By Tsvetana Paraskova of OilPrice.com
Since gasoline prices started surging at the end of last year, the U.S. Administration has been saying that it would consider and potentially use every tool at its disposal to lower prices at the pump. The problem for the Biden Administration—and for U.S. drivers—is that there isn’t a short-term solution to skyrocketing gasoline prices that set new record-highs day after day. Every tool at Biden’s disposal has its own drawbacks and political consequences, and every move the Administration is studying is unlikely to dent gasoline prices too much, analysts and White House insiders say.
The only “solution” to record-high gasoline prices is not one U.S. policymakers and consumers would want—a recession. And this is now a distinct possibility, although not a base-case scenario for most analysts.
Still, chances of a recession are rising, investment banks and analysts warn.
JPMorgan Chase, for example, warned just this week that a “hurricane” may hit the economy with the Fed starting to remove liquidity from the system and the Russian invasion of Ukraine that could send oil prices to $150 or even $175 per barrel.
“Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this,” JPMorgan Chase CEO Jamie Dimon said at a financial conference this week, as carried by CNBC.
“That hurricane is right out there, down the road, coming our way,” Dimon added, warning, “You’d better brace yourself.”
Yet a recession is not inevitable, says Goldman Sachs, for example.
“We believe fears of declining economic activity this year will prove overblown unless new negative shocks materialize,” Goldman Sachs economists wrote in a report dated May 30.
“We continue to forecast slower but not recessionary growth, with a trade-related rebound to +2.8% in Q2 followed by +1.6% average growth over the following four quarters,” Goldman Sachs said.
If the U.S. avoids a recession and a subsequent decline in oil consumption, the Administration doesn’t have the tools to influence the price of oil, which is the single largest determinant in U.S. gasoline price trends.
Sure, the White House praised OPEC+, and Saudi Arabia in particular, after the group, including Russia, decided to accelerate the monthly production increases to 648,000 bpd in July and August, from the 432,000 bpd monthly hike so far.
“We recognize the role of Saudi Arabia as the chair of OPEC+ and its largest producer in achieving this consensus amongst the group members. The United States will continue to use all tools at our disposal to address energy prices pressures,” White House Press Secretary Karine Jean-Pierre said on Thursday.
Yet, the Administration still doesn’t really have “tools” that would cut gasoline prices substantially in America. Global supply is constrained because Europe is now sourcing growing volumes of seaborne non-Russian crude, global refinery capacity has shrunk by a few million bpd since COVID, and fuel inventories in the U.S. are at multi-year lows.
Gasoline prices are the single biggest obsession at the White House right now, with aides considering various measures—from limiting oil exports to easing environmental rules for gasoline content—none of which are going to materially bring down prices at the pump.
“We’re going to take every action that we can that will make a meaningful difference,” a White House official told Politico this week. But the official added,
“While understanding and dealing with the reality that global oil prices and gas prices are controlled by much greater forces than any one person.”
Each option the Administration has been studying comes with its own complicated and potentially painful political drawbacks and tradeoffs, and those options may not even lead to lower gasoline prices, sources with knowledge of the discussions at the White House told Politico.
“What they have is a whole bunch of 10-cent policies,” Claudia Sahm, a former Federal Reserve economist and member of the Obama administration’s Council of Economic Advisers, told Politico.
Meanwhile, the national average gasoline price hit another record at $4.715 a gallon on Thursday. That’s up from $3.041/gal at this time last year.
With less than $0.25 from $5.00, the national average could hit $5/gal around June 17, Patrick De Haan, head of petroleum analysis for fuel-savings app GasBuddy, said on Thursday.
Gasoline at $5 will certainly be politically painful for the Biden Administration. Yet, the only short-term “fix” for this is a slump in oil demand through a recession—an even more painful outcome for the economy, employment, and consumers.