Price concerns relate to the timing of tougher sanctions on Russia, which will further choke off global oil supplies. JP Morgan has warned that in the worst-case scenario – in which Russia retaliates by completely shutting down its supply – the price of oil could climb to $380 a barrel, more than triple what it is today.
“If you asked me where oil prices could go, I would say pick a number,” said Michael Tran, managing director of global energy strategy at RBC Capital, who said that while the outlook is murky, several indicators point to a price. bounce. “This is the tightest oil market we’ve seen in a generation or more.”
The ominous prognosis for consumers, as the country already grapples with historic levels of inflation, has the Biden administration seizing on interventions that could bring relief.
Yet WE political leaders are faced with the reality that even the most aggressive national policy measures often have little impact on prices in a global oil market driven by forces beyond their control.
Economists across the ideological spectrum are warning that the measures the White House is promoting — allowing Russian oil to enter the world market at discounted prices, taxing oil company “windfall” profits, reducing the federal tax on gasoline – could ultimately aggravate the energy crisis in the United States, rather than alleviate it.
“When things like this happen, we tend to focus on short-term fixes,” said Christopher Knittel, a professor of applied economics at MIT’s Sloan School of Management. “But, unfortunately, gas prices aren’t really something you can fix in the short term.”
The White House concerns come at a time when consumers see gas prices as one of the few things in the economy that are headed in the right direction. The cost of a gallon has gone from over $5 a month ago to a national average of $4.60, according to AAA. Oil is trading cheaper than before Russia invaded Ukraine.
Concerns about a potential recession dampening demand played a significant role in lowering prices.
Another key reason why prices have fallen lately is that the initial sanctions against Russia are much less effective than expected. The country’s oil is making its way onto world markets despite restrictions, flowing to places like China and India. This means that global supply is not as tight as expected when the United States and Europe initially joined forces to punish Russia for its invasion.
This could change with the next round of planned sanctions. A total ban on Russian oil cargo shipments to Europe is set to apply on December 5, with the market expected to take notice much sooner.
The sanctions would be accompanied by a ban on insuring vessels carrying Russian oil, preventing them from accessing international waterways. Insurance policies for most oil cargo ships in the world are taken out outside Europe.
As a result, Russia would face huge new hurdles in getting its oil anywhere. The sanctions aim to double the amount of Russian oil withdrawn from the market since the start of the war.
Internal US Treasury analysis predicts the price of oil will climb 50% above its current level. Some market analysts are warning of potentially bigger increases, which could push gasoline prices past $6 a gallon.
The warnings are all accompanied by cautions. In the event of further bad economic news signaling a prolonged recession, for example, prices would likely stabilize. Less gasoline is used when the economy is down.
A new round of coronavirus shutdowns in major Chinese cities would similarly weaken global demand and ease upward pressure on prices.
Yet the imbalance between supply and demand for oil and gasoline is so pronounced at the moment that prices could rise months before new sanctions take effect, central to the medium-term campaign, a said Kevin Book, managing director of ClearView Energy Partners, a research firm. .
“People who buy oil bid early,” Book said. “It takes four to six weeks for it to be delivered. If they think a shortage is coming, they plan for it.
Pump Shock: Why Gas Prices Are So High
The political and economic dilemma highlights the challenges of using energy as a cudgel of foreign policy.
“Energy sanctions have never been the silver bullet people were hoping for,” said Edward Chow, an energy security specialist at the Center for Strategic and International Studies who has worked in the industry for decades. “Politicians tell voters we can do it and people don’t have to sacrifice. It only works if you are willing to make sacrifices and actually reduce demand.
US lawmakers have shown little appetite for the conservation measures the International Energy Agency is urging be implemented as part of the Ukraine aid effort. The 10 point plan the agency unveiled months ago – aimed at reducing oil demand by the equivalent of all cars in China – calls on economically advanced countries to lower speed limits on highways, make car-free cities a day a week and implement vehicle sharing.
The plans are seen as political losers in the United States, echoing the unpopular conservation initiatives that doomed the Carter administration when it faced an energy crisis in the 1970s.
The White House is instead pressuring world leaders to agree to a new price cap that would allow Russia to continue selling its oil after Dec. 5, but at a steeply reduced price. The idea is to avoid a global shortage while reducing the oil profits that Russia uses to finance its war effort.
Although the plan has prominent champions, energy experts are deeply skeptical. They warn that Russia has various levers it could use to throw the market into chaos, including cutting off all overseas shipments, plunging countries like India deeper into crisis.
JP Morgan’s warning that oil prices could more than triple in a worst-case scenario hinges on its conclusion that Russia’s economy can withstand a cut in oil production of millions of barrels a day.
“The problem is that Russia also gets a vote,” Book said. “Just because something hasn’t been done before doesn’t mean it shouldn’t be done. But sometimes there’s a reason it was never done.
Chow called the effort “puzzling.” “I haven’t come across a single person who’s worked in the energy industry who thinks this can work,” he said.
Other measures the Biden administration is pursuing would target oil companies, heavily taxing the “windfall” profits they make from high prices. Leading Democrats argue such actions are overdue.
“In my view, many interventions are appropriate in this market,” said Sen. Sheldon Whitehouse (DR.I.). “You are not as a government interfering in the market. You neutralize the anti-competitive effects of a cartel. Even if you are a believer in the free market, it is right to bring down cartel-driven anti-competitive practices. »
It’s a powerful argument and one that resonates with voters, who blame the oil companies for the high prices. But the United States has a history dating back to the Nixon administration of trying to use regulation to control prices at the pump. Knittel reported in a detailed academic document how these efforts backfired, leading to oil shortages and long lines at gas stations in the 1970s.
Countries currently tinkering with aggressive market interventions face the same dilemma again. Before Russia invaded Ukraine, the Hungarian government imposed price controls capping the cost of gas at $4.80 per gallon. Shortages followed. Drivers are now prohibited from purchasing more than 13 gallons of fuel per day.
“Gas prices are set on the basis of a global oil market, and it’s difficult for a country to have a significant impact on that market in a short period of time,” Knittel said. “The way to stop this is a call for federal legislation that reduces long-term oil demand. So the next time prices go up like this, it won’t hit us as hard.