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US fuel taxes are not a key factor for prices
The Biden administration’s proposed gasoline tax holiday is an ineffective instrument for cutting fuel prices. Changes in the global supply / demand balance have much more impact
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The US has some of the lowest fuel taxes in the developed world. The federal gasoline tax is 18.4 cents per (US) gallon, and the median state tax is a further 26.1 cents. In the EU, the minimum tax on unleaded gasoline is €0.359, equivalent at current exchange rates to about $1.43 per gallon.
The lower tax levels help support patterns of living and working that mean the average American drives more than twice as far each year as the average resident of the UK, France or Norway. But they also mean that retail fuel prices are more volatile, because the impact of changes in crude prices and refining margins is not cushioned by the tax wedge. And they limit the ability of the government to ease the pain of higher prices by cutting those taxes.
President Joe Biden this week announced that he wanted Congress to agree a three-month holiday for federal gasoline and diesel taxes. The White House said the president “understands that a gas tax holiday alone will not, on its own, relieve the run up in costs that we’ve seen. But… at this unique moment… Congress should do what it can to provide working families breathing room.” The administration has been casting around for solutions to high fuel prices, which are contributing to the slump in the president’s approval ratings, and is now seeking to following the example of several states that have suspended their fuel taxes temporarily.
The proposal faces an uphill battle in Congress. Senator Joe Manchin of West Virginia, a Democrat who is often a key swing vote in the Senate, said he was “not a yes right now, that’s for sure.” The proposal has attracted a broad coalition of opponents. Bloomberg’s Jennifer Dlouhy noted that both the American Exploration and Production Council, an industry group, and the environmentalist Sierra Club had attacked the plan. Even President Biden’s own economic team have raised doubts about it, according to the Washington Post.
Much of the criticism of the gasoline tax holiday is well-founded. Even if it is enacted, which seems unlikely, it would have only a marginal impact. It is only fair to note, however, that some of the arguments used against a tax cut do not really hold water, either. For example, it is often suggested that a cut would not be passed on to consumers, but instead go to increase profits for fuel retailers and marketers. In what is still a highly competitive retail fuels market, that seems unlikely, and the evidence from state tax holidays is that most of the reductions do indeed get passed on. Research by the Penn Wharton Budget Model team at the University of Pennsylvania found that in Georgia, Maryland and Connecticut, 58-87% of the recent tax cut was passed on to consumers in lower retail prices at some point during the holiday.
Another dubious argument against the gasoline tax cut is that it would blunt the price signal showing that oil demand needs to be curbed to bring it into better balance with supply. Given that US retail gasoline prices have risen by about $2.80 per gallon on average since the start of 2021, an 18 cent per gallon cut is clearly not going to make a massive difference to the signal.
In fact, it is very clear that oil prices at their current levels are already having a significant impact on demand. Recent modelling from Wood Mackenzie, set out in a new presentation from Suzanne Danforth, director of Americas downstream oil and NGLs, shows how expectations of oil demand this year have been revised down significantly, as a result of the hit to Russia’s economic growth from sanctions, Covid-19 containment measures in China and demand erosion from the surge in prices. In January, we were projecting a 4.5 million barrel per day increase in average global oil demand for 2022. Now we expect the increase to be only about half that, at 2.3 million b/d, and average global demand this year is projected to be still significantly below its pre-pandemic peak. We do not expect global demand for gasoline and diesel to get back to pre-pandemic levels before the fourth quarter of 2023.
Since early March, we have lowered our 2022 oil demand outlook in North America, Europe, Latin America, Asia ex-China and Africa by 1 million b/d as a result of high fuel prices. More than half this revision has come in our projections for North America. In the US, there have been clear signs for several weeks that high fuel prices have been taking a toll. Google mobility data and weekly gasoline sales numbers from the Energy Information Administration have shown that personal mobility declined year-on-year in both May and June, even though there were still many Covid-19 related restrictions a year ago that are no longer in effect today. Total US gasoline sales this year are on course to be about the same as in 2021, and even next year they are still expected to be below pre-pandemic levels.
Ultimately, significant changes in US fuel prices will come from changes in global supply and demand balances for crude and refined products, not from tax cuts. And here there have been some encouraging moves for consumers in recent weeks. New York Harbor RBOB gasoline futures have dropped from a high of $4.31 a gallon at the beginning of the month to a low of $3.75 a gallon this week, while Brent crude has dropped from a high of about $124 a barrel to about $112 a barrel this week. That move in gasoline futures is about three times the 18.4 cent level of the federal gas tax.
Dallas Fed survey highlights steel pipe shortages
The Federal Reserve Bank of Dallas quarterly energy survey is always a useful source of insight on the US oil and gas industry, and the latest edition is no exception. The latest results show another quarter of robust growth in activity, but rising costs and worsening delays in the supply chain. Those problems were the main focus of this quarter’s special questions, which vary from survey to survey.
94% of the executives who responded said supply chain issues were having a negative effect on their businesses; 47% said the impact was “slightly negative”, and another 47% said it was “significantly negative”. Those issues are generally expected to persist: 66% of those respondents said they thought it would take more than 12 months for their supply chain issues to be resolved.
Shortages were reported across a range of inputs, including equipment and labour, but the biggest problem highlighted by respondents was for steel tubular goods, including drill pipe and casing. 50% of respondents said there was a “significant shortage”, with a further 39% reporting a “shortage”. The American Petroleum Institute recently urged President Biden to rescind steel tariffs to help ease supply chain problems.
Asked to identify the principal cause of uncertainty facing their businesses, respondents most commonly said “labour shortages, cost inflation and/or supply-chain bottlenecks”, which were cited by 46% of respondents. The second most common choice was “uncertainty about government regulation”, cited by 27%. The results make interesting reading alongside responses in the first quarter survey. Back then, asked to give the primary reason that publicly traded oil producers were restraining growth, despite high oil prices, 59% cited “investor pressure to maintain capital discipline”, and only 15% highlighted “other” factors, including supply chain issues.
One other noteworthy point from the survey is that expectations of future natural gas prices have increased sharply since the last survey three months ago. The average expectation for Henry Hub gas prices at the end of 2022 was $7.55 per million British Thermal Units, up 65% from the average forecast of $4.57 / mmBTU in the previous survey. Expectations for WTI crude prices at year-end have also been uprated, but less sharply: from $93.26 a barrel in the last survey to $107.93 in the latest one.
Cheniere Energy has given a positive final investment decision for Stage 3 of its Corpus Christi LNG plant, adding 10+ million tons per year of new capacity. The deal is the latest sign that the boom in US LNG predicted by Wood Mackenzie analysts is taking shape. There was a series of other announcements this week, including Chevron signing up for 4 mmtpa of new US LNG supply, EnBW agreeing to purchase 1.5 mmtpa from Venture Global, and INEOS signing up for a provisional 1.4 mmtpa offtake deal with Sempra. Giles Farrer, Wood Mackenzie’s head of gas and LNG asset research, commented: “US LNG was already in the fast lane and is now going into overdrive… Coming hot on the heel of multiple other deals in recent weeks, this is teeing up 2022 to be a record-breaking year for US LNG.”
The US Energy Information Administration has taken the highly unusual step of delaying almost all of its data reports because of a “systems issue”. Bloomberg reported that “electricity issues” had caused “an unspecified hardware failure”.
Massimo Di Odoardo and others — The Big Ban: Global commodities in a post-Ukraine-war world
Kavita Jadhav, Rachel Schelble and Andrew Harwood — Will COP27 be a turning point for oil and gas funding?
Sustainable smelting: How green can it go?
Quote of the week
“You have called on our industry to increase energy production. We agree. Let's work together. The U.S. energy sector needs cooperation and support from your Administration for our country to return to a path toward greater energy security, economic prosperity, and environmental protection… Most importantly, we need an honest dialogue on how to best balance energy, economic, and environmental objectives – one that recognizes our industry is a vital sector of the U.S. economy and is essential to our national security.” — Mike Wirth, chief executive of Chevron, replied in an open letter to President Biden, following the president’s call last week for leading refining companies to increase supplies of gasoline, diesel and other oil products.
The letter was released ahead of the meeting on Thursday between Jennifer Granholm, the energy secretary, and seven oil industry leaders including Wirth. In a statement after the meeting, the Department of Energy said it had taken “a productive focus on dissecting the current global problems of supply and refining, generating an opportunity for industry to work with government to help deliver needed relief to American consumers.”
Chart of the week
This comes from a fascinating presentation by Max Reid, a research analyst in Wood Mackenzie’s battery raw materials service. He looks at the outlook for lithium, nickel and cobalt, given the expected surge in production of electric vehicles, and asks the question of whether recycled metals from old EVs and other sources can help fill some of the looming gaps in supply. This chart shows the colossal scale of the expected growth in demand for lithium ion batteries, and how EVs dominate that outlook. The presentation is full of interesting charts, though, and it is well worth going through the whole deck.