President Biden made a speech Wednesday, outlining his plan to lower gasoline prices at the pump for Americans. The plan includes four key points:
- Congress should suspend the gasoline tax for 90 days; 18c per gallon for gasoline, 24c per gallon for diesel.
- States should suspend State gasoline taxes, the national average State gas tax is 30c per gallon, according to the President.
- Oil companies (XLE) should use profits to increase refining capacity.
- Gasoline stations should pass along the decrease in oil prices to consumers.
Notably, none of these actions are within the President’s control. However, given Democrat’s control of Congress, the federal gas tax is likely to move forward in coming weeks. Many States have already suspended gasoline taxes, and more are likely to join, following the President’s call to action.
The President noted that during the pandemic, many oil companies shuttered refining capacity. While true, many of those refineries were converted into bio-fuel processing plants, with significantly reduced capacity. However, the story of US refinery closures begins well before the pandemic, as the Department of Energy highlighted in its recently published Refinery Capacity Report. The report notes that since 1990, the US has shuttered 86 refineries totaling more than 5mb/d of capacity. Or more than a quarter of current operational capacity. Nevertheless, the President went onto say, “we should lower the price of electric vehicles, so we don’t have to pay at the pump to begin with.” A statement somewhat at odds with his proposal for the industry to invest billions of dollars expanding capacity.
The final piece of the puzzle, in President Biden’s view, is for retailers to pass savings to consumers. Biden said, “to the companies running gas stations and setting those prices at the pump .. these are not normal times, bring down the price you are charging at the pump to reflect the price you are paying for the product.” Of the ~145,000 gas stations in the US, Exxon (XOM) and Chevron (CVX) own ~300, with the majority of the remainder owned by independent franchisees. The call from the President misses the fact that gasoline is sold on a wholesale market, to both US and international retailers. And the highly fragmented and competitive US gas station business has little control over the price of oil (USO) or gasoline.
The President closed by stating that rising prices are the fault of Putin, and that US energy policy had no impact on fuel prices preceding the historic release of strategic reserves. With industry leaders set to meet Energy Secretary Granholm Thursday, management teams will have an opportunity to voice their opinion. Both Chevron (CVX) and Exxon (XOM) have provided short and long-term solutions to the current energy crisis. Whether those solutions are implemented remains to be seen. However, barring constructive cooperation between industry and Washington, it’s difficult to see energy prices falling dramatically in the near term.