Supply and Demand Set Gas Prices, Not Corporate Greed
Gas prices have increased over the past 18 months, hitting new records and contributing to the rapidly rising inflation that is making everything Americans buy more expensive. President Biden and others in Congress attribute the price hike largely to the Russian invasion of Ukraine and price gouging by oil and gas firms. These claims are not supported by the evidence.
The price per gallon of gasoline increased from $2.34 in January 2021 to a peak of $5.11 in June 2022, the highest level on record. Gas prices remain elevated at over $4.50 per gallon in July.
We estimate that the Russian invasion of Ukraine explains 30 percent of the increase in gasoline prices from January 2021 through June 2022. The remaining 70 percent of the increase is due to pre-existing price trends arising from suppressed supply of oil production and surging demand.
U.S. oil production remains 9 percent below the pre-pandemic levels, ranking last in recovery out of the top ten oil producing countries.
The policy choices and rhetoric of the Biden Administration have slowed recovery in the production of oil and diminished refinery capacity that has contributed to elevated gas prices.
There is no evidence of oil and gas firms engaging in collusion or price gouging to raise prices during the current crisis. U.S. oil and gas producers, refiners, and retailers operate in competitive markets that preclude this possibility.
Reducing unnecessary regulations and increasing policy certainty for domestic producers is the best way to lower gas prices for American consumers.
Figure 1. Estimated Effect of Russian Invasion on Retail Gasoline Prices, January 2019–July 2022
Source: EIA, Weekly Retail Gasoline and Diesel Prices; JEC Calculations.
Note: Gasoline in the figure refers to the average price for all grades, all formulations. The vertical lines corresponding to “COVID-19 Lockdown” and “Russian Invasion of Ukraine” correspond to the beginning of the two crises. The green line is the JEC forecasted value absent the Russian invasion of Ukraine.