Are gasoline prices in the US really too high?

Another day, another economic threat from Donald Trump.

Donald J. Trump

@realDonaldTrump

The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!

The average price of gasoline in the US has risen above $3 per gallon. In a country addicted to gas-guzzling SUVs and muscle cars, this matters. As the 2018 mid-term elections loom, Trump’s threat to the Saudi-led OPEC oil cartel is a sign to voters that he’s doing something about rising prices at the pump (even if it’s just sending tweets). It’s telling that this is his third provocation on oil prices since April.

There are a number of factors behind the recent price rise. There have been supply outages in Venezuela, Libya, Canada, Angola, Iran, and Kazakhstan, according to the trade publication Oil Price. The Saudis have increased oil production, following an OPEC meeting last month, but it hasn’t been enough to overcome the effects of reduced supplies from other producers. (So it’s unclear how much effect Trump’s morning tweet will have anyway.) On top of all that, Trump’s decision to sanction Iran’s supplies, and his generally hardline stance against the country, add to market worries.

In the global context, however, US gas is already incredibly cheap. Americans pay the second-lowest price per gallon among major economies.

Why? As Quartz explained previously:

In a free market, you could argue that the price of fuel is a reflection of supply and demand. The US, like Russia, is an energy-rich country, so its fuel prices ought to be low. But markets are never completely free. The price at a petrol—or gasoline, in America—pump varies from country to country for many reasons: domestic oil production, national refinery capacity, subsidies, taxes, and so on. The US continues to spend billions in subsidies for oil exploration, which helps keep fuel costs artificially low.

Even if a country’s market is freer than others, it’s still not a true reflection of costs. That’s because most countries do not price in the social cost of carbon, a metric that economists have developed to estimate the harm caused by each ton of carbon dioxide added to the atmosphere. Norway, the world’s 15th biggest oil producer, has one of the world’s highest taxes on carbon, making its fuel price nearly three times that of the US.

There is one way that Trump could bring down gasoline prices in the US. He could dip into the the Strategic Petroleum Reserve (SPR), the country’s emergency supply set up after the 1970s oil crisis. The SPR was supposed to be a buffer against a severe supply crunch, but as sources of domestic oil have grown—thanks largely to shale exploitation—the standards for tapping the SPR have relaxed. That’s why Standard Chartered believes that oil prices don’t have to rise much more before Trump decides to open up the SPR, and make good on his promise to reduce gas prices in an election year.

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