The Dual Effect of High Petroleum Prices and How to Fix It

To reduce inflation, the government should address the high prices of oil and gas (petroleum) in addition to decreasing the spending by both the federal government and Federal Reserve. When one thinks of high gas prices, the first thought typically is the pain at the gas pump. In reality, though, it has two consequences.

The second, and least publicized, effect is that higher petroleum prices have contributed to increased prices for food and other products. Reducing the price of petroleum will likely lead to a reduction in the price of goods throughout the economy.

With increasing gas prices, companies have higher expenses. The rising expenses occur at most — if not all — levels of the supply chain for almost all products as well as food. An example of the supply chain is: (1) procuring raw materials, (2) producing the product, (3) transporting the product to a distributor, and (4) moving the product from a distributor to a place of sales (such as a shopping mall, store, or supermarket).

Cars or trucks are used in producing items, transporting them to consumers, or both. The use of cars or trucks involve gasoline and, as the price of gasoline increases, the total amount of expenses increases. Moreover, the price of diesel fuel (used often in 18-wheelers and farm equipment) is very high and rising at a faster rate than regular gasoline. It should be noted that, while the Biden administration touts electric cars, the number of electric cars in the United States is miniscule.

Ultimately, consumers pay for these higher expenses because companies strive to maintain a consistent profit (the difference between revenue and expenses). If the number of goods sold remains the same and expenses are increased, one of the ways for companies to keep the same profit is to increase their revenue by charging more for their goods.

Revenue is defined as average sales price multiplied by the number of goods sold. As companies in each layer of production pay higher expenses, these companies charge higher prices to those customers at the next level of the supply chain. Ultimately, at the last level of the supply chain, the consumer pays a higher price for goods.

Additionally, many products are made from petroleum. Expenses increase even more for these goods because the products themselves, not just the transportation of them, have increased. To compensate for the higher expenses and maintain a consistent profit, producers will charge higher prices to increase their revenue.

Rising petroleum prices have an additional impact on fruits and vegetables due to how they are grown and cultivated. Farmers often use diesel fuel in farming (machines used to plant, harvest, etc.), and the cost of diesel has increased. Additionally, petroleum is a component in many fertilizers, and, as fertilizer prices increase, the expenses of food producers increase. To compensate for these higher expenses, the price of food increases.

The U.S government should be taking steps to lower prices for consumers. One of the ways to do so is to influence a decline in the cost of petroleum. The cost of petroleum will likely decrease if the supply of petroleum increases. The U.S. government can increase the supply of petroleum by stimulating the production of domestic of oil and natural gas. To do so, the Biden administration should reverse the actions it has taken that has hampered petroleum production.

The Biden administration should: repeal regulations aimed at slowing the petroleum industry, reinstitute federal and oil gas leases, restart the Keystone XL pipeline, and create a business environment in which the petroleum business is seen as a profitable and long-term industry (which would stimulate investment in domestic production of petroleum).

Increased oil and natural gas in the United States will lower petroleum prices due to increased supply. As companies' petroleum expenses decrease, the prices for their goods will hopefully decrease (or at least not increase).

Lastly, increased petroleum production in the United States will have a national security benefit. With more domestic petroleum, U.S. industries and consumers will be less dependent on the supply whims of foreign oil-producing nations.

Michael B. Abramson is a practicing attorney. He is also an adviser with the National Diversity Coalition for Trump. He is the host of the "Advancing the Agenda" podcast and the author of "A Playbook for Taking Back America: Lessons from the 2012 Presidential Election." Follow him on his website and Twitter, @mbabramson. Read Michael B. Abramson's Reports — More Here.