U.S. President Joe Biden, faced with plunging poll numbers and a looming recession, has announced yet another Band-Aid on gasoline prices by announcing a federal tax holiday for gasoline. This will only feed the tightness on gasoline supply. The Fox Business Network reported that Biden will ask Congress to suspend the federal gas tax until September as Americans across the country grapple with soaring prices at the pump and not solve any problems in the long run. The president will urge members of Congress to institute a three-month federal gas tax holiday without stripping money from the Highway Trust Fund that finances highways and mass transit. Fox Business says that the federal government currently charges 18 cents in taxes per gallon of gasoline and imposes a 20% tax for each gallon of diesel, the official said.
Fox Business reports that Biden will also call on states, oil companies and retailers to pause gas taxes. The Penn Wharton Budget Model published estimates Wednesday revealing that gas tax holidays in Georgia, Maryland and Connecticut saved consumers money at the pump. Most of the savings in these areas went to consumers instead of service stations and others in the energy sector. The cost of gas began to soar last fall and continued to rise following Russia’s invasion of Ukraine in late February, although the administration is framing the increase in gas prices as the “Putin price hike.” “[Biden] believes that states, oil companies and retailers have a responsibility in this unique moment – to do their part to ameliorate Putin’s price hike,” the official said. “He’s calling on states to suspend their gas taxes or else find other ways to deliver the same relief, such as consumer rebates or relief payments.”
The tax break, while it might seem welcome, will not help solve the underlying problems in the U.S. petroleum product market. You can continue to blame the “Putin price hike,” but it was not Vladmir Putin who cancelled the Keystone XL pipeline or put on drilling moratoriums, reduced production and leases on federal land and reversed Trump-era streamlining of oil and gas projects that removed unnecessary red tape by government bureaucrats. The problem in the gasoline market is not the gasoline tax but the fact that refining capacity can’t keep up with demand. If you lower the gasoline tax, that’s a great thing, but it’s only going to cause demand to go higher as refiners are already producing gasoline at maximum capacity.
The Biden administration is meeting with energy company executives asking about why there is no refining capacity. Well one of the main reasons is his green energy policies that have discouraged investment in the industry he said he was going to put out of business.
Still, the oil market is getting slammed on recession fears as well as the perception that Russian oil supply is not getting removed from the market but is filling the coffers in China and India that are loading up on the Russian blends.
The Wall Street Journal Reports that, “The Indian government has asked state oil companies to scoop up huge volumes of cheap crude from Russia, according to industry executives, strengthening commercial ties with the country even as the West tightens sanctions on Moscow. Western countries have sought to hamper Russia’s ability to use its vast oil and gas exports to fund the war in Ukraine. The emergence of India as a major buyer of Russian oil has the potential to take the sting out of the sanctions. Other nations, including China and Turkey, have also stepped up their purchases of Russian oil, though the country’s exports remain below prewar levels. Indian oil executives say they have been strongly encouraged in recent weeks by government officials to find ways to continue purchases and take advantage of the price discount on Russian oil.
We are seeing a bit of the unwinding on oil with looming recession fears that some banks are now say is a 50/50 shot of happening and some worries about COVID cases that are in China. Yet, if Russian oil is being exported to other places, is it fair to take out the Russia war premium and just how big is that premium? Well, Kuwait thinks it much larger than many analysts think. Bloomberg News Reports that, “The chief executive of Kuwait’s state oil company said a $30-per-barrel “war premium” has been built into the cost of oil. “I see a war premium of about $30 in the price right now,” Kuwait Petroleum Corp.’s Sheikh Nawaf Al-Sabah told Bloomberg TV on the sidelines of the Qatar Economic forum on Tuesday. There’s little sign of demand destruction in oil markets because of unaffordable prices, although growth is slowing.
Yet, while China and India benefit with Russia supply, the IEA is warning Europe to reverse the energy policies that this organization championed in recent years. The FT reports, “The International Energy Agency has warned that Europe must prepare immediately for the complete severance of Russian gas exports this winter, urging governments to take measures to cut demand and keep aging nuclear power stations open. Fatih Birol, the head of the IEA, said Russia’s decision to reduce gas supplies to European countries in the past week may be a precursor to further cuts as Moscow looks to gain “leverage” during its war with Ukraine. “Europe should be ready in case Russian gas is completely cut off,” Birol told the Financial Times in an interview. “The nearer we are coming to winter, the more we understand Russia’s intentions,” he said. “I believe the cuts are geared towards avoiding Europe filling storage and increasing Russia’s leverage in the winter months.” Birol said emergency measures taken by European countries this week to reduce gas demand, such as firing up old coal-fired power stations, were justified by the scale of the crisis despite concerns about rising carbon emissions according to the FT.
Let’s face it, the reason why Europe is vulnerable to Russia energy blackmail is the short-sighted plans by the EU to go green without weighing the real-world consequences. Now you would think after the record-breaking run in oil and gas prices that people would be throwing money at fossil fuels. Not so much. Bloomberg News reports, “Global oil investment will be stagnant this year and may even decline as producers deal with surging inflation and volatile prices caused by Russia’s war in Ukraine, according to the International Energy Forum. Increasing costs for energy projects as well as supply-chain issues are making it harder to source equipment and may discourage spending, the Riyadh-based consultant and adviser said. “These issues make investment decisions more challenging and less likely,” IEF Secretary General Joe McMonigle said in an interview. “For 2022, it looks like the situation is not improving and may get even worse.”
Investment is set to be below the $441 billion spent in 2019 for a third straight year, endangering future energy security, according to the IEF. The consultant said in a December report with IHS Markit, a research unit of S&P Global (NYSE:SPGI) Platts, that spending needs to be sustained at about $525 billion a year through 2030 to meet global demand for crude and products.
Fed Chairman Jerome Powell speaks today and it’ll be interesting to see how aggressive he feels when it comes to the outlook on interest rates. There is no doubt that the market is fearing a recession. Will Powell save the market by suggesting that they can take it easy when it comes to raising interest rates? Or, are they going to be in the mode of doing everything it takes to cool off inflation? Stay tuned.
It’s a rarity, an oil and gas correction. We believe we’re getting to the point where we should be bottoming soon. The correction to the lower Bolinger band is a reveal of recession fears and the market trying to adjust to how much demand destruction will occur. While the market may not shoot right back up, we believe that we will be retesting market highs in a few months. Use the break to hedge.
Despite the theatrics by the Biden administration, we know that its policies have been devastating for the economy and for the energy industry. The lashing out at the industry that it has tried to put out of business or restrain for the last two years is somewhat laughable, but it just shows you when you have a failed policy and you refuse to admit that you do, then you’re just going to try to blame everybody else for the problems you’ve created. Leadership, at times, is admitting you’re wrong and then chart a new course. Not to double down on the same course that is leading to destruction.