Pump shock: Why gas prices are so high
Sky-high prices show no signs of abating in the immediate future, as global forces continue to prevent disturbed supply from keeping pace with strong demand from countries rapidly returning from the pandemic. Western sanctions against Russia over their invasion of Ukraine have wreaked havoc on global energy markets, but the most dramatic measure – the EU’s ban on Russian oil imports – will not even take effect until the end of this year. Gas prices could also be further pushed up by drivers driving on the road for summer holidays, and the lifting of covid restrictions in some Chinese cities is expected to lead to increasing fuel demand there, putting further upward pressure on prices internationally.
Energy costs rose by 3.9 percent from April to May, while energy prices as a whole have risen by 35 percent since last year, according to a report from the Bureau of Labor Statistics published on Friday. Inflation overall reached 8.6 percent in May, the government reported on Friday, the highest rate in 40 years.
The relentless rise in gas prices has emerged as one of the most important domestic political threats to the Biden administration ahead of this autumn’s midterm elections, and the White House has few obvious solutions to reverse the trend despite intense pressure from top aides and the president. himself. The White House is now caught between liberal allies in Congress pushing for an escalation of a populist attack on oil and gas companies, and the views of some of their trusted economic experts who believe these efforts may prove counterproductive.
A poll released Thursday by The Washington Post and George Mason University’s Schar School found that Americans were broadly concerned about both inflation in general and rising gas prices in particular. About 44 percent of drivers said they have only partially filled the car’s gas tank as a result of higher prices, and 61 percent of those earning less than $ 50,000 a year do so. About two-thirds of drivers reported that they made fewer trips to the grocery store due to rising gas prices.
“This is a huge economic and political albatross around the neck of the administration, and the difficulty is that there really is no easy way to deal with this by using the political tools available to them,” said Eswar Prasad, an economist at Cornell University. .
Americans are not used to seeing energy prices as high as they have been in recent months. The average price of a gallon of gas in the United States reached $ 5,004 on Saturday, according to AAA. Already, at least 19 states have average gas prices of $ 5 or more, with California over $ 6 per gallon. Some analysts believe that America may approach a nationwide average of $ 6 per gallon by the end of the summer. Diesel prices, especially important for the truck and construction industry, have risen nationally from $ 3.21 last year to $ 5.74 on Friday, a record, according to GasBuddy, which tracks fuel prices.
These higher energy prices seep into almost every major part of the economy. They increase the costs of electricity, transport, freight, logistics, flights, agriculture, fertilizers and the production of other goods. They cut corporate revenue: Walmart recently pointed to fuel and storage peaks hurting profits. Demand for natural gas is increasing globally to compensate for Russian energy, and as a result it is also the demand for American natural gas, which is creating new economic burdens for domestic producers and the country’s power grid – just as more and more Americans are starting to run the air. balm this summer.
Higher energy prices are also often a sign of an economic downturn, as consumers respond to higher prices by reducing spending on other goods and services. Historically, oil price peaks such as those now facing the West have “always” preceded or led to an economic recession, according to a research note by Jeremy Grantham, an analyst at GMO, an investment and asset management firm.
Most Americans expect inflation to get worse, the Post-Schar School survey finds
“I want to be vigilant right now to see if the economy succumbs to this latest sting in the heart of higher energy prices,” said Chris Rupkey, chief economist at Fwdbonds. “Realistically, it will be a miracle if we do not enter a recession.”
But the economy after covid has repeatedly defied experts’ expectations, and there is good reason to believe that strong growth can survive higher energy prices. Gas purchases accounted for about 3 percent of consumers’ annual spending before the pandemic began, according to the Bureau of Labor Statistics. Unlike the 1970s, America is now a major producer of global energy supplies – meaning that high prices benefit American energy producers instead of just burdening household costs, as companies can increase employment and consumption with higher incomes. Businesses are also less vulnerable to gas and oil price fluctuations than they once were, in part due to improved efficiency in recent decades, according to Matthew J. Slaughter, an economist at Dartmouth College.
Economic growth has remained strong in the United States since shortly after the early pandemic closures were lifted, and politicians have hoped demand will cool, as inflation is by far the fastest rising in consumer prices in about four decades. Higher energy expenditures could, some economists hope, empty demand in other sectors, which could ease other price pressures. It may hurt in the short term, but it can help overall.
“It sounds hard to say, but we need a decline in overall demand,” Slaughter said. “And it’s not that big compared to other things in the consumption basket.”
The economy is showing resilience despite growing fears of recession
But while higher gas prices are helping to slow the economy and curb inflation, they are also pushing politicians. And lawmakers and the Biden administration are desperate to reverse the trend. The White House has implemented a number of measures aimed at easing the gas price squeeze, such as committing to freeing 1 million barrels a day from the country’s strategic petroleum reserve and deploying the Defense Production Act to encourage the production of critical minerals. The White House has also allowed a gasoline blend that consists in part of ethanol to be sold over the summer despite opposition from environmental groups, who claim the move will exacerbate air pollution.
The president is also reportedly planning a trip to Saudi Arabia, as the United States looks to other parts of the world to increase oil production to reduce global dependence on Russia, the world’s third largest oil supplier before the war in Ukraine. Biden had once sworn to make Saudi Arabia a “pariah”, given the treatment of women and other human rights violations. But the White House has defended the potential journey, both to help brokers in diplomatic talks in the Middle East and to increase oil production. The US government has also tried to work with Venezuela and other oil producers to increase supply since Russia’s war began.
The White House is exploring alternatives to gas prices while Sanders is pushing for capital gains tax
However, White House officials have been frustrated, as their efforts to this point have been confused by global forces. Earlier this month, a group of oil-producing nations known as OPEC Plus announced that they had committed to a major boost in production this summer – a move that was quickly praised by the Biden administration. Internally, White House officials hoped the announcement would lead to a drop in oil prices, said two people familiar with the matter. Instead, prices continued to rise.
“They were confused that it was not a more lasting response,” said a White House official, speaking on condition of anonymity to describe private conversations. “They said, ‘Man, we can not take a break.'”
On Friday, Biden accused large oil and gas companies of not doing more to increase production, and accused them of choosing profit over lower prices for Americans. “They are not drilling. Why do they not drill? Because they make more money from not producing more oil, Biden said. “The price goes up.”
The Post-Schar School survey found that 72 percent of Americans accused companies of trying to increase profits from rising gas prices, including 86 percent of Democrats, 52 percent of Republicans and 76 percent of independents. The total number owed to companies was higher than the proportion that gave Biden or disturbances caused by the pandemic (both 58 percent) and about the same proportion that owed to Russia’s invasion of Ukraine (69 percent).
Biden has stopped embracing some of the actions that were pressured by Democratic allies in Congress to target oil producers. Sens. Sheldon Whitehouse (DR.I.) and Elizabeth Warren (D-Mass.) Have pushed for a tax on the profits of oil and gas companies that will return revenue to consumers, with similar measures already adopted by the UK, Italy and some other European countries .
“American politicians should quickly follow suit or risk continued profiteering and pain at the pump,” said Lindsay Owens, CEO of Groundwork Collaborative, a left-wing group. The Groundwork Collaborative found that the largest 24 oil and gas companies recorded $ 174 billion in profits last year – the highest increase in seven years.
The White House has said they are studying this approach, as embracing such a measure could give the administration an effective political response to higher gas prices. But it would lead to a violent setback from industry, centrist economists and the GOP. Critics warn that taxing oil and gas companies will discourage them from increasing production, which could hurt prices in the long run.
Bob McNally, an energy analyst at Rapidan Energy Group who served in the George W. Bush administration, said the White House has no options that would immediately improve the gas price crisis. He said it was crucial that Biden avoid embracing solutions such as price caps and an oil profits tax that he said would make the problem worse.
“The White House has two options: they can do symbolic things that do not really lower prices, and they can do really stupid things that are counterproductive,” McNally said. “Despite my many reservations about the president’s energy policy, it is nevertheless impressive that he has so far resisted stretching himself into the stupid curve.”