Yesterday, I talked about the curious things happening with the White House’s quest to increase electric vehicle production and mining of battery minerals like lithium to meet the goal.
The president recently set a mandate for half of all new vehicles sold in 2030 to be powered from non-carbon-based fuels. In addition, the White House has a task force that aims to increase private investment in lithium and other rare earth metals for production.
As I noted, the problem is that the Fish and Wildlife Service, also part of the Biden administration, is pushing to put a rare flower on the Endangered Species list. If that happens, it could shut down the production of a massive lithium mine because the flower grows on that land.
This is a classic case of environmentalism clashing with economic interest in the United States.
But long before the lithium wars began between environmentalists and miners, there existed a massive battle to limit U.S. oil and gas production.
If you think the lithium story is bad, wait until I show you what just happened over oil production here in the States.
Gasoline Prices on the Rise
As you likely know, gasoline prices continue to rise across the United States. On Aug. 12, the average price for a gallon of regular gas sat at $3.18, according to AAA. Compare this to a year ago, when the average price was $2.17.
The Biden administration is quite aware of the impact of rising gasoline prices. If prices continue to rise, it will increase the cost of other goods, weaken the U.S. economic recovery, and raise new concerns about supply in the market.
Naturally, the solution is to increase production here in the United States, right?
The plan is the opposite.
According to reports, the administration asked members of OPEC — a cartel of energy-producing nations like Saudi Arabia, Iran, and Iraq — and other oil nations like Russia to increase production and ship more crude to America.
If that makes your head spin, I understand.
But there is a bit of method to the madness.
You see, OPEC alone controls about 50% of the global oil output and nearly 80% of the proven reserves of crude oil. As a result, OPEC is the primary driver of Brent crude oil, the worldwide benchmark for prices.
If OPEC continues to suppress output, it will drive up the cost of domestic crude oil here in the United States. West Texas Intermediate crude – the benchmark at the NYMEX trading center in New York – reacts to the price movement of Brent crude.
But the entire situation creates a string of headaches for bureaucrats in Washington.
Public officials are trying to toe the line between environmental activists (who want the oil to stay in the ground, and lithium, too) and economic interests. The Biden administration said yesterday that it “wants Americans to have access to affordable and reliable energy, including at the pump.”
The key issue that the administration fails to remember is why OPEC exists in the first place.
OPEC Will Ignore Biden for Now
OPEC+ unites 23 oil-producing nations with one goal in mind: to limit production in a way that creates the best price possible for their balance sheets. They are colluding to ensure that no single country increases production to take advantage of higher price moves. Thus, they are effectively engaging in price-fixing.
And if you’re a small country that relies on oil production to fund social programs or finance existing debt, you want the largest producers like Russia and Saudi Arabia to cooperate.
If you have a choice between producing 500,000 barrels at $60…
Or 450,000 barrels at $70, which do you choose?
The answer is the second choice.
That generates more money for the nation’s coffers.
Even though you produce 50,000 fewer barrels as part of an agreement, you would generate much more money thanks to the higher price.
OPEC has already said that it will increase oil production in the near term, but it’s not going to increase production levels dramatically just to be nice to America.
Other nations are coming out of a massive coronavirus-induced slump as well. As a result, market analysts don’t believe there will be enough global oil production to meet rising demand across the United States and Europe, one of the reasons why some analysts are still sticking to $80 price targets on oil for later this year.
The Biden administration has not called on U.S. producers to increase output yet. However, the administration has launched an investigation claiming that there may be anticompetitive forces driving up the cost of gasoline.
But once again, we see the difference between environmental activism and economic priorities.
The White House has already halted new oil and gas leases on federal lands, eliminated the Keystone Pipeline after nearly 12 years of debate, told federal agencies to eliminate subsidies for fossil fuels, reversed methane regulations, and demanded that the SEC create tools to mandate climate disclosures. These are all dramatic efforts to curb emissions in favor of environmentalist policies.
We know from the lithium situation we discussed yesterday that you can’t have it both ways. The call for more oil production comes just two days after the United Nations issued a dire warning on climate change.
The problem with all of this is that it continues to send uncertain signals to the stock market.
That’s especially true for domestic oil producers. Oil analyst Ellen Wald of the Atlantic Council recently told Axios that the climate agenda is making U.S. producers anxious about increasing production.
“There’s regulatory uncertainty, and there’s just this idea that they’re going to be met with resistance from the Biden administration. And so that’s keeping a lot of producers from producing, which keeps American production down,” she told the media outlet.
As Axios then noted, OPEC now has more leverage over U.S. gasoline prices.
We’re likely heading toward higher gas prices at the pump due to this ongoing battle between environmental and economic interests. We’ll look for unique ways to make money on this trend, but we have to be cautious.
With the administration constantly changing the discourse, the risks only increase for all parties.
I’ll be back on Monday to discuss another area of inflation. More importantly, we’ll look at one company bucking the trend and delivering investors huge profit potential.