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Good morning from London. First up, Goldman Sachs’ longtime commodity analyst Jeff Currie is leaving after 15 years as a partner. But it’s not all bad news for oil bulls. More on that below.
As it’s the dog days of August and the middle of the summer driving season, it seems like a suitable time to look at what’s happening with US pump prices again.
But it’s not just going to dictate how much your summer road trip may cost.
It could play a significant role in deciding the outcome of the US presidential election next year, with implications for everything from attempts to cut emissions to the outcome of the war in Ukraine.
Myles McCormick and I took a newsy look at the developing issue over the weekend, but if oil keeps rising we can expect more panic before the summer is out. It’s definitely going to remain an issue to watch.
Thanks for reading. — David
White House eyes rising pump prices warily
The Biden administration is worried about pump prices again. Retail petrol prices, while still down from the highs following Russia’s full-scale invasion of Ukraine, have risen almost 10 per cent in the past month to $3.83 a gallon. In August of 2022 they stood at about $4, according to the American Automobile Association.
The increase has primarily been driven by the near-15 per cent jump in crude prices last month, with Brent now near $85 a barrel and close to its highs for the year. As analysts start to talk about a return of $100 a barrel oil, President Joe Biden’s team is watching the issue closely, and has taken briefings from multiple industry specialists in recent weeks.
They are unlikely to have been comforted by the message they’ve heard.
Saudi Arabia is determined to draw down inventories and support the price, as evidenced by its warning on Thursday that Riyadh could “deepen” its existing cuts. Russia is also cutting supplies, and there are growing fears that Moscow may try to interfere in next year’s US election through oil prices.
Former president Donald Trump has indicated he would try to force Ukraine to negotiate with Russia, giving Vladimir Putin a clear incentive to try and tip the scale in any way he can.
The Biden administration is not without options. But none of them look great.
Exploring the best bad option
Significant releases from the US’s Strategic Petroleum Reserve have become more challenging, as the amount drawn from the SPR last year in the aftermath of Russia’s invasion left stocks at their lowest level since the 1980s.
Politically speaking, taking more oil out of the reserve would be challenging — unless outright shortages emerge. A rising oil price may indicate a degree of scarcity, but not the pumps running dry.
Boosting domestic production is also tricky. The relatively low prices so far in 2023 have not exactly encouraged the shale industry to go flat out, particularly when they are still constrained by their financial backers. Since 2020 Wall Street has wanted to see profits, not growth.
If prices do surge, US production is likely to respond at the margin, but shale drillers are unlikely to go full-bore. The number of rigs drilling in the US has been declining in recent weeks.
That leaves tapping foreign sources of supplies as a third option.
Most oil analysts think the Biden administration has already been less rigorous than they might have been in enforcing sanctions on Iran and Venezuela’s oil sales, where rising output has been one factor helping keep prices in check.
Longer-term increases in production from countries such as Guyana and Brazil, and slowing demand growth in developed countries, should still act as a brake on oil prices.
But election cycles don’t wait, leaving the Biden administration arguably increasingly reliant on Opec+ and Saudi Arabia again.
Relations between the Biden administration and Riyadh have never been particularly rosy, ever since the president said during his election campaign 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 bilateral relations, with some success, it’s worth remembering that Trump’s first foreign 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 glad to see Trump back in power. Trump might also be expected to slow the Biden administration’s environmental reforms, which are partly designed to cut the US’s reliance on fossil fuels.
The flip side is that while Saudi Arabia wants higher oil prices, in part to fund MBS’s so-called Gigaprojects such as the hypermodern city of Neom, it is unlikely to want them to get out of control given the potential long-term impact on oil demand globally.
And all the supply cuts Saudi Arabia has made since October means it is sitting on a pretty sizeable buffer of spare capacity of roughly 3mn barrels a day — or about 3 per cent of world supply.
As Opec’s de facto leader, Saudi Arabia may be in a position to drive a pretty hard bargain with the US, to extract more of what it wants out of the relationship — if Washington wants it to produce more crude. That could include additional security guarantees from the US, or even the green light to pursue civilian nuclear power.
In Thursday’s newsletter we asked readers whether the US nuclear industry is on the brink of a comeback. A majority said that nuclear power will play a major role in the energy transition. Thanks to those who participated. Here is the breakdown of responses:
Do you have a different view? Write to us at [email protected].
There’s really only one data point that matters in the UK energy transition right now.
The price of carbon allowances, known as the UK ETS (Emissions Trading Scheme), is down to near £40 a tonne. Almost exactly a year ago it hit its all-time high near £100 a tonne, but has since had the rug pulled from under it as the government has lapsed on its commitment to green issues.
The EU equivalent, on which the UK ETS was originally modelled, is still at €83 (£71.50).
This matters as while it means cheaper electricity and lower costs for heavy industry in the UK today, it also makes it harder to justify investing in many of the green projects the country will need to deliver on its net zero commitments. With a general election next year it’s hard to see the government taking steps to strengthen the carbon price in the short run, meaning there is the risk the UK gets left behind.
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