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Policy

Joe Biden’s Energy Crisis — and Implications for Foreign Policy

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Oil prices are a perennial political concern for US presidents, but US President Joe Biden is facing a uniquely complex energy crisis. After the pandemic-induced collapse in oil and products output, resurgent demand and the fallout of Russia’s invasion have sent prices surging. Calls for new supplies face industry and investor concern over the long-term payoff of financing new oil and gas supplies amid the energy transition. The Biden administration is pulling different domestic and foreign policy levers to try and find relief, but their impact only goes so far. Meanwhile, energy prices themselves are a factor in how far US sanctions can go in undercutting Russian financial power.

  • At home, Biden has the bully pulpit, but his policy tools are limited.

Prices at the pump have risen dramatically — 48% in the year through May, according to government data — driving inflation higher. Natural gas prices are compounding the economic pain, and are expected to rise further this year.

This week, executives from refining and oil companies met with US Energy Secretary Jennifer Granholm, following a public letter from Biden upbraiding them for “well-above normal” profits. Momentum for a windfall tax on the industry is also building among some Democrats in Congress, which the Biden administration has stopped short of endorsing.

But it’s not as though Biden can simply order refiners to increase output. For one thing, they’re already running at 94% capacity. For another, shuttered facilities are either being converted into renewable diesel plants, or would face expensive and lengthy restarts that aren’t certain to pay off. Curbing products exports, which some administration officials are reportedly considering in the bid to tame prices, would likely backfire. The meeting will focus on whether the US government can do anything to facilitate increased capacity, a senior administration official said.

To deal with the pain at the pump in the meantime, Biden is pushing for a three-month gas tax holiday. But Biden can’t act alone — he needs lawmakers on board to offer a reprieve. The White House’s most impactful executive actions were taken earlier, with the administration tapping the Strategic Petroleum Reserve at a rate of about 1 million barrels per day, and authorizing the sale of gasoline with a higher ethanol content over the summer.

  • The president has more flexibility when it comes to setting foreign policy with other producers, but shifts here can only go so far as well.

The most notable change when it comes to the current administration’s energy-related foreign policy is the decision for Biden to travel to Saudi Arabia for high-level meetings next month, amid a broader rapprochement between the two countries. That announcement came alongside the Opec-plus decision to augment planned output increases in July and August.

There are incremental changes when it comes to Venezuela as well, with the administration allowing European firms Repsol and Eni to take payment for investments in the country in the form of crude. That move could add some barrels to the market, too. Venezuelan exports averaged about 280,000 b/d lower after the US in 2020 began threatening economic retaliation against firms for taking payment in kind.

But the largest diplomatic source of additional barrels — those from Iran — might not come on line as attempts to revive the 2015 nuclear deal appear increasingly precarious.

  • Energy prices are serving as a limit to how aggressive the administration’s sanctions policy toward Russia can get.

At the outset, the administration tried to limit the extent to which sanctions would cause economic pain, focusing on financial sector measures that blocked Russia's access to cash in part
to reduce the risk Russia would halt energy exports. That rapidly changed, with the US enacting an embargo on Russian oil imports within two weeks of the invasion and Europe, more heavily dependent on Russian supply, deciding last month to put forward its own ban.

Energy price and supply considerations may serve to limit the sanctions, but so far are not prompting a dramatic shift in Washington’s policy when it comes to how it supports Ukraine against Russia's war. A tough stance toward an invading Russia remains a rare bipartisan issue in the US, and Washington is continuing to defensively supply Ukraine. Ukrainian President Volodymyr Zelensky’s stance that Russia's position should be pushed back to where it was before the Feb. 24 invasion is not particularly controversial.

Moreover, Biden frames the stance toward Moscow in existential terms, acknowledging Wednesday that sanctions are causing pain at home. Without energy sanctions, “the price of gas wouldn’t have spiked the way it has,” he said. “I believe that would have been wrong. I believed then and I believe now: The free world has no choice … if we did stand by, Putin wouldn’t have stopped. Putin would have kept going.” That hardly points to a relaxation of Washington's current positioning toward Russia, in spite of the economic pain.

"Historically for the US, significant national security concerns have always trumped economic concerns," says David Goldwyn, a former State Department energy envoy who now runs a consultancy. “The US is going to continue to find ways to support Ukraine in its defense and to find ways to punish the Russians for their invasion. The question is can they go any farther [on energy sanctions] given where prices are right now, or have they reached a limit?” he adds. “And I think they are reaching a limit, and that is why they have to be much more creative.”

  • Differences in the approach to energy sanctions between Brussels and Washington are emerging.

Brussels is pushing forward on its embargo of most Russian oil exports, buttressed by shipping and insurance sanctions that take effect in parallel. But concerned about the price impact, US officials are increasingly making the case for an oil price cap in public. “We are talking about price caps or a price exception that would enhance and strengthen recent and proposed energy restrictions by Europe, the United States, the UK and others,” US Treasury Secretary Janet Yellen said this week. The objective is to “push down the price of Russian oil and depress Putin’s revenues, while allowing more oil supply to reach the global market,” she reportedly said.

A price cap has been discussed for months and is favored by the US and Italy publicly. But European views on that are mixed, with some concerned over how such a move — which likely requires complex integration with other sanctions — would be executed.

Topics:
Policy and Regulation, Sanctions, Ukraine Crisis
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