5-20-2026 11:20am

Rockets & Feathers

Rockets & Feathers

Why your gas bill is a policy choice, not a law of nature
Opinion · May 2026 · Iko Knyphausen

The pump price you paid this morning was set by a war you didn't start, over a waterway you've never seen, because of decisions made in Washington forty years ago that nobody remembers making.

Americans are filling up at $4.50, $5.00, and in some regions higher. The Strait of Hormuz, a narrow passage between Iran and Oman, has been effectively closed since late February, when US and Israeli forces struck Iran. Roughly one-fifth of the world's oil supply normally flows through that strait.1 Now it doesn't.

Here is what makes this infuriating: the United States produces more oil than any nation on earth. We pump 13.6 million barrels a day from our own soil and coastal waters,2 and we only need 10.8 million barrels a day for our own consumption. We share a continent with Canada, the fourth-largest oil producer in the world. We are connected to Canadian production by 85,000 miles of pipelines that no war, no maritime closure, no foreign power can sever.3 And we are paying crisis prices for a commodity we produce in record quantities.

This is not a law of nature. It is a policy choice.

The Well, the Rocket, and the Feather

Economists have a name for what you are experiencing: rockets and feathers, or more scientifically, asymmetric pricing transmission. When crude oil prices spike, pump prices shoot up like a rocket, immediately, within hours. When crude falls, pump prices drift down like a feather, slowly, grudgingly, over weeks and months. The pattern has been documented across dozens of markets and confirmed in peer-reviewed economics literature going back to 1991.4

What drives it? Not a conspiracy. Economics professor Mariano Tappata demonstrated in a landmark 2009 paper that the asymmetry emerges naturally from rational market behavior, without any coordination between oil companies required.5

The mechanism is this. When a global event causes crude prices to jump, the value of oil already lifted or still in the ground increases instantly. The well-owner's cost of extracting that oil does not change by a single cent. Lifting cost runs roughly $8 to $15 per barrel for US shale production.6 It is completely insensitive to what WTI (West Texas Intermediate, the US crude oil benchmark) is trading at in New York.

When WTI rises from $62 to $101 in three months, as it has since the Hormuz closure began, the cost of operating an existing well does not change. The Dallas Fed Energy Survey reports that large Permian producers need approximately $31 per barrel to cover operating expenses on existing wells; the average across all producers is $41 per barrel. The gap between that operating cost and the $101 spot price, roughly $60–70 per barrel, is pure windfall, captured entirely by whoever owns the oil in the ground, starting the moment the price moves.

This windfall flows not just to oil companies but to every mineral rights owner: the thousands of Texas families, university endowments, and investment funds that collect royalties as a percentage of revenue. They did nothing differently either. The price simply moved.

This is the rocket.

The feather is different. When crude prices fall, refiners widen their crack spread, the margin between crude input cost and refined product price, capturing the crude cost decline as extra refinery profit rather than reducing the wholesale price. Retail stations, which often compressed their margins during the rapid upswing, take the opportunity to recover those losses on the way down. Everyone in the chain has a rational reason to be slow. The consumer bears the full cost on the way up and receives only a slow, partial benefit on the way down. This pattern has repeated across every major price cycle for fifty years.

The Infrastructure Trap

The United States produces 13.6 million barrels of oil per day, mostly light sweet crude from Texas and North Dakota. But 70% of US refinery capacity was built decades ago for a different type of crude: heavy, sour oil from Venezuela and the Middle East. When the shale revolution transformed America into the world's largest oil producer, nobody converted the refineries.

So today we export roughly 4 million barrels per day of our own light sweet crude, not because we have a surplus, but because the wrong refineries can't process it.7 At the same time we import roughly 5.6 million barrels per day of heavy sour crude to feed the refineries built for it. The total annual cost of this cross-shipping is approximately $30 billion a year. And it costs more during the precise moments when Americans can least afford it.

There is no import requirement rooted in resource necessity. We produce domestically all the heavy crude we genuinely need for products that cannot be made from light sweet oil. Every barrel of the 5.6 million imported reflects refinery configuration, not resource need. It is an infrastructure problem, entirely solvable.

The Hidden Cost Nobody Talks About

Everything made from petroleum or transported by it will get more expensive. That inflationary pressure forces the Federal Reserve to raise interest rates to cool the economy, which slows growth and raises unemployment. But the less visible consequence is what it does to the national debt.

Every year, roughly one-sixth of the national debt matures and must be refinanced at current rates.8 That is about $6 trillion annually. Add another $2 trillion in new deficit spending, and $8 trillion of debt reprices every year at whatever rate the Fed has set. A 1% rate hike costs an additional $80 billion in year one. If rates stay elevated, as they do when oil prices stay high, another $8 trillion reprices the following year: $160 billion in year two. Then $240 billion in year three. This compounds for up to six years until the entire portfolio has cycled through.

The 2022–2023 hiking cycle already demonstrated this at scale: annual federal interest payments rose from $352 billion to nearly $1 trillion in four years.9 The Hormuz crisis is restarting that clock.

That money does not build roads or fund hospitals. It goes to bondholders. Much of it goes overseas. Higher rates also mean higher mortgage payments, higher credit card rates, and tighter business credit, costs borne by every American, not just those who drive.

What Could Be Done

The solution is neither radical nor complicated. It requires three things.

First, build the right refineries. A government-financed program of $150–200 billion over 10–15 years to convert or build flexible refineries capable of processing domestic light sweet crude would eliminate the cross-shipping paradox permanently.10 This would not happen overnight: permitting, environmental review, and workforce constraints mean a realistic timeline is 10–15 years at best. The investment case nonetheless remains strong: the US military spends an estimated $80–150 billion annually securing Middle Eastern oil supply routes,11 a figure that is contested but even at its lower bound suggests a payback period of two to three years.

Second, anchor domestic prices to a rolling average. The rocket leg of the problem is not inevitable. It is the product of pricing domestic petroleum at instantaneous global spot prices, even when the crude in the refinery was purchased weeks ago at lower prices. Requiring that domestic crude and refined products be priced at the six-month rolling average of the spot benchmark, rather than today's crisis price, would have kept American pump prices near $3.70 throughout the current Hormuz crisis instead of $4.50 and rising. Producers selling domestically still earn an extraordinary profit: at a $76 rolling average against operating costs of $31–41 per barrel for existing wells, producers still net $35–45 per barrel. Nobody is being confiscated.

This mechanism would require careful legal design. It is not a price control in the traditional sense: the benchmark is a public mathematical formula derived from existing market data, not a government-set price. But trade implications, particularly WTO compatibility and effects on futures markets and hedging instruments, would need to be addressed in implementing legislation. These are solvable problems; they are not reasons to abandon the approach.

Third, auction the right to export at spot prices. If domestic prices are anchored at the rolling average while global spot is $101, producers have an incentive to maximize exports. The solution is a Petroleum Export Credit system, modeled on carbon pollution credit markets that industry has already accepted as preferable to direct regulation. A finite pool of export credits is auctioned annually, equal to the true US petroleum surplus of about 2.8 million barrels per day. Any entity wishing to sell US-origin petroleum at global spot prices must hold credits for that volume. Credits are freely tradeable, creating a liquid secondary market. The auction revenue flows to a North American Energy Sovereignty Fund, America's long-overdue answer to Norway's $2 trillion sovereign wealth fund, built on the same price windfalls that in the United States flow entirely to private shareholders.

The Norway Question

Norway produces far less oil than the United States. Its North Sea fields are mature and declining. And yet the Norwegian Government Pension Fund Global, built entirely on petroleum revenue captured by treating oil in the ground as national property, is now worth approximately $2 trillion, roughly $400,000 for every Norwegian citizen.

The United States has produced far more oil than Norway, from far larger reserves, over a far longer period. We have captured essentially none of it for public benefit. The windfall from every price spike, including this one, flows to shareholders of publicly traded oil companies, an increasingly concentrated group of institutional investors, many of them foreign.

The Argument You Will Hear

When these proposals are discussed you will hear the word "socialism." It is an effective word. It has ended serious conversations about energy policy for fifty years.

But consider what is actually socialist in the current arrangement. The oil industry receives an estimated $20 billion per year in direct federal tax subsidies embedded in the tax code since the 1920s.12 It drills on federal land leased at below-market rates. It exports through ports built with public money. And when global prices spike, it captures the full value of the increase on oil extracted from under American ground, while American consumers pay that price at the pump, and the American government pays the interest rate consequences in the federal budget.

The proposals here do not nationalize the wells. They do not set the price of oil. They require that the domestic market price reflect a six-month average rather than today's crisis number, and they auction the right to sell above that average to whoever values it most. The proceeds build a fund for all Americans.

That is not socialism. That is a more honest capitalism, one where the public resource at the base of the supply chain is priced as a public resource, and the service of extracting it is compensated handsomely but not infinitely.

What Happens Next

The Hormuz crisis will end. When it does, crude prices will fall, eventually. The feather will drift down and pump prices will decline, slowly. But waiting for the next crisis to resolve itself is a choice, too: one that leaves private shareholders capturing sudden windfalls while ordinary Americans shoulder the immediate pain in higher prices, higher borrowing costs, and a heavier federal bill.

And then, sometime in the next decade, there will be another crisis. Another war, another embargo, another OPEC decision. Crude will spike again. Pump prices will rocket up again. The Fed will hike again. The debt service will climb again. And the same familiar divide will open up.

In theory, anyone can hedge against climbing pump prices by investing in oil company stocks, whose value rises with crude prices. In practice, effective hedging requires substantial capital, a sophisticated portfolio, and the financial literacy to execute it. The majority of Americans either lack the means to invest at sufficient scale, or have never been taught that this is even possible. Hedging is an advanced investing strategy; the very wealthy learn it, the rest pay the price at the pump.

This cycle is predictable. It has repeated every decade for fifty years. The 1973 OPEC embargo. The 1979 Iranian revolution. The 1990 Gulf War. The 2008 commodity super-spike. The 2022 Ukraine war. The 2026 Hormuz closure.

Each time, the same conversation. Anger at the pump. Congressional hearings. Some calls for windfall taxes that go nowhere. Then prices fall, the anger fades, and nothing changes.

The three ideas sketched here, flexible refineries, a six-month rolling domestic pricing benchmark, and an auctioned export-credit system that funds a North American sovereign wealth-style fund, are not legislative fine print. They are a high-level framework intended to shift the debate: from reflexive outrage at the pump to a sober conversation about how we structure who benefits when global shocks hit.

We can also act in the near term. Targeted SPR management, temporary rebates for the most vulnerable drivers, or a brief, narrowly focused tax credit could blunt this crisis while refinery upgrades proceed. That combination recognizes both urgency and realism.

This is about choices we make, not inevitabilities we endure. If we treat the public value of American oil as a public asset rather than an occasional private windfall, we can reduce the next rocket at the pump and share the gains more fairly. Lawmakers should start that conversation now.

Notes & Sources

EIA, World Oil Transit Chokepoints, 2024: approximately 21 million barrels per day transited the Strait of Hormuz in 2023, representing roughly 21% of global petroleum liquids consumption.
EIA Short-Term Energy Outlook, March 2026: "U.S. crude oil production grew by 3%, setting a new annual production record of 13.6 million b/d."
Pipeline101.org, citing PHMSA National Pipeline Mapping System: "There are approximately 85,000 miles of crude oil lines in the U.S."
Bacon, R.W. (1991). "Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes." Energy Economics, 13(3), 211–218. The first formal identification of asymmetric price transmission in retail gasoline markets.
Tappata, M. (2009). "Rockets and feathers: Understanding asymmetric pricing." RAND Journal of Economics, 40(4), 673–687. Formally proves asymmetric pricing is a Nash equilibrium in markets with consumer search costs, requiring no collusion.
Range reflects direct variable costs (electricity, labor, maintenance) only. The Dallas Fed Q1 2026 Energy Survey reports broader operating expenses of $32/bbl for large producers and $46/bbl for smaller operators.
EIA, Annual U.S. Crude Oil Exports Decrease for First Time Since 2021, March 10, 2026: "In 2025, the United States exported 4.0 million b/d of crude oil."
US Treasury, Fiscal Year 2024 Debt Management Report: weighted average maturity of marketable Treasury debt approximately 6.1 years as of September 2024, implying roughly $6 trillion in annual maturities on a $36 trillion portfolio.
FY2021: US OMB via FRED St. Louis Fed (series FYOINT). FY2024–FY2025: American Action Forum citing Treasury Financial Statement; Taxpayers for Common Sense.
Aggregate cost estimate derived from per-facility data. Individual refinery conversions: $100M–$1B per facility; major Gulf Coast conversions with new hydrocracking units: $2–5B each. The $150–200B figure is an analytical estimate covering 15–20 major facility conversions plus pipeline and storage infrastructure.
SAFE (Securing America Future Energy), Military Cost of Defending Global Oil Supply, 2018: 16% of the annual base defense budget, scaling to $130B+ at current $850B+ budgets. Even at the lower bound of $80B annually, the payback period on a $200B investment is approximately 2.5 years.
Environmental and Energy Study Institute (EESI), Fact Sheet: Fossil Fuel Subsidies, 2023: estimates US federal fossil fuel subsidies at $20 billion per year including intangible drilling cost deductions, percentage depletion allowances, and other provisions dating to the Revenue Act of 1926.