The highest oil and gasoline prices since 2014 are putting the recovery from the COVID-19 slump in jeopardy. Energy price shock threatens to exacerbate the country’s worst inflation worry in more than a decade.

President Biden faces severe electoral difficulties as a result of $3 a gallon for gas. High gas prices irritate voters, and they have a history of blaming whoever is in the White House, fair or not.

According to the American Automobile Association, the U.S. average price for a gallon of standard unleaded gasoline increased two cents to $3.204, the highest amount since October 2014. California has the highest gas costs, at an average of $4.414 per gallon. Mississippi has the cheapest gas at an average price of $2.829 per gallon.

Gas prices had also increased by more than a dollar since Oct. 2020’s price of $2.186 a gallon.

In July of 2008, the highest national average ever recorded was $4.114. The significant increase in oil prices is most likely to blame for the rise in gas prices. Crude oil prices have risen to over $80 per barrel.

Total domestic gasoline inventories in the United States climbed marginally this week, from 221.6 million barrels last week to 221.8 million barrels this week, according to a report by the Energy Information Administration (EIA).

Production of gasoline is presently at 9.7 million barrels per day, an increase of around 800,000 barrels per day from the same period last year. However, demand has increased to about 9.4 million barrels per day, up from approximately 8.5 million in Sept. 2020 and 8.9 million only last week. As a result, oil output was lower below pre-COVID levels over the same period in 2019, according to EIA statistics.

In a statement, Andrew Gross from AAA stated, “Global economic uncertainty and supply chain concerns caused by the lingering COVID-19 pandemic could be playing a role in keeping crude oil prices elevated.” However, he added, “there may be some relief on the horizon due to the news that OPEC and its allies might ramp up production increases faster than previously agreed.”

The Organization of Petroleum Exporting Countries (OPEC) cut oil output when demand for crude oil fell due to COVID-19 travel restrictions but has begun to ramp up production as economic activity and travel resumed.

OPEC has already agreed to gradually raise monthly oil output by roughly 400,000 barrels per day through April 2022. According to Bloomberg, Saudi Arabia, the organization’s de facto leader, has increased its production to reach pre-COVID levels, at around 9.8 million barrels of oil per day.

Some people were hoping that OPEC would boost its supply by a larger amount. According to Bloomberg, several delegates expected a higher-than-planned rise in output, but the group opted to maintain its steady growth during a meeting on Monday. The United States imports roughly 989,000 barrels per day or about 10% of its total oil output.

Energy diplomacy

Plan A aimed to persuade OPEC and its partners, collectively known as OPEC+, to open the taps. But, unfortunately, that hasn’t worked out, at least not yet. 

There are conflicting reports on whether the emergency oil reserve should be tapped. According to Energy Secretary Jennifer Granholm, the Biden administration is exploring a Plan B and a Plan C.

At the Financial Times’ Energy Transition Strategies Summit, Granholm was questioned if it made sense to release barrels from the Strategic Petroleum Reserve (SPR), the country’s emergency crude reserve.

“It’s a tool that is under consideration,” Granholm said, adding, “certainly the president will consider that.”

Following those remarks regarding the SPR, which the Biden administration activated last month after Hurricane Ida, U.S. oil prices temporarily fell below $75 per barrel.

Granholm’s statements were later retracted by the Energy Department, which stated that “there is no urgent intention” to tap the SPR. Crude prices have since recovered to around $79 per barrel as a result of the explanation.

You need a cannon

In any event, industry insiders doubt that unilaterally accessing the SPR will significantly impact current energy costs.

“It would be a big mistake, like bringing a squirt gun to a fight,” said Bob McNally, president of Rapidan Energy Group, a consultancy business. “You need a cannon. The SPR is too small.”

Indeed, Goldman Sachs warned that releasing up to 60 million barrels of oil from the SPR would only be of “limited assistance,” lowering its year-end Brent crude projection by only $3.

In a note to clients on Wednesday, Goldman Sachs analysts said, “The timing of such an SPR release is unexpected. While oil prices have risen this year, they are not at historic highs.”

Goldman Sachs said previous sales had been announced at an average price of $93 a barrel for Brent since 2000, after inflation.

Another issue is that releasing barrels from the SPR to lower oil prices might deter U.S. shale oil businesses from increasing output. (Even though oil prices have more than entirely recovered, U.S. oil output remains below pre-COVID levels.)

A further delay in U.S. shale output will harm natural gas supply, according to Goldman Sachs strategists, “driving U.S. natural gas prices significantly higher.” Natural gas prices in the United States have nearly quadrupled in the last year, implying that home heating and power bills will rise in the coming months.

Goldman Sachs analysts stated of the SPR release, “We believe such moves might perversely become inflationary.”

Plan C 

Granholm would not rule out the more severe option of prohibiting oil exports when speaking at the FT event.

“That’s a tool we haven’t utilized yet, but it’s a tool,” Granholm added. “We are now engaged in an intergovernmental procedure. All options are on the table, as [White House Press Secretary] Jen Psaki stated. However, some are more easily accessible than others.”

On the other hand, the Energy Department pulled that back as well, stating there is no urgent intention to prohibit oil exports. Nevertheless, some oil analysts are pessimistic.

“Jennifer Granholm may or may not have gone completely insane. She’s expressing the administration’s worry about rising oil and gasoline costs, as well as a global energy problem.” an RBC Capital Market analyst reported.

McNally, who served as an energy advisor to former President George W. Bush, believes Biden has a slim 5-10% chance of initiating the arduous process of prohibiting oil exports, which he vehemently opposes.

“That would be catastrophic and unproductive,” McNally added.

Oil is an internationally traded commodity, and Brent, the worldwide benchmark, determines gas prices in the United States. Brent crude prices would undoubtedly rise if the globe suddenly lost access to U.S. oil owing to reduced production. To produce gasoline, jet fuel, and diesel, U.S. refineries need access to foreign oil. They can’t rely just on U.S. shale.

As a result, an export restriction may backfire on American motorists. However, Goldman Sachs strategists stated, “Ironically, it would be extremely positive for gasoline and refined goods.”

Concerns about the environment

Energy diplomacy with OPEC may, of course, interfere with climate diplomacy.

Biden will meet with world leaders at COP26 in Glasgow later this month to forge support for weaning the global economy off fossil fuels.

Biden officials will almost certainly be compelled to press OPEC to generate additional fossil fuels behind the scenes. It’s simply another example of how difficult the energy transition will be and how dependent the world is on oil.

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