Energy Experts: Prices Will Drop and Inflation Will Come Down…But When?

The number one issue on Americans’ minds is inflation. It’s become a hot button in politics, the reason Build Back Better is dead (for now), and the major topic keeping the White House awake at night.  The biggest driver of inflation has actually been energy: largely the price of gasoline, but also the price of natural gas which affects home heating and even the cost of electricity.

On the Great Ideas Podcast with Matt Robison, two top oil and gas sector experts – Mike Sloan and Andrew Griffith of the consulting firm ICF – explain what’s causing higher prices, what government leaders can do about them, and most importantly, when we can expect them to fall again.

Listen to the full conversation here:

This conversation has been condensed and edited. 

What drives the price of oil and gas?

It’s really about supply and demand. . Covid had a pretty significant impact on the markets. Demand dropped precipitously. Now as we’re coming out of Covid, the economy is strengthening. People are becoming more mobile. We’re using more gasoline and diesel fuel and demand is going up, especially relative to where it was last year. On the natural gas side, we’re also seeing an increase in demand because we’re exporting more. At the same time, low prices for gasoline and fuel oil had a big impact on supply. Producers cut back on investment and production. That set up the basic imbalance we are seeing today.

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In addition, there were a couple of important events on the supply side. Hurricane Ida had a big impact on oil and gas production in the Gulf Coast. At the end of last winter, the polar vortex took out a lot of production. There was a big draw down of storage inventories that was still being felt through the summer.

Prices have been much more stable in recent years.  Why?

A lot of it was the fracking revolution. When prices go up, producers invest in new supply sources.  Consumers invest more in conservation and reducing demand. So we have always tended to get pretty significant up and down cycles. The fracking revolution changed that dynamic just a little.  The U.S. has shifted from being a major importer to essentially an exporter at this point.  So we are less influenced by what happens in international markets and more influenced by the domestic market. And that’s led to a more stable market in the U.S. for the last 10 years, and consumers have gotten used to that.

From a political and consumer standpoint, the issue with energy is usually stability more than total price. If prices are stable people adjust to them.  It’s when prices change rapidly that it creates political and economic instability.

One other factor to consider right now is that environmental concerns have slowed down investment. Financing sources have gotten more cautious about putting money into the industry, and that’s slowed the rate at which the industry is responding to the current higher price environment.

Is there an upside right now in that high prices for oil and gas might drive people to seek out renewable alternatives?

Certainly think that is part of the equation. But I’d caution that from an environmental perspective, you definitely want to minimize the use of coal. With high gas prices, we are seeing a little bit more coal burning right now. But in the long-term you may be able to grow renewable power faster if both coal and natural gas prices are higher.

Is there something that we can do that will have a major effect on energy prices?

Not a lot. The President announced a release of 50 million barrels from the strategic petroleum reserve. U.S. consumption of oil is about 20 million barrels per day. So, not the biggest deal. What actually had the biggest impact on oil prices was the announcement of the new Omicron variant.. That’s what actually moved oil markets down in the past couple of weeks because of the expectation of a hit to the economy overall.

So the big question: what are you projecting is going to happen to the prices of oil and gas?

The market fundamentals suggest that prices will drop down.  Maybe not to where they were during the middle of Covid, but certainly down to where they were during the period before we entered Covid.  I would then expect prices to be relatively stable going forward. The transition is going to occur over the next year to a year and a half.

But it’s hard to say whether we’re going to see significantly lower prices before the midterm elections or after the midterm elections. That may depend on weather and other acts of God.

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Matt Robison

Matt Robison is a writer and political analyst who focuses on trends in demographics, psychology, policy, and economics that are shaping American politics. He spent a decade working on Capitol Hill as a Legislative Director and Chief of Staff to three Members of Congress, and also worked as a senior advisor, campaign manager, or consultant on several Congressional races, with a focus in New Hampshire. In 2012, he ran a come-from-behind race that national political analysts called the biggest surprise win of the election. He went on to work as Policy Director in the New Hampshire state senate, successfully helping to coordinate the legislative effort to pass Medicaid expansion.  He has also done extensive private sector work on energy regulatory policy. Matt holds a Bachelor’s degree in economics from Swarthmore College and a Master’s degree in public policy from the Harvard Kennedy School of Government.  He lives with his wife and three children in Amherst, Massachusetts.