There’s not much that unites Democrats and Republicans in Washington, D.C. But a foreign attack on American energy prices might do it.
The recent Saudi-led decision by the OPEC+ oil cartel to cut production promptly pushed prices up by about $5 per barrel, to about $81 in the United States. Some forecasters see prices rising by another 10% or 15%, which would quickly boost the cost of gasoline and other types of carbon energy.
But the United States isn’t nearly as captive to Middle East petrostates as it used to be, and the OPEC move could trigger unified action in Washington that could ultimately work in President Biden’s favor. For one thing, it might open a pathway to resolving the debt-ceiling impasse that could soon reach (man-made) crisis proportions. It could also create momentum for reforms meant to safeguard the carbon energy we’re largely dependent on today, as well as the green energy we’ll need much more of in the future.
“We expect a wider window of possible actions out of Washington to increase domestic energy production,” Raymond James analysts wrote in response to the April 2 OPEC production cut announcement. “The pace of negotiations around a debt limit deal is due to accelerate around mid-April, and the latest OPEC news will position energy policy as a central aspect of talks as lawmakers explore a bipartisan compromise solution.”
OPEC says it will cut oil production by about 1.7 million barrels per day, which is a little less than 2% of global production. That might not seem like a lot, but energy markets are pretty tight and marginal changes in supply can have pronounced effects on prices.
OPEC leader Saudi Arabia indicated a desire to prop up prices, which helps Russia in its protracted war against Ukraine. Oil exports are Russia’s largest source of revenue, which it desperately needs to carry on a disastrous war that is grinding up troops and equipment and wrecking Russia’s economy. So while the Saudis might be safeguarding their own economic interests, helping Russia, whether deliberately or inadvertently, casts a sinister geopolitical pall over the move.
The White House complained, and for good reason. In addition to helping Russia, a pop in energy prices could interrupt the gradual downdraft in inflation since it peaked last June. Inflation has dropped from 9% to 6%, allowing the Federal Reserve to ease the pace of interest rate hikes. Some economists think the Fed should stop hiking altogether, given recent turmoil among some regional banks suffering losses caused in part by the sharp rise in rates. A fresh bout of energy-driven inflation might mean the Fed has to keep hiking instead of easing off for a while.
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But Washington has some cards to play, if it could only stop its customary infighting for a spell. The Republican-controlled House of Representatives recently passed an energy bill that would streamline permitting for pipelines and other types of infrastructure and enact other measures to safeguard fossil-fuel supplies. The bill includes some elements Democrats will never vote for, such as the repeal of some parts of the Dems’ own green-energy bill from last year. The Democratically controlled Senate won’t pass the House bill, as is.
But there is bipartisan interest in easing the difficulty getting new energy projects approved—and that includes new infrastructure needed to move green energy around. Permitting snags have become a huge barrier to energy development. They explain why copious natural gas from the Appalachian basin can’t make it to the East Coast for export or to homes in New England that are heated instead by dirtier oil. The same types of snarls are already hindering green energy development, such as the need to build new high-voltage transmission lines from where the green energy is to where it’s needed.
Biden has trash-talked fossil fuels, in solidarity with progressive climate warriors, and one of his first acts as president was canceling the planned Keystone XL oil pipeline from Canada to the U.S. Gulf Coast. But Biden has become more pragmatic of late, approving a controversial drilling project in Alaska and allowing new drilling in the Gulf of Mexico. This seems to be tacit acknowledgement that the United States is going to need ample supplies of oil and natural gas for decades, and the best source isn’t Saudi Arabia or Russia; it’s America’s own deposits.
This could play into the debt-ceiling showdown because Democrats and Republicans need some kind of compromise to end the standoff and let the Treasury borrow what it needs to pay the nation’s bills. Republicans who won control of the House last year are demanding unspecified spending cuts as a condition of raising the debt ceiling and avoiding the financial chaos that would accompany a U.S. default. Biden and his fellow Democrats say raise the debt ceiling and negotiate on budgeting issues separately. The drop-dead deadline, when Treasury will run short of money, is most likely around mid-summer.
Energy could be the way to a compromise that resolves the problem. “New domestic energy provisions are becoming more closely linked to negotiations on a debt ceiling deal,” Raymond James says. “We expect energy policies will become more central to these discussions going forward in light of the OPEC moves as energy security concerns are once again elevated.”
U.S. energy production has already picked up during the last 12 months, largely because higher prices make it more economically viable. U.S. crude production plunged during the COVID pandemic in 2020, but has since bounced back and would probably be higher still if not for supply-chain snafus and worker shortages. The fracking revolution has made the United States an energy powerhouse. In 2019, the United States became a net energy exporter for the first time since the 1950s, a status it has held every year since.
Biden has been loath to unleash U.S. oil and gas production and risk the ire of environmentalists. But the run-up in oil and gasoline prices last year coincided with a drop in Biden’s approval rating and probably contributed to the Democrats’ loss of the House in the midterm elections. Russia’s effort to weaponize energy and use high prices to finance a war the United States opposes makes domestic energy production a key security issue as well. That could make Biden increasingly comfortable aligning with fossil fuels, when it’s an alliance of convenience.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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