US President Joe Biden promised he would lower prices at the pump, which have eased since topping $5/gal last summer, but the president will face new challenges and limited options if domestic fuel prices surge again as Russia has shown no signs of ending its war with Ukraine.
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US gasoline prices averaged $3.38/gal the week ended Feb. 20, down $1.63/gal from their mid-June 2022 peak, according to the Energy Information Administration. But as the Russia-Ukraine war enters its second year, more price spikes and supply dislocations are possible.
Price caps on Russian seaborne exports of crude and petroleum products that went into effect Dec. 5 and Feb. 5, respectively, could begin to present limitations on oil supplies, especially as analysts have suggested good odds for G7 countries agreeing to lower the $60/b price threshold on Russian crude during a March review. Preliminary signs already point to a slowdown in Russian crude and refined product exports, and Russia's announced 500,000 b/d cut in oil production could be the start of counter sanctions imposed by Russia.
Tapping Strategic Petroleum Reserve
The White House last year leaned heavily on the Strategic Petroleum Reserve to curtail global oil supply shortages and bring down domestic fuel prices, to the chagrin of Republicans and the oil industry.
But the SPR currently stands at 371.6 million barrels and will soon be drained of another 26 million barrels as part of a congressionally mandated sale, leaving about 93 million barrels before the emergency reserve hits minimum stock levels of 252.4 million barrels that limit Biden's authority for further drawdowns.
"The Biden administration needs to realize that it cannot control global oil prices through the US SPR," Ellen Wald, chief industry officer at Washington Ivy Advisors, said.
She and industry advocates have instead called on the administration to encourage the expansion of US refining capacity, relax some regulations on oil producers while they contend with labor and supply chain issues, and hold federal oil and gas lease sales to help bring gasoline prices down as sanctions on Russia will continue to make oil more expensive.
Efforts to replenish the emergency crude stockpile got off to a rocky start with the Department of Energy turning down all of the offers it received as part of its first solicitation to repurchase up to 3 million barrels of sour crude to begin refilling the SPR. The DOE indicated that bids it received did not meet the crude specifications and price it was looking for.
David Goldwyn, president of Goldwyn Global Strategies and chairman of the Atlantic Council Global Energy Center's Energy Advisory Group, said Asia is now the key market for OPEC and thus global oil production from that bloc will be significantly driven by market impacts in Asia rather than those in the US and Europe.
"The response of the US oil patch is driven far more by how private equity investors and companies see the future of the market and how much they are focused on maximizing returns rather than reinvesting," Goldwyn said. "Despite the rhetoric, oil companies never pay much attention to the desires of any US administration, Republican or Democrat, when deciding whether they want to ramp up production or pay higher dividends."
With oil prices in the midst of a multiyear boom cycle, "the president has no good options to reduce short-term oil prices," Bob McNally, founder and president of Rapidan Energy Group, said. "However, his administration has been considering resorting to bad options, such as restricting oil exports and windfall profits taxes."
Punitive taxes on the oil sector would require congressional support, an unlikely feat with Republicans controlling the House, but Biden could move to restrict exports on his own.
"While some in the Biden administration understand that export restrictions would be counterproductive, help [Russian President Vladimir] Putin, and hurt our allies, others will likely insist on imposing restrictions if SPR releases fail to restrain any future oil price spike," McNally said.
Increased demand from Europe has helped to push US crude exports to record highs. Exports in the week ended Feb. 17 were at 4.6 million b/d, according to the US Energy Information Administration.
Other policy tools that could rein in prices at the pump include tax holidays that some states experimented with last year and could be expanded on a national basis by Congress, as well as air quality waivers for certain fuel specifications like the one that allowed retailers nationwide to continue selling a higher ethanol blend mix through the summer.
Those waivers, however, could come with more emissions and pollution, a consequence the administration has thus far avoided and would be hard pressed to agree to waive clean air standards more broadly considering Biden's strong stand to protect frontline and fenceline communities.
Because most of the available policy tools are "terrible ideas" that come with significant economic, environmental and geopolitical consequences, "I don't think that we'll see a lot of those tools brought to bear," Kevin Book, managing director at ClearView Energy Partners, said. "But there are all sorts of presidential powers, so I don't think we should just pretend the president isn't powerful enough to step in. I think what we're recognizing is that none of the options are good ones."
That said, "I don't think that you should conclude that they're off the table just because something's a bad option," Book said. "Most of our energy policy reflects political decisions made when the costs of inaction exceeded the costs of action ... and that's why a lot of things don't happen until there's a supply disruption or an environmental disaster."
Of note, Biden "is the first president in my career and probably in modern history to take ownership of the gasoline price," Book said. Taking that extraordinary step to promise voters that he would lower gasoline prices is "not only nearly impossible to do, it's something that I think is very unlikely to be rewarded by voters who rather than thanking the White House for whatever success it had with the [SPR] will now blame the White House because the president has taken ownership."
Book predicted that "blame deflection" would be the next step in the White House's playbook after taking so much ownership of fuel prices.
"It's a lot easier to talk about blame and accountability and to point to industry as failing to invest enough than it is to actually move global markets and the prices that come home," Book said of the administration likely turning to a "rhetorical toolkit" that could get quite harsh if prices start to rise.
And words can indeed hurt and impact market fundamentals in an indirect way that's worth considering, he argued.
"When the industry is widely reviled and political leaders are putting them out there as wrongdoers, it does create an environment for what I would call sort of second order or indirect windfall taxation," Book said.
The bipartisan infrastructure law and Inflation Reduction Act both reinstated Superfund excise taxes that Book characterized as de facto windfall taxes on oil profits.
"The rising price made it a lot easier for members of Congress to come after the industry and to take taxes that they might have previously resisted and come up with a reason to support them," Book said, adding that tax law changes were also made in 2006 and 2008 on a bipartisan basis when prices were high. "The hotter rhetorical temperature does have a way of burning the industry when it makes it easier for lawmakers to indirectly exert sort of a windfall sentiment behind a tax increase."