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Economic Slowdown Predicted By Biden's Subdued Response To OPEC+ Cuts

April 14, 2023
minute read

President Joe Biden responded to OPEC+'s unexpected decision earlier this month to cut oil production with a shrug when it was announced that oil production would be cut. Unlike his statement in October that Saudi Arabia would experience "consequences" when it lowered output, Biden's response was a lot different than his declaration that there would be consequences for Saudi Arabia.

There is a tepid response to the production cuts, which reflects, in part, the Biden administration's perception that the cuts won't have as big an impact on the slowing U.S. and global economies as last year's cuts, which came during a period when oil supplies were still tight and raising concerns of a potential recession. In the opinion of the U.S. officials, this is the beginning of a more predictable and less volatile phase for the United States, as it is the largest consumer of oil in the world.

An unexpected fast-paced COVID recovery last year, coupled with a surge in demand, sparked a spike in inflation to the highest levels in 40 years.

According to administration officials, gasoline prices have stabilised at a lower level, U.S. oil production is closing in on records, and even though the job market is still strong, it is showing signs of cooling down with inflation, certain officials say.

The White House, which had predicted that the US economy was reaching a new plateau in January, slashed its estimates for GDP growth in 2023 to just 0.4% in March, putting the economy in danger of falling into another recession. The decline from last August's 1.8% is in line with the forecasts of outside economists who have been predicting a recession for months now and have been flashing warning signs like the possibility of a recession for the White House as well.

A possible US recession offset concerns of tight supply on Thursday as oil prices slipped as the prospect of a possible recession offset concerns of a tight supply shortage. Minutes released on Wednesday from the Federal Reserve's last policy meeting illustrated that the industry is suffering under stress from the banking system.

A number of U.S. officials and analysts interviewed by me pointed out that Biden's efforts to tame nagging inflation and dampen gasoline prices in his home country could still be complicated by the OPEC move, regardless of the slowing economy. Forecasters are warning that the recent U.S. banking crisis has added to the uncertainty surrounding global and U.S. economic forecasts as well.

Several Goldman Sachs Group analysts have raised their Brent crude price target by $5 for this year to $95 per barrel, their year-end price target for the global benchmark. Analysts estimate that if the price reaches $100, gasoline prices will rise by at least 50 cents a gallon, pushing them above the crucial $4 mark.

With energy prices at record highs, the U.S. Federal Reserve has been forced into raising interest rates as a result of inflationary pressures, which has stoked fears of a recession and prompted more rate hikes.

Victor Ponsford of Rystad Energy noted that in a research note that he wrote, "The predicted increase in oil prices in the coming period coupled with the voluntary cuts could spark global inflation, leading global central banks to put forward more hawkish stances on interest rate hikes, both domestically and internationally.

President Joe Biden
President Joe Biden

GAS PRICES: FEWER TOOLS

Upon entering the office, Biden vowed to wean the country off fossil fuels, but the invasion of Ukraine interfered with his plans. When the government saw gasoline prices surge to over $5 per gallon last year, they turned to the oil industry to boost production of crude oil and refined products such as gasoline and diesel by increasing production of oil and refined products.

As a way to help with the price of summer gasoline, Biden lifted smog-reducing rules on summer gasoline, significantly reduced the nation's strategic oil reserves, and encouraged the oil industry to make more of its products. A year ago, gas prices were $4.12 per gallon, and now they are hovering around $3.60 a gallon.

The United States has been forced to draw 180 million barrels from its strategic reserves over the past few weeks, bringing inventories down to levels that hadn't been seen since 1984, which leaves Biden with fewer tools to combat high oil prices this summer. The oil executives told Trade Algo last summer that discussions regarding expanding refinery capacity or limiting fuel exports have ceased since then.

A U.S. refinery executive said he was expecting a call from the administration when he saw the headlines about OPEC's announcement, but he never received one. Should prices rise again, he said, the industry can expect to once again become the boogeyman of an OPEC meeting-style rally.

There are indications that there is a possibility for price hikes ahead of the busy summer driving season, which is just around the corner.

Fuel inventories in the United States are lower than last year, which is a potential indicator of future market conditions. This is partly the result of refinery maintenance which was delayed as refiners chased higher margins last year, which led refineries to delay maintenance this year. Last year, as a means of restricting exports, the Biden administration floated the idea of imposing minimum fuel storage requirements.

According to the latest data provided by the National Petroleum Data Center, the total inventories of gasoline in the United States now fall to 222.57 million barrels, about 7% lower than they were last year. Across the dense region of the Northeast, gasoline inventories are down 7.6% compared to last year.

In her interview with Groundwork Collaborative, a liberal nonprofit focused on economic issues and led by Lindsay Owens, it is evident that oil companies have the means, the motivation and the opportunity to raise prices as a result of OPEC+'s output cut, just as they did following the invasion of Ukraine by Russian troops last summer.

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