You Won’t Believe How Pump Prices Are Making the Road to the White House a Total Nightmare!

Good morning from London. First, Jeff Currie, longtime commodity analyst at Goldman Sachs It is going away after 15 years as a partner. But it’s not all bad news for oil bulls. Read more below.

Given that it’s the heatwave days of August and the middle of the summer driving season, it seems like a fitting time to look again at what’s happening with pump prices in the US.

But it won’t just determine how much your summer trip might cost.

It could play a significant role in deciding the outcome of next year’s US presidential election, with implications for everything from attempts to cut emissions to the outcome of the war in Ukraine.

Myles McCormick and I took a journalist look to the developing problem over the weekend, but if oil continues to rise, we can expect more panic before the end of the summer. It will certainly remain an issue to keep an eye on.

Thanks for reading. — David

The White House is watching the rise in pump prices cautiously

The Biden administration is worried about pump prices again. Retail gasoline prices, while still below the peaks following Russia’s full-scale invasion of Ukraine, rose nearly 10% in the past month to $3.83 a gallon. In August of 2022, they stood at around $4, according to the American Automobile Association.

The increase was mainly driven by the nearly 15% jump in crude oil prices last month, with Brent now near $85 a barrel and close to its highs for the year. As analysts begin to talk about a return of $100 a barrel of oil, President Joe Biden’s team is watching the matter closely and has held briefings from several industry specialists in recent weeks.

It is unlikely that they were comforted by the message they heard.

Saudi Arabia is determined to reduce inventories and support the price, as evidenced by its warning on Thursday that Riyadh could “deepen” existing cuts. Russia is also cutting supplies and fears are growing that Moscow could try to interfere in next year’s US elections through oil prices.

Former President Donald Trump has indicated that he would try to force Ukraine to negotiate with Russia, giving Vladimir Putin a clear incentive to try to tip the balance any way he can.

The Biden administration is not without options. But none of them look good.

Exploring the best bad option

Significant releases from the US Strategic Petroleum Reserve have become more challenging, as the amount drawn from the SPR last year following Russia’s invasion left inventories at their lowest level since the 1980s.

Politically, getting more oil out of the reserve would be a challenge, unless real shortages emerge. A rise in the price of oil may indicate a degree of scarcity, but not pumps running dry.

Increasing domestic production is also complicated. The relatively low prices so far in 2023 haven’t exactly encouraged the shale industry to boom, particularly when it’s still constrained by its lenders. From 2020, Wall Street wants to see profits, not growth.

If prices rise, US production is likely to respond on the margin, but shale drillers are unlikely to go full throttle. The number of drilling in the US has been declining in recent weeks.

This leaves access to foreign sources of supply as a third option.

Most oil analysts believe the Biden administration has already been less strict than it could have been in imposing sanctions on oil sales by Iran and Venezuela, where increased production has been a contributing factor to keep prices under control.

Long-term increases in production from countries such as Guyana and Brazil and slowing demand growth in developed countries should further dampen oil prices.

But election cycles don’t wait, leaving the Biden administration likely increasingly dependent on OPEC+ and Saudi Arabia.

Relations between the Biden administration and Riyadh have never been particularly rosy, since the president during his election campaign said that the kingdom should be treated as a “pariah” in the aftermath of the death of journalist Jamal Khashoggi.

Saudi Arabia in the driver’s seat

While Biden’s team has worked to smooth out bilateral relations, with some success, it’s worth mentioning that Trump’s first overseas trip as president was to Riyadh. At the back of the Biden administration’s mind will be the suspicion that Crown Prince Mohammed bin Salman would be quite happy to see Trump back in power. Trump might also be expected to slow down the Biden administration’s environmental reforms, which are in part designed to reduce US dependence on fossil fuels.

The downside is that while Saudi Arabia wants higher oil prices, in part to finance so-called MBS Gigaprojects like the hypermodern city of Neom, it is unlikely to want them to spiral out of control given the potential long-term impact on the oil demand globally.

And all the supply cuts Saudi Arabia has made since October mean it’s sitting on a pretty sizable reserve of spare capacity of about 3 million barrels a day, or about 3% of world supply.

As the de facto leader of OPEC, Saudi Arabia may be in a position to wage a rather difficult deal with the US to extract more of what it wants out of the relationship if Washington wants it to produce more crude. This could include additional security guarantees from the United States or even the green light to pursue civilian nuclear energy.

Poll Results

In Thursday bulletin we asked readers if the US nuclear industry is on the verge of a comeback. The majority said that nuclear power will play an important role in the energy transition. Thanks to those who participated. Here is the breakdown of the answers:

Do you have a different view? Email us at energy.source@ft.com.

Data tutorial

There is really only one data point that matters in the UK’s energy transition right now.

The price of carbon allowances, known as the UK ETS (Emissions Trading Scheme), has fallen to nearly £40 a tonne. Almost exactly a year ago it hit its all-time high near £100 a tonne, but the rug has since been pulled out from under it as the government has failed in his commitment to green issues.

The EU equivalent, which the UK ETS was originally modeled after, is still €83 (£71.50).

This is important as, while it means cheaper electricity and lower costs for heavy industry in the UK today, it also makes it more difficult to justify investing in many of the green projects the country will need to meet its net-zero pledges. With a general election next year it is hard to see the government taking steps to raise the price of carbon in the short term meaning there is a risk of the UK being left behind.

Strengths

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Energy Source is written by the FT’s global energy team. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Retrieve past editions of the newsletter Here.