President Joe Biden, facing the risk of a destabilizing energy price shock, is promising to blunt the impact of rising energy prices on American families. But that won’t be easy.
The Russia-Ukraine crisis has already helped lift oil and gasoline prices to levels unseen since 2014. Further sanctions on Moscow could drive pump prices closer to $4 a gallon.
Biden is bracing the public for just that, acknowledging on Tuesday that “defending freedom will have costs.”
“I want to limit the pain the American people are feeling at the gas pump. This is critical to me,” Biden said during prepared remarks.
There’s a long history of voters blaming presidents for high gas prices – fair or not. Yet presidents have limited power to drive down energy prices, as Biden himself has learned painfully in recent months.
“Biden’s options mostly come in two categories: Nothing-burgers and mistakes,” said Bob McNally, president of energy consulting firm Rapidan Energy Group. “That’s true of almost all presidents.”
That doesn’t mean Biden won’t try.
‘We cannot afford to lose any barrels’
Markets are on high-alert for signs that Russia’s supplies are threatened, either through US sanctions, damage from a potential war or Moscow deciding to weaponize energy.
Russia is the world’s second-largest oil producer and exporter of crude oil, with 5 million barrels per day getting sent overseas. That’s roughly 12% of the global crude trade, according to the International Energy Agency.
Any disruption to Russia’s oil flows would “easily” drive up crude prices to $120 a barrel, JPMorgan recently warned. Brent, the world benchmark, surged to $99.50 a barrel on Tuesday before backing off.
“Global supply is already tight. We cannot afford to lose any barrels, let alone 5 million barrels,” said Robert Yawger, vice president of energy futures at Mizuho Securities.
Back to the SPR well?
Biden said US officials are “executive a plan in coordination” with both oil producers and consumers to shield the public from price spikes.
That suggests the United States could release more oil from emergency reserves in tandem with other countries doing the same. Just before Thanksgiving, Biden announced the biggest-ever release from the Strategic Petroleum Reserve (SPR). The 50-million-barrel release amounted to just 12 hours of global oil consumption.
Oil prices dropped in the lead-up to that announcement. And then they tumbled when Omicron emerged.
Yet gas prices took just a modest dip – before returning to where they started. And the national average today stands at $3.54 a gallon – 12 cents higher than before SPR rumors emerged last fall.
That experience – and the fact another SPR release is being talked about now – underscores how this isn’t a meaningful solution to the supply-demand imbalance. There are a finite number of barrels in emergency reserves. And each release leaves fewer barrels for the next emergency.
Making nice with Iran
Even before the Russia-Ukraine crisis, supply was failing to keep up with demand.
Biden’s best bet to boost supply, from a purely financial perspective, might be reaching a nuclear deal with Iran.
Iran, once one of OPEC’s leading oil producers, has been sidelined since 2018 when the nuclear agreement with the West collapsed.
“Biden’s only good option is to sign a nuclear deal with Iran. That’s the only lever he has,” said McNally, the energy consultant who previously served as an adviser to former President George W. Bush.
Of course, there are potential national security and diplomatic tradeoffs to making nice with Iran.
But these negotiations with Tehran are not taking place in a vacuum. Analysts estimate that within months a new deal – which both sides have signaled is close – would add approximately 1 million barrels per day in oil supply. And the market could really use those barrels right now.
“I don’t think Biden is going to say he’s going to give the Iranians what they want,” Yawger said. “You can’t help but wonder though if we’re going to loosen up on the terms.”
Ban oil exports
One option that has frequently been discussed is banning US oil exports to insulate American drivers from global volatility.
Although that might feel good, industry experts have warned such a move would likely backfire on US consumers.
That’s because oil is a globally traded commodity. Taking US barrels off the world market would drive up world prices. And prices at the pump take their cues from world prices.
Besides, banning oil exports would only make US allies in Europe and elsewhere more reliant on barrels from Russia.
A phone call to MBS
Saudi Arabia-led OPEC has repeatedly refused to heed US calls to significantly ramp up oil production that was sidelined during the onset of Covid.
The Biden administration’s efforts to persuade OPEC to open the taps have not been helped by the strained relationship between Washington and Saudi Arabia.
Patching up relations with Saudi Crown Prince Mohammed bin Salman, known as MBS, could help. But it’s not clear what it would take to make that happen.
On the campaign trail, Biden previously promised to treat Saudi Arabia as a “pariah.” And that was before US intelligence found that MBS approved the operation to capture or kill journalist Jamal Khashoggi in 2018.
Gas tax holiday
Earlier this month, Democratic Senators Mark Kelly and Maggie Hassan introduced legislation that would seek to eliminate 18 cents per gallon of federal gas taxes until January 1.
While this plan would save consumers money, it’s hardly a solution to the underlying problem. In fact, it would seemingly artificially boost support at a time when supply is low.
Budget watchdogs are already crying foul. The Committee for a Responsible Federal Budget slammed the proposal as a “wrong turn,” warning a gas tax holiday would slash tax revenue by $20 billion.