President Biden is taking baby steps in his effort to lower oil and gasoline prices: Calling for a gas-tax holiday that will probably never happen. Sending “stern messages” to U.S. oil and gas producers. Releasing oil from the strategic reserve. Browbeating Saudi Arabia to produce more oil.
At best, these types of measures will help lower pump prices a bit. At worst, they’ll have no effect consumers can discern, making Biden seem hapless.
There’s one obvious thing that would promptly lower oil and gas prices: An end to Russia’s war in Ukraine. The Russian invasion isn’t responsible for the entire increase in oil and gas prices since Biden took office in January 2021. But it has caused much of it. U.S. pump prices have risen from about $3.60 per gallon before Russian president Vladimir Putin ordered the invasion on Feb. 24 to $5 now. That extra $1.40 per gallon is legitimately the “Putin price hike,” as Biden calls it. For a driver averaging 25 miles per gallon over 12,000 miles per year, that’s nearly $700 in additional spending on gas.
The United States, Europe and other nations are obviously doing much to help Ukraine fight back against the much larger Russian invasion force, and to punish Russia for its belligerence. But Biden has not framed aid for Ukraine as a dual-purpose mission to defeat Russia while calming global energy markets and bringing relief to consumers everywhere. He could do that, however, and it might look a lot more convincing than what he has tried so far.
Sanctions may never dislodge Russian forces
The global response to the Russian invasion involves sanctions meant to tank the Russian economy and disrupt Russia’s ability to maintain and rebuild its military. They’re sorta working. The Russian economy is likely to shrink by around 10% this year, which is a severe recession. But Russia’s economy has also stabilized after an early shock, and the effect of sanctions has “dissipated since May,” according to the Center for Strategic and International Studies.
More importantly, sanctions are not denting Russia’s energy revenue, and that is the top source of funding for Russia’s military. In fact, Russia’s oil and natural gas revenues have grown by 80% this year, despite sanctions, because oil and gas prices are much higher that before the war. CSIS estimates that Russian energy exports generate $1 billion per day in revenue, while Russia spends $325 million per day on military expenditures. Some analysts think sanctions will hurt Russia more the longer they are in place, but Ukraine and its allies should also prepare for the possibility that sanctions may never help dislodge Russian forces from Ukraine.
Putin clearly fumbled the beginning of the war, when Russian forces expecting little resistance taking Ukraine’s capital, Kyiv, instead met fierce defenders who forced Russia into a disastrous retreat. But Putin’s strategy on withstanding sanctions looks much more clever.
“It may be morally repugnant, but this has forced the realization of just how dependent we are on Russian exports in the global energy markets,” Alan Gelder, vice president of refining, chemicals and oil markets at research firm Wood Mackenzie, told Yahoo Finance. “The opportunity to do anything is very limited unless you bear a lot of pain.”
The United States has already banned imports of Russian oil, which made up only about 2% of the U.S. supply. But that has contributed to higher gas prices anyway. Oil comes in many grades, and Russian crude is well-suited for Gulf Coast refineries.
“That’s not available now,” says Gelder. “There’s been some replacement oil, but every time you impose barriers, you make the system less efficient and more costly.”
Europe is attempting to cut its own purchases of Russian oil by 90% by the end of the year. It can get replacement oil from the Middle East, but that is another workaround likely to raise costs. Russia, meanwhile, will be able to sell some of its oil to other customers, such as India or China. Overall, analysts think that by the end of the year, sanctions will block perhaps 1.5 million barrels per day of Russian oil from the global market, or about 1.5% of total supply.
The 'fear premium'
With energy markets already tight, even a low-single-digit drop in supply can boost prices. There’s another important factor pushing prices even higher: The “fear premium,” or concern that future developments in the war could cause a much bigger supply shock.
“What’s driving this market is fear,” says Raoul LeBlanc, vice president of the energy practice at S&P Global. “There’s a large risk premium in the market. People look on the horizon and see things that could exacerbate the situation.”
An end to the war would not mean the immediate end of sanctions on Russia, which could persist for years. But it would most likely deflate the fear premium and bring gasoline prices down by more than everything else Biden is attempting, combined. Gas in the United States may never fall below $3 a gallon again, given a decline in refining capacity that will keep the supply of finished product tighter. But the price of oil is the main cost driver for gasoline, and a decline in the input price will generate a drop in the output price.
Could Ukraine’s allies do much, if anything, to speed an end to Russia’s war in Ukraine? Ukraine has said it won’t give up land for peace, and most of its allies support that. So the real question is whether there’s a plausible way to accelerate the defeat of Russian forces on the battlefield.
It’s possible. The United States and other nations have given Ukraine many of the weapon systems it has asked for, including long-range artillery that is finally finding its way to Ukraine’s front-line troops. Much more military aid is on the way, and some of it can’t be rushed, because training takes time and maintenance tails are complex and time-consuming to build.
But there are other things Ukraine has asked for, and not received—most notably fighter jets that would give Ukraine new attack capabilities and begin to even out Russia’s heavy airpower advantage. The United States and NATO have obviously declined to provide any kind of no-fly zone over Ukraine, using their own troops. NATO won’t even provide naval escort for commercial ships bearing Ukrainian food exports, which are now subject to a de facto Russian blockade that’s causing food shortages in some parts of the world.
There’s also a lot that’s not publicly known, such as how much intelligence the United States and other allies are providing Ukraine, and what other types of clandestine aid Ukraine might be receiving. So nobody analyzing the war should presume they know everything that’s going on.
No end in sight
The war has become a bloody slog in eastern Ukraine, with Russian forces now making limited territorial gains, but nothing that seems likely to be strategically decisive. Soldiers on both sides are exhausted. Russia has a vast firepower advantage but severe manpower shortfalls. Ukraine has a morale advantage but a shortage of weapons. Nothing suggests either side can manage a breakout that turns the tide in their favor, and it’s quite possible this savagery will last for months or years.
The sophisticated arms flowing to Ukraine will beef up those forces. But that could coincide with sanctions fatigue, especially in Europe, as the war drags on, hundreds of millions of consumers lose patience with sky-high energy costs and pressure mounts on Western leaders to put their own constituents first. Putin may even be counting on that.
Biden says his goal in the war is “a democratic, independent, sovereign and prosperous Ukraine,” while he seeks to avoid a direct confrontation between NATO and Russia. It could take a year, or five years, for Ukraine to achieve Biden’s desired status. Oil and gasoline prices are likely to stay near current highs, or go even higher, during most or all of that time. Biden obviously thinks current levels of aid to Ukraine will help achieve his goal. So wouldn’t more aid for Ukraine, faster, be good for everybody other than the aggressor, Russia?
Biden has to calibrate what kind of aid to Ukraine might cross a threshold triggering Russian use of mass-destruction weapons or some escalation beyond Ukraine. But he also has to calibrate the harm record-high energy prices are already causing consumers, and whether he has an obligation to intervene. The final piece of the puzzle involves Biden’s own political fortunes, which are waning now and will continue to decline for as long as Putin blackmails energy consumers in America and elsewhere. Putin may be able to wait longer than Biden.