The Biden administration seeks help on fuel prices
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You can tell that energy has become a significant political issue when it starts showing up social media. A glance at the hashtag #gasprices on Instagram shows posts from thousands of Americans complaining or making bitter jokes about the cost of fuel. US retail gasoline prices hit record highs this week, at an average of $4.414 a gallon, according to the Energy Information Administration. That is well above the previous peak of $4.165, reached in July 2008. At those levels, fuel prices are a political problem for President Joe Biden, and an economic problem for the world.
Gasoline is a big factor in US household budgets: on average it accounted for 18.3% of the incomes of the poorest fifth of Americans in 2013, when prices were lower than they are today. When the cost of that item jumps by 50% in a year, as US gasoline has done, people notice.
President Biden’s approval rating is firmly in negative territory, and gasoline prices are one of the reasons why. About 42% of Americans approve of the job he is doing, while about 53% disapprove, according to the polling average compiled by FiveThirtyEight.com. That puts his net approval in line with Donald Trump’s at the same stage of his presidency, and well behind the ratings for Barack Obama, George W. Bush, or Bill Clinton. A recent poll for ABC News found that 70% of respondents disapproved of the way President Biden is handling gasoline prices, and the same proportion disapproved of his handling of inflation in general.
In an attempt to deflect the blame, Democrats have been seeking to identify other targets for public anger. Chuck Schumer, the Democratic majority leader in the Senate, said the latest rise in gasoline prices, while crude was falling back from its earlier highs, “smacks of price gouging." He called for the oil Majors’ chief executives to be summoned to Congress to give evidence. President Biden made a similar point about prices in slightly more careful language, warning: “Oil and gas companies shouldn’t pad their profits at the expense of hardworking Americans.”
Meanwhile, the White House has recruited influencers on TikTok to make the argument that it is Russia that has caused prices to rise. The White House has been promoting the hashtag #PutinsGasHike on Twitter, although as is often been the case with this kind of campaign, it is also being used to reverse the message and point the finger at President Biden. History shows that voters do not always blame sitting presidents when gasoline goes up, but if prices continue rising or even just stay at these levels, they will remain an important issue for US voters.
The economic impact of high fuel prices is less immediate, but could be severe. The last time prices reached these levels, they were followed by the worst recession in the US since World War 2. US consumer price inflation has risen to a 40-year high of 7.9%, and the Federal Reserve this week raised interest rates for the first time since 2018.
There are some more reassuring indicators: in real terms, oil prices are still well below their 2008 peak, for example. But the combination of economic and geopolitical factors is in some respects uncomfortably reminiscent of past oil shocks.
US oil production growth can accelerate, but not immediately
One difference between now and the 1970s is that for most of that decade US oil production was falling or flat, unable to grow significantly given the available technology and resources. Today, although many segments of the US industry face constraints, production is still able to increase. Attention is often focused on the listed E&Ps, which are under pressure to return cash to investors and have typically set targets for production growth this year of 5% or less. But there are two other types of company that are growing strongly: the US Majors, ExxonMobil and Chevron, which are ramping up output in the Permian, and some of the larger privately-held operators, as discussed in a good piece in the Wall Street Journal this week.
Wood Mackenzie’s base case forecast is that US crude production will grow by 730,000 barrels per day this year, which is more than was added in the best year of the 1970s, 1978. But even that pace of growth is not been enough to calm oil markets that have focused on the impact of sanctions on Russia. After a wild ride this month, crude prices have been falling for most of this week, but picked up on Thursday, leaving Brent over $107 a barrel on Friday morning. President Biden and his team have taken to lecturing the US industry about the case for increasing production faster. “In this time of war, it’s not a time of profit,” the president said last week. “It’s time for reinvesting in America.”
Our US upstream analysts have been looking at the prospects for accelerating US production growth, and assessing the conditions that would make it possible. At a time when WTI is over $100 a barrel, E&Ps should be able to increase capital spending to accelerate production growth, while also meeting investors’ demands for cash returns. “The hesitation in raising budgets and production targets is understandable,” says Ryan Duman, a principal analyst in Wood Mackenzie’s Lower 48 upstream research team. “But modest growth of 5-10%, aggressive dividends, buybacks, and debt reduction are all possible at today’s prices.”
Realistically, any acceleration would be unlikely to make much difference to production this year. The industry faces constraints including tightness in the oilfield services supply chain, and there are unavoidable lags between a capex decision and first oil. But if activity continues to build, an additional 350,000 b/d of production is possible next year.
By the time of the midterm elections in November, a sustained surge in activity and the prospect of faster production growth could help put downward pressure on prices for crude, and hence on the cost of gasoline.
One test for President Biden will be to see how far he is prepared to go in supporting US oil producers. When he took office 14 months ago, he quickly announced a range of measures that signaled his intent to use energy policy to address the threat of climate change. Those measures included restrictions on oil and gas lease sales and permitting in federal areas. Because federal lands account for only about 6% of US oil production, any impact from those restrictions always looked likely to be small, and a slowdown in permit approvals lasted for only a few months. So although regulatory changes might help production at the margin, it is hard to see them having any really material impact on US output in the short term.
What seems most significant from the administration is not any specific regulation, but the general strategy for addressing climate change: the emissions goals for 2030 and 2050, the support for renewables and electric vehicles, and so on. That strategy raises questions about the outlook for oil and gas, not just in the long term, but in this decade, in ways that make companies and investors think twice about committing capital.
President Biden wants the US to join the global effort to tackle climate change, and is under pressure from the environmentalist wing of the Democratic party not to slip back on any of the commitments he has made. But the longer gasoline prices stay at their current levels, the more tempting it will be for him to take measures to support oil production, even if it means relegating his climate goals to a lower priority for a while
China reported 2,388 new local COVID-19 cases with confirmed symptoms on Thursday, almost double the tally the day before. Tens of millions of people in the country have been living under varying degrees of lockdown, in cities including Shenzhen and Jilin City. Chinese experts have been debating proposals for managing the disease, including a possible move away from the highly restrictive “zero Covid” strategy.
There are already signs that the lockdowns are disrupting international trade, exacerbating global inflationary pressures and raising the risk of recession. Some Chinese companies have been asking workers to stay in isolated “bubbles” isolated from the rest of society, so they can keep their factories running. The system is known as “closed-loop management”.
Saudi Arabia is considering accepting renminbi for its oil sales to China, the Wall Street Journal reported, in the latest in a long line of suggestions that the dollar could be displaced as the dominant currency for oil trading in particular and the world economy in general. As always with these stories, the important question to watch is whether the other currency will simply be used as an accounting unit, or as a store of value. If Saudi Arabia accepts renminbi in payment and then changes them into dollar assets, the economic impact is likely to be minimal. If it becomes an increasingly large holder of Chinese assets, that would be more significant.
Boris Johnson, the UK prime minister, visited the leaders of Saudi Arabia and the United Arab Emirates, saying he wanted to work with them on a range of issues, including energy security.
President Biden has withdrawn the nomination of Sara Bloom Raskin to be vice-chair for supervision on the Federal Reserve board of governors. Senator Joe Manchin, the centrist Democratic senator from West Virginia who is a crucial swing voter in the Senate, said on Monday that he would not support her for the job. Raskin has argued that financial regulators need to pay attention to climate risk and should help accelerate the transition away from fossil fuels. She wrote last year that regulators should both prepare companies to face a warming world, and see how “their existing instruments can be used to incentivise a rapid, orderly, and just transition away from high-emission and biodiversity-destroying investments.”
Quote of the week
“If we flip a switch immediately, there will be supply shortages, even supply stops in Germany… mass unemployment, poverty, people who can’t heat their homes, people who run out of petrol.” — Robert Habeck, Germany’s economy and climate minister, warned of the dire consequences of shutting off energy imports from Russia.
Chart of the week
This comes from BP’s latest annual Energy Outlook, which as usual is full of useful insights and data. It gives the company’s view of possible futures out to 2050 in three scenarios, showing a varying pace of transition away from fossil fuels. In all three scenarios, oil demand is lower in 2050 than it was in 2019, although the timing and the pace of decline are very different. This was a chart that I found particularly interesting, showing possible markets for hydrogen in 2030 and 2050. In both the Accelerated and Net Zero scenarios, which are both consistent with meeting the goals of the Paris climate agreement, demand for hydrogen grows rapidly. But what is particularly noteworthy is BP’s assessment of which uses for hydrogen are likely to be most important. Industry, including steel, chemicals and cement, is expected to be much bigger than power generation. And direct use of hydrogen for transport is projected to be eclipsed by hydrogen-derived fuels, including ammonia, methanol and synthetic diesel. If you are interested in comparing BP’s scenarios with other views, you can take a look at Wood Mackenzie’s take on a 1.5 °C world.