For President Joe Biden, tapping the Strategic Petroleum Reserve to lower gasoline prices RB00, +1.28% —along with pardons for federal marijuana possession convictions and forgiving student debt—was a key midterm election strategy.
He managed to reduce the average pump prices from $5.11 in June to $3.77 in September, but that effort was partially foiled by the grip of European sanctions on Russian oil and Saudi Crown Prince Mohammed bin Salman collaborating with Russian President Vladimir Putin to curtail OPEC oil production.
Biden has run down 37% of the SPR. If enough oil is to be kept for a security emergency like a conflict in the Persian Gulf that could choke oil CL00, +3.04% and natural gas NG00, +2.09% shipments, Biden must stop depleting the reserve. Gas prices will then rise even as the economy slides into a Federal Reserve-induced recession intended to curb overall inflation.
Seeking political cover, Biden blames greedy oil monopolists, Putin’s war and the Saudis, but responsibility rests squarely with him. Through executive orders, regulations and the Inflation Reduction Act, he has imposed policies that reveal little sensitivity to how the American energy markets work.
The United States may be the world’s largest producer and has the potential to supply all its own needs, but petroleum products are commodities whose prices are largely determined by international market conditions.
Treasury Secretary Janet Yellen’s plan to cap the price for Russian oil, which still flows to China, India and other markets in Asia, won’t work well. As the EU denies tankers access to insurance and other services, Russia can curtail production and force non-Western customers to rely more on the real oil monopolist—Saudi Arabia through its dominance of OPEC.
Re-engineering the economy
Biden ambitiously seeks to generate 80% of U.S. electricity from renewables, reduce economywide carbon emissions by 50%—including by boosting electric vehicle sales to 50% of all cars sold by 2030. And to ensure as a byproduct: a renaissance for American manufacturing through domestic content requirements, stronger unions and more benefits for previously underrepresented women and minorities to better serve the goals of economic and social justice.
Apparently overly impressed with the success of Obamacare in re-engineering—and in some places monopolizing—key elements of the U.S. health-care industry, his West Wing policy architects believe through edict and subsidies they can radically transform the American energy and automobile industries.
But their market structures are terribly different and less insulated from international conditions than health care. Before Obamacare, the federal government directly and through state agencies already purchased large shares of U.S. health-care services through Medicare, Medicaid and federal employee, military and veterans’ benefits.
Complex markets and regulations
The U.S. electricity, petroleum and motor-vehicle markets are dominated by private purchases and largely regulated by politically independent federal agencies like the Federal Energy Regulatory Commission and state and municipal governments.
Permits to build windmills and solar farms are often controlled locally and power grids are largely run and jointly regulated by states, consortiums of states and the federal agencies.
The building blocks of green energy, polysilicon and lithium, are largely produced abroad and too often in China. Permitting new manufacturing and mining in the United States is controlled by the states and NIMBY activists who access the courts to impose lengthy delays.
Reliance on green power requires massive new power transmission lines to bring electricity from where solar and wind power are abundant to the cities where it is needed. Environmental reviews and other litigation can take up to a decade, and sometimes local building permits are never issued.
Green energy requires nuclear or fossil-fuel backup, but regulatory preferences for solar and wind often make those too expensive to operate. Hence, blackout risks are exacerbated in Texas, California and elsewhere, and that uncertainty will spread throughout the nation as the transition to renewable energy continues.
Biden is pushing Americans into EVs and away from fossil fuels generally by limiting pipeline development and leasing for oil and gas drilling and discouraging financing for private projects.
Five U.S. refineries have shut down in 2020 and distillate inventories are dangerously low. Focusing on the longer-term policy environment, oil companies are reluctant to make major investments in these kinds of facilities.
His hasty and botched withdrawal from Afghanistan and calling out MBS for the murder of Jamal Khashoggi encouraged Putin into believing Western opposition to an invasion of Ukraine would prove fleeting. And for MBS to consort with Putin to cut OPEC production rather than lend a sympathetic ear to the president’s requests to keep the oil flowing.
All of this will make the job of the Federal Reserve in curbing inflation more difficult, but the price of gas can only go down if the president dangerously depletes the SPR, relents on tough restrictions on drilling and new pipelines, or the Fed imposes continuously slow growth or a permanent recession.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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