Rising oil prices spell trouble for President Joe Biden's reelection campaign as voters are ... [+]
Inflation concerns are back, and rising energy markets are primarily to blame.
That's bad news for the Biden administration, which has made a mess of U.S. energy policy over the past three years and now must face voters struggling to cope with higher prices for goods and services in the post-Covid economy.
With a likely election rematch with Republican Donald Trump about six months away, the White House is noticeably nervous about rising energy prices. But the Biden administration has few levers to pull to tamp down prices – and that's a real problem for the president's re-election campaign.
Oil prices have risen from under $75 a barrel at the start of the year to about $90 a barrel, while U.S. gasoline prices at the pump – the real benchmark for consumers' energy pain – have jumped to $3.60 a gallon on average from around $3 a gallon at the beginning of 2024.
Many analysts expect prices to keep rising, too.
The peak summer driving season – when demand traditionally spikes as Americans take to the open road – has yet to begin. At the same time, OPEC+ has reestablished tighter control over the market through supply cuts and enhanced compliance.
It's no secret that the leaders of the oil cartel, Saudi Arabia and Russia, are not big fans of the Biden administration. U.S.-Saudi relations are at an all-time low, while Russia continues to prosecute its war in Ukraine despite escalating Western sanctions, including a price cap on Russian oil exports.
No, help won't come from OPEC+ in the form of higher supply, which is the only effective magic wand for managing this market.
While U.S. oil production is at record levels, new production growth has slowed significantly. Producers are not responding to higher prices by adding drilling rigs because they are committed to capital discipline. While the shale sector will continue to grow, analysts don't expect it to grow by 1 million barrels a day anymore as it did in 2023. Annual growth this year – and beyond – is projected to be closer to 300,000 barrels a day as the sector matures and shale companies stay disciplined with their capital at the behest of Wall Street.
Gasoline prices of $4 a gallon don't seem far off, particularly since a geopolitical risk premium has returned to energy markets. Rising tensions in the Middle East and Ukrainian drone attacks on Russia's refining sector—the third largest in the world and a critical exporter of refined products—are also driving prices higher.
The surge in energy prices comes amid a nearly 14% jump in the Commodity Research Bureau (CRB) Index, which measures the prices of a basket of commodities, including the raw materials needed for the low-carbon energy transition. The CRB Index is nearing its highest level since August 2022, when energy markets spiked after Russia's initial invasion of Ukraine in February.
The situation in energy markets threatens to reignite inflation and challenge any move by the U.S. Federal Reserve to lower interest rates, which many investors – and consumers – have been banking on this year. Upward pressure on gasoline, diesel, and other petroleum products like jet fuel could pass through to other products and services and create fresh inflationary pressures.
That's a nightmare for Biden since, according to a recent Gallup poll, inflation, the economy, and the availability of affordable energy continue to be voters' top concerns. Conversely, tackling climate change—a Biden priority in his energy agenda—doesn't make the list of voters' top concerns.
Several recent public opinion polls show Biden trailing Trump, the presumptive Republican presidential nominee, in a head-to-head contest, particularly in critical swing states that will determine the November election. Trump and fellow Republicans have been on the attack, vowing to undo most of the president's renewable energy agenda and further "unleash" American oil and gas production.
The White House is clearly unnerved by the present situation. Administration officials recently assured oil and gas executives at an industry conference in Houston that the White House's freeze on permits for new liquefied natural gas (LNG) export facilities would be gone by next March. Biden is also leaning against reimposing tough energy sanctions on OPEC+ member Venezuela, even though Caracas' commitment to free and fair elections remains dubious.
With oil prices so high, the administration has also stopped making purchases to refill the U.S. Strategic Petroleum Reserve (SPR), hoping this will reduce demand for crude oil. But Biden was responsible for record SPR releases of 180 million barrels in 2022 at the start of the Ukraine crisis – a decision timed to impact pump prices right before midterm elections. Further releases aimed at taming prices could be dicey, opening the president to criticism about his commitment to American energy security. Still, it would not be shocking to see a desperate White House take this path.
What's left for policy moves to ease upward energy price pressure? Very little.
Biden could press for a conclusion to the Israel-Hamas war or push Ukraine to stop attacking Russian refineries. That could lessen the geopolitical premium in energy prices.
Neither would be easy or come without risk, however. Biden made his commitment to Israel clear after the October 7 attack by Hamas, and reversing course now could have harsh political ramifications. Ukraine, meanwhile, has already been forced to do more with less as the White House struggles with Congress to get more funding to Kiev, meaning the Ukrainians are unlikely to take further drone strikes on Russian energy infrastructure off the table.
That leaves Biden hoping that energy inflation eases on its own – an extremely dangerous place to be given how the global oil market is set up.
