conduct like price-fixing and exclusive dealing contracts. There is zero evidence that anything of the sort is happening here. But Brian Deese of the National Economic Council, had written FTC chair Lina Khan in August demanding that the agency act on any collusion in the US petrol market.1
Failure of past efforts to have the FTC bully Big Oil into moderating prices.
Absence of a long-standing abuse. The divergence between the oil price decline and the increase at the pump has been operative for only about a month. That doesn’t prove much. And the energy players might have justifications for keeping this divergence going, like scarcity of truckers affecting deliveries to retailers.
In fact, the Wall Street Journal points out that while this pattern is atypical, it is far from unheard of:
ClearView Energy Partners, an independent research firm, found that retail gasoline prices were closely correlated with unfinished gasoline prices over the last 10 years, but sometimes diverged. The firm found 13 instances over the past decade where monthly prices for unfinished gasoline went down while retail gasoline prices went up…
Rapidan Energy Group, a research and consulting firm, analyzed the disparity between unfinished gasoline and retail pump prices cited in Mr. Biden’s letter and said the difference wasn’t out of the normal range. Unfinished gasoline requires blending with other liquids to be suitable for use in spark-ignition engines, according to the U.S. Energy Information Administration.
The Financial Times peanut gallery was caustic. For instance:
What actually is the complaint? That big oil, under stranded asset and ROCE pressure, got out of shale oil/gas and took its drill baby drill cash with it and has returned proceeds to investors? The idea of a falling supply but just enough availability to moderate prices is truly hilarious.
So the US rejected mass public transport in favour of the automobile decades ago. It then builds the biggest road network on the planet with taxpayer money, but also limits its own production of petroleum.
Prices are therefore heavily dependent on what US “partners” decide.
Does the right hand know what the left hand is doing? Confusing stuff.
Finally, some capitalists in the comment section of the FT. Where are the usual ESG folks? They should be rejoicing when gasoline is $5.00 a gallon. How about $10? After all, high prices should accelerate the demand for alternative, “clean” energy. But when these hipsters are hit in the pocketbook idealism goes out the window.
I am all for transitioning to alternatives, but this change will take be incremental. Fossil fuel production in America involves environmental regulation. It is doubtful that fossil fuel production in Saudi Arabia or Russia entails much environmental scrutiny. Yet, President Biden will do everything he can to stop production and transportation in the US while begging the worst energy polluters in the Middle East to increase supply.
The hypocrisy is maddening.
Inability to have an impact near term. All Biden has done is gin up an investigation. Even if the FTC actually could make a case, it would take too long to give Biden relief any time soon.
A different set of issues is that higher priced gas is exactly what you want if you want to save the planet. Carbon taxes were a hot topic at COP26, and moves in that direction would increase fossil fuel prices, including gas. So Biden is engaging in climate cakeism, wanting to win points from climate change activists via cancelling the permit for the Keystone XL pipeline and restricting drilling on Federal land (although then reversing that policy post COP26 by approving a huge new lease for drilling in the Gulf of Mexico).
Climate activists: Biden needs to get tougher on oil companies
Biden: I've asked the FTC to investigate oil companies, because gas should be cheaper
Activists: no not like that
— Adam Aton (@AdamAton) November 17, 2021
So it’s obvious that Biden’s energy/climate policy is reactive, and averse to taking even mildly tough measures to wean consumers off their beloved gas while finding ways to reduce the pain for poor and lower income households. And if he’s going to make those big bad oil companies his whipping boys, he needs to be able to inflict pain, not just harrumph.
1 Without belaboring details, there are all sorts of ways that producers/sellers in a market signal on pricing that fall way way below the level of collusion. One bank or airline can increase prices. Others may or may not follow. There may be more complicated patterns, like certain big market participants might have to validate a price rise for prevailing prices to move, but this isn’t a process of men meeting in smoky conference rooms with Scotch. It’s done with public price changes and the knowledge that everyone in the game is watching the action.