Gas prices are at their highest for 7 years, and there isn’t much Biden can do about it
Gasoline at $ 3 also poses serious political problems for US President Joe Biden, although the blame of Republicans is largely misplaced. Voters don’t like high gas prices and, fair or not, they have a habit of blaming whoever is in the White House.
There is “growing concern in the White House about a perilous price hike that could derail the global recovery,” wrote Helima Croft, head of commodities strategy at RBC Capital Markets, in a note to customers this week.
The Biden administration said “every tool in the toolbox” is being explored to tackle high energy prices.
Unfortunately, industry sources say the toolkit is quite limited right now. And some options that might be considered could actually make the situation worse.
Plan A was to get OPEC and its allies, known collectively as OPEC +, to clear the taps. It hasn’t been a success, at least so far.
OPEC + announced on Monday that it would only gradually increase supply in the market, refusing to respond to calls from the White House to significantly increase production.
OPEC + news pushed U.S. crude above $ 79 a barrel for the first time since November 14.
Mixed signs on the exploitation of the emergency oil stockpile
Energy Secretary Jennifer Granholm suggested this week that the Biden administration consider Plan B, and possibly Plan C.
“It is a tool which is under consideration,” said Granholm, adding that “the president will certainly consider it”.
However, the Energy Ministry then echoed Granholm’s remarks, saying “there was no immediate plan” to operate the SPR. Following this clarification, crude rose to almost $ 79 per barrel.
“Bring a water pistol to a fight”
In any case, industry sources are skeptical that unilateral operation of the SPR would significantly reduce high energy prices.
“It would be a big mistake, like bringing a water gun to fight,” said Bob McNally, president of consulting firm Rapidan Energy Group. “You need a cannon. The SPR is too small.”
Indeed, Goldman Sachs said releasing up to 60 million barrels of oil from the SPR would only be “modest help,” reducing Wall Street’s year-end forecast by just $ 3 for $ 90 Brent crude.
“The timing of such a release from SPR is surprising,” Goldman Sachs strategists wrote in a note to clients on Wednesday. “Although oil prices have increased this year, they are not historically high.”
Goldman Sachs noted that since 2000, past sales have been reported at an average price of $ 93 per barrel for Brent, allowing for inflation.
Another problem is that if the release of barrels from the SPR helped lower oil prices, it could discourage US shale oil companies from increasing their oil production. (Oil production in the United States remains below pre-Covid levels – although prices have more than fully recovered).
“We believe that such actions could turn out to be perversely inflationary,” Goldman Sachs strategists wrote of the SPR statement.
Let’s move on to plan C.
“It’s a tool we haven’t used, but it’s also a tool,” said Granholm. “We have an intergovernmental process underway. [White House Press Secretary] Jen Psaki said, all the tools are on the table. But some are more easily accessible than others. “
However, the Energy Ministry also backed down, saying there was no immediate plan to ban oil exports.
Some oil watchers are skeptical.
“I’m not sure Jennifer Granholm has gone completely rogue. She is telegraphing the administration’s concern over oil and gasoline prices – and a larger global energy crisis,” Croft said. , the RBC analyst, to CNN in an interview.
McNally, previously energy adviser to former President George W. Bush, sees a 5% to 10% chance that Biden will begin the lengthy process of banning oil exports – a move he strongly advised against.
“It would be really disastrous and counterproductive,” McNally said.
The problem is, oil is a globally traded commodity – and US gas prices are set by Brent, the global benchmark. If the world suddenly lost access to U.S. oil, Brent crude prices would likely rise due to lower supply. And American refiners need access to foreign oil to produce gasoline, jet fuel, and diesel. They can’t just rely on American shale.
This means that an export ban could backfire on American drivers.
“Ironically, that would be particularly bullish for gasoline and refined products,” wrote strategists at Goldman Sachs.
Inflation nervousness responds to climate concerns
A sustained surge in energy prices would only exacerbate inflationary pressures.
“We should be watching this closely. People build inflation expectations around their most recent experiences, like at the gas station or in the stores,” Roger Ferguson, former vice president of the Federal Reserve.
All of this brings the White House back to Plan A: persuading OPEC + to more aggressively flip production that was sidelined at the height of Covid.
Of course, energy diplomacy with OPEC could interfere with another priority this fall: climate diplomacy.
Behind the scenes, Biden officials will likely be forced to push OPEC to produce more fossil fuels. This is just another reminder of the difficulty of the energy transition and of the world’s dependence on oil.