Behind High Energy Prices

Original article published in the American Chamber of Commerce. Prepared by Matt Letourneau, Managing Director of Communications and Media at the U.S. Chamber’s Global Energy Institute. Translated and edited by AmCham Peru.

General Summary: As energy prices and the cost of inflation rise, the Biden Administration can help control rising energy prices by expanding U.S. energy production.

In March, year-over-year increases in consumer prices exceeded 8.5%; the highest inflationary increase in 40 years. One of the drivers was soaring energy costs, affecting virtually every sector of the economy.

While the war in Ukraine and the supply chain impacts of Russian sanctions have exacerbated price pressures, energy prices were already rising long before the conflict did. Gasoline prices have more than doubled from their pandemic lows and now average $4.21 per gallon nationwide. In the year prior to the Russian invasion of Ukraine, prices had risen by about 40% (more than $1 per gallon).

Natural gas and electricity prices are also major contributors. This can be seen in the Global Energy Institute’s 2021 electricity price map, which recorded a record 5.6% increase in electricity prices last year alone, a figure that only increased in 2022.

What is behind the high energy prices?

Supply and demand. Like other commodities, energy prices are dictated by basic supply and demand. As business and leisure travel has resumed and manufacturing has returned, demand has increased; but supplies remain constrained by a variety of factors.

Uncertainty. The current administration took office with an agenda that includes phasing out fossil fuels such as oil and natural gas on an aggressive schedule. Oil and natural gas exploration and production are extremely capital-intensive and require significant upfront investment and planning.

Investors pay close attention to these types of signals, and fears that regulatory hurdles will affect profitability have held back investment. Some politicians insist on blaming oil and natural gas companies for the current situation; accusing them of price increases and using discredited arguments about unused leases.

That sends the wrong signal to the market. In part to balance this headwind, companies are now returning a higher percentage of profits to investors and investing less in new exploration and production.

Supply chain and labor. Like any other sector, energy companies are still recovering from pandemic-related bottlenecks and are struggling to obtain the materials and workers to expand production.

Global shortages and transportation bottlenecks have pushed inputs such as tubular steel and sand to historically high prices. Often, they are not available at all. This limits new exploration worldwide and prevents supply from keeping up with demand.

Infrastructure. The United States lacks the infrastructure to support increased production. Well-funded and coordinated campaigns have defeated major projects such as natural gas and oil pipelines that are necessary to move products. New York and New England lack the pipeline capacity to take advantage of the nearby Marcellus Shale formation in Pennsylvania and, as a result, have some of the highest energy prices in the country.

After years of bipartisan efforts to streamline permitting for projects, the Biden Administration has now moved to aggressively reverse them, sending us back to a 1970s-era environmental review process that will delay projects of all types, especially renewables. To view popular topics within the energy industry, visit their blog at Thumbwind.

Lack of action. While the Biden Administration has expressed support for increased domestic production, its rhetoric has not been met with action. Apparently, the Administration is still pausing some, if not all, new leasing and permitting on federal lands and waters.

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