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Analysis: Gas prices are at seven-year highs and Biden can’t do much about it

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The $ 3 gas also poses serious political problems for U.S. President Joe Biden, although Republican blame is out of place. Voters don’t like high gasoline prices and, fair or not, have a history of blaming anyone in the White House.

There is “a growing concern in the White House about a dangerous price hike that could derail the global recovery,” Helima Croft, head of commodity strategy at RBC Capital Markets, wrote in a note to clients this week.

The Biden administration has said it is considering “all the tools in the toolbox” to combat high energy prices.

Unfortunately, industry sources say that right now the toolbox is quite limited. And some options that can be considered can make the situation worse.

Energy diplomacy

Plan A was to get OPEC and its allies, collectively known as OPEC +, to trigger the spikelets. This has not been successful, at least so far.

OPEC + announced on Monday that it would only gradually add supply to the market, and refused to heed White House calls to drastically increase production.

OPEC + news sent US crude above $ 79 a barrel for the first time since Nov. 14.

Prices at the pump also continue to rise. The national average gas price rose $ 3.24 a gallon on Thursday from $ 2.18 a year ago. according to AAA.

Mixed signals when touching the emergency oil reserve

Energy Secretary Jennifer Granholm suggested this week that the Biden administration be considering a plan B and possibly a plan C.

Granholm was asked at FT Energy Transition Strategies Summit if it would make sense to free up new barrels from the Strategic Oil Reserve, the nation’s emergency oil reserve.

“It’s a tool being considered,” Granholm said, adding, “no doubt the president will consider it.”

US oil prices fell briefly below $ 75 a barrel following comments about the SPR, which the Biden administration took advantage of last month in the wake of Hurricane Ida.

However, the Department of Energy later withdrew Granholm’s remarks, saying “there is no immediate plan” to take advantage of the SPR. Following this clarification, crude rose again to about $ 79 a barrel.

“Carrying a throwing weapon in the fight”

In any case, industry sources are skeptical that taking advantage of the SPR unilaterally would cause a significant spike in high energy prices.

“It would be a big mistake, like carrying a gun to a fight,” said Bob McNally, president of consulting firm Rapidan Energy Group. “You need a cannon. The SPR is too small.”

Shock adhesive for home heating: the cost of natural gas increases by 180%

In fact, Goldman Sachs said releasing up to 60 million barrels of oil from the SPR would only be “modest help,” reducing the Wall Street bank’s year-end forecast for Brent crude to $ 90 in just 3 dollars.

“The timing of this release of SPR is astonishing,” Goldman Sachs strategists wrote Wednesday in a note to clients. “While oil prices have risen this year, they are not historically high.”

Goldman Sachs noted that since 2000 past sales have been announced at an average price of $ 93 a barrel for Brent, adjusting for inflation.

Another problem: if the release of barrels from the SPR worked to lower oil prices, it could deter U.S. slate oil companies from increasing oil production. (U.S. oil production remains below pre-covid levels, although prices have recovered more than completely).

Another delay in slate production in the United States would hurt natural gas production, “sharply raising U.S. natural gas prices,” Goldman Sachs strategists noted. Natural gas prices in the US have almost tripled over the past year, increasing the risk of higher heating and electricity costs in the coming months.

“We believe these actions can be perversely inflationary,” Goldman Sachs strategists wrote on the SPR statement.

“Truly disastrous”

Moving on to plan C.

Speaking at the FT event, Granholm did not rule out the most extreme step of the ban oil exports.

“This is a tool we haven’t used, but it’s also a tool,” Granholm said. “We have an ongoing intergovernmental process [White House Press Secretary] Jen Psaki said all the tools are on the table. But some are more available than others. “

However, the Department of Energy also backed down, saying there is no immediate plan to ban oil exports.

Some oil observers are skeptical.

“I’m not sure Jennifer Granholm has been totally rogue. She’s telegraphing the administration’s concern about oil and gasoline prices and a wider global energy crisis,” RBC analyst Croft told CNN in an interview.

America’s offshore oil infrastructure is aging.  & Rdquo;  We don’t know there is a problem until there is a problem.  & # 39;

McNally, a former 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 decision he strongly discouraged.

“That would be really disastrous and counterproductive,” McNally said.

The problem is that oil is a commodity traded worldwide and gas prices in the United States are set by Brent, the world leader. If the world suddenly lost access to U.S. oil, Brent crude oil prices are likely to rise due to weaker supply. And American refiners require access to foreign oil to produce gasoline, aircraft fuel and diesel. They can’t just rely on American shales.

This means that the export ban could offset American drivers.

“Ironically, it would be especially bullish for gasoline and refined products,” Goldman Sachs strategists wrote.

Inflationary nerves meet climate concerns

A sustained rise in energy prices would only exacerbate inflationary pressures.

Consumer prices rose this summer in the fastest annual rate since 2008. The risk is that high pump prices will raise inflation expectations among consumers and CEOs, a situation that may come to fruition.

“We should look at it closely. People are building inflation expectations around their most recent experiences, such as at the gas station or in stores,” Roger Ferguson, the former vice president of the Federal Reserve, told CNN.

All this makes the White House return to Plan A: persuade OPEC + to return more aggressively the production that was set aside during the height of Covid.

Big Oil is dedicated to fighting climate standards at Build Back Better

Of course, energy diplomacy with OPEC could interfere with another priority this fall: climate diplomacy.

Biden will meet with world leaders in Glasgow later this month at COP26, a summit aimed at forging support to wean the world economy from fossil fuels.

Behind the scenes, Biden officials will likely be forced to push OPEC to produce more fossil fuels. It is just a reminder of the difficulty of the energy transition and the world’s dependence on oil.

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