President Biden is taking baby steps in an effort to reduce oil and gasoline prices: a call for a gas-tax holiday that will probably never happen. Sending “tough messages” to US oil and gas producers. Release of strategic reserve oil. Defeating Saudi Arabia to produce more oil.
At best, measures like these can help reduce pump prices a bit. At worst, they have no effect on what consumers perceive, making Biden helpless.
There is one obvious thing that will quickly reduce oil and gas prices: the end of the Russian war in Ukraine. The Russian invasion will not be responsible for the complete increase in oil and gas prices since Biden took office in January 2021. But it has caused more. US pump prices have risen from about $ 3.60 to $ 5 per gallon before Russian President Vladimir Putin ordered the invasion on February 24. An additional $ 1.40 per gallon is what Biden legally calls “the rise of Putin.” For an average 25 miles per gallon driver, over 12,000 miles per year, it costs about $ 700 more on gas.
The United States, Europe and other countries are certainly doing more to help Ukraine fight a much larger Russian invasion force and punish Russia for its war. But Biden has not envisioned Ukraine as a dual-purpose mission to calm Russia’s global energy markets and defeat Russia while bringing relief to consumers everywhere. However, he can do it and it may be more convincing than he has tried so far.
Sanctions can never expel Russian troops
The global response to the Russian aggression includes sanctions to disrupt the Russian economy and disrupt Russia’s ability to maintain and rebuild its military. They work like one. The Russian economy is likely to shrink by around 10% this year, a sharp recession. But Russia’s economy has stabilized since the initial shock and the impact of sanctions has “dissolved since May,” according to the Center for Strategic and International Studies.
More importantly, sanctions are not reducing Russian energy revenues and it is a high source of funding for the Russian military. In fact, Russian oil and natural gas revenues have increased by 80% this year, despite the restrictions that oil and gas prices have risen much before the war. According to CSIS estimates, Russian energy exports earn $ 1 billion a day, while Russia spends $ 325 million a day on military expenses. Some analysts think sanctions will hurt Russia more and more in the space they are in, but Ukraine and its allies should be prepared for the possibility that sanctions will never help drive Russian forces out of Ukraine.
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Putin clearly fell at the start of the war when Russian forces expected little resistance to take Ukraine’s capital, Kiev, instead meeting fierce defenders who had forced Russia into a devastating retreat. But Putin’s tactic to withstand sanctions is more intelligent.
“This may sound morally offensive, but it forces us to realize just how reliant we are on Russian exports to the global energy market,” Alan Gelder, vice president of processing, chemicals and oil markets at research firm Wood Mackenzie, told Yahoo Finance. . “The opportunity to do something is very limited unless you tolerate a lot of pain.”
The United States has already banned the import of Russian oil, which accounts for just 2% of US supply. But it has somehow contributed to the higher gas prices. The oil comes in many grades and Russian crude is best suited to Gulf Coast refineries.
“It’s not available now,” Gelder says. “There is some replacement oil, but every time you impose barriers, you make the system less efficient and more expensive.”
Europe is trying to cut its own Russian oil purchases by 90% by the end of the year. It can get replacement oil from the Middle East, but this is another solution that will increase costs. Meanwhile, Russia will be able to sell its oil to other customers, such as India or China. Analysts hope that by the end of the year, the restrictions will block 1.5 million barrels per day or 1.5% of the total supply from the global market.
With energy markets already tight, a low-single-digit drop in supply could drive prices up. There is another key factor that pushes even higher prices: the “fear premium” or concerns that future developments in war could cause a much larger supply shock.
“Driving this market is a fear,” says Raul LeBlanc, vice president of energy practice at S&P Global. “There is a huge risk premium in the market. People look at the horizon and see things that could exacerbate the situation.
The end of the war does not mean the immediate end of sanctions on Russia, which will last for years. But it also lowers the fear premium and lowers gasoline prices more than anything Biden is trying to do. Gas in the United States will never again drop below $ 3 per gallon, given the decline in processing capacity that tightens the supply of finished products. But the price of oil is the main cost driver for gasoline and a drop in input prices causes a drop in output prices.
Could Ukraine’s allies do anything to quickly end the Russian war in Ukraine? Ukraine has said it will not give up land for peace and most of its allies support it. So the real question is whether there is a plausible way to speed up the defeat of Russian forces on the battlefield.
It is possible. The United States and other countries have given Ukraine many of the weapons systems it has asked for, including long-range artillery that is finally finding its way into Ukraine’s frontline forces. Most military aid is on the way, and some of it is not rushed, because training takes time and maintenance tails are complex and time consuming to build.
But there are other things that Ukraine has not heard and accepted – mainly warplanes that give Ukraine new attack capabilities and begin to take advantage of Russian heavy air power. The United States and NATO obviously refuse to provide any kind of no-fly zone over Ukraine using their own forces. NATO does not provide naval escort for commercial vessels carrying Ukrainian food exports, which are now subject to a virtual Russian blockade, which causes food shortages in some parts of the world.
There is much that is not publicly known, such as how much intelligence the United States and other allies are providing Ukraine and what kind of covert aid Ukraine may receive. So no one who analyzes the war should assume that they know everything that is going on.
There is no end in sight
The war has become a bloody slog in eastern Ukraine, with Russian forces now making limited territorial gains, but none seem to be strategically critical. Soldiers on both sides are tired. Russia has extensive firepower advantage but a severe lack of manpower. Ukraine has a moral advantage but no shortage of weapons. Nothing indicates that either side can handle the breakout that turns the tide in their favor, and this barbarism can last for months or years.
Sophisticated weapons that flow into Ukraine increase those forces. But that may coincide with the fatigue of sanctions, especially in Europe, where as the war drags on, hundreds of millions of consumers lose patience with sky-high energy costs and put pressure on Western leaders to put their own units first. Putin, too, may be counting on it.
Biden says his aim in the war is “democratic, independent, sovereign and prosperous Ukraine,” but he also tries to avoid a direct confrontation between NATO and Russia. It may take a year or five for Ukraine to achieve the desired status of Biden. Oil and gasoline prices are likely to remain at their current highs, or higher or at all. Biden certainly hopes that the current level of aid to Ukraine will help him achieve his goal. So is it not good for everyone except Ukraine to have more aid, faster, aggressive Russia?
Biden has to calibrate what kind of aid to Ukraine may surpass the threshold triggered by the Russian use of weapons of mass destruction, or some exacerbate it beyond Ukraine. But they must be calibrated to see if record-high energy prices for the damage are already causing consumers and they are responsible for interfering. The final part of the riddle involves Biden’s own political fortunes, which are now declining and will continue to decline until Putin blackmails energy consumers in America and elsewhere. Putin will be able to wait longer than Biden.
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