Drivers relieved by the recent dip in gas prices may be in for a shock when the summer winds down, with energy analysts warning a fresh round of price surges could emerge as soon as October.
The price concerns are tied to the timeline for stricter sanctions on Russia that will further choke the global oil supply. J.P. Morgan has warned that in a worst-case scenario — in which Russia retaliates by shutting down its supply altogether — the price of oil could jump to $380 per barrel, more than triple what it is today.
“If you were to ask me where could oil prices go, I would say pick a number,” said Michael Tran, managing director for global energy strategy at RBC Capital, who says that while the outlook is murky, several indicators point to a price rebound. “This is the tightest oil market we have seen in a generation or more.”
The worrisome prognosis for consumers, coming as the nation is already struggling with historic levels of inflation, has the Biden administration grasping for interventions that could bring relief.
Yet U.S. political leaders are confronting the reality that even the most aggressive domestic political and policy measures often have scant impact over prices in a global oil market guided by forces out of their control.
Economists across the ideological spectrum warn that the measures the White House is promoting — allowing Russian oil into the global market at reduced prices, taxing oil company “windfall” profits, cutting the federal gas tax — could ultimately aggravate the energy crunch in the United States, rather than ease it.
“When things like this happen, we tend to focus on short-term fixes,” said Christopher Knittel, a professor of applied economics at MIT’s Sloan School of Management. “But, unfortunately, gas prices are not really something you can fix in the short term.”
The White House worries come at a moment consumers see gas prices as one of the few things in the economy trending in the right direction. The cost of a gallon has fallen from more than $5 a month ago to a national average of $4.60, according to AAA. Oil is trading for less than the price it did before Russia invaded Ukraine.
Concerns about a potential recession dampening demand have played big in the price drop.
Another key reason prices have fallen lately is that initial sanctions against Russia are far less effective than planned. The country’s oil is making its way into world markets despite the restrictions, flowing to places like China and India. It means the global supply is not as tight as forecast when the United States and Europe initially joined forces to punish Russia over its invasion.
That could change with the next round of planned sanctions. A full ban of cargo shipments of Russian oil to Europe is set to take hold on Dec. 5, with the market expected to factor in its impact much sooner.
The sanctions would be accompanied by a ban on insuring ships that carry Russian oil, preventing them from accessing international waterways. The insurance policies for most of the world’s oil cargo ships are written out of Europe.
As a result, Russia would confront steep new obstacles to moving its oil anywhere. The sanctions are intended to double the amount of Russian oil pulled from the market since the war began.
An internal U.S. Treasury analysis projects that could send the price of oil soaring 50 percent above where it is today. Some market analysts are warning of potentially steeper climbs, which could push gas prices beyond $6 a gallon.
The warnings all come with caveats. In the event of more bad economic news signaling a prolonged recession, for example, prices would likely stabilize. Less gasoline is used when the economy is in retreat.
A fresh round of coronavirus lockdowns in large Chinese cities would similarly weaken global demand and ease upward pressure on prices.
Yet the imbalance between oil and gasoline supply and demand is so pronounced right now that prices could swing back up months before new sanctions take effect, in the thick of the midterm campaign, said Kevin Book, managing director at ClearView Energy Partners, a research firm.
“People procuring oil make their bids early,” Book said. “It takes four to six weeks for it to be delivered. If they think a shortage is coming, they plan for it.”
The political and economic dilemma points to the challenges of using energy as a foreign policy cudgel.
“Energy sanctions were never the silver bullet people hoped,” said Edward Chow, an energy security scholar at the Center for Strategic and International Studies who worked in the industry for decades. “Politicians are telling voters that we can do this and people don’t have to sacrifice. It only works if you are willing to make sacrifices and actually cut demand.”
American lawmakers have shown little appetite for the conservation measures that the International Energy Agency is urging be implemented as part of the effort to assist Ukraine. The 10-point plan the agency unveiled months ago — aimed at cutting oil demand by the equivalent of all the cars in China — calls on economically advanced nations to lower highway speed limits, make cities car-free one day a week and implement vehicle sharing.
The plans are seen as political losers in the United States, echoing the unpopular conservation initiatives that doomed the Carter administration when it confronted an energy crisis in the 1970s.
The White House is instead lobbying world leaders to agree on a novel price cap that would allow Russia to continue to sell its oil after Dec. 5 but at a heavily reduced price. The idea is to avoid a global shortage while also cutting the oil profits Russia uses to fund its war effort.
Although the plan has some prominent champions, energy experts are deeply skeptical. They warn that Russia has various levers it could pull to throw the market into chaos, including cutting off all shipments abroad, plunging countries like India deeper into crisis.
The J.P. Morgan warning, that oil prices could more than triple in a worst-case scenario, is premised on its finding that Russia’s economy can sustain a cut in oil production of millions of barrels per day.
“The problem is Russia gets a vote, too,” Book said. “Just because something has never been done before doesn’t necessarily mean it can’t be done. But sometimes there is a reason it has never been done.”
Chow called the effort “puzzling.” “I have not met a single person who has worked in the energy industry who believes this can work,” he said.
Other measures the Biden administration is pursuing would take aim at oil companies, heavily taxing the “windfall” profits they are earning from high prices. Leading Democrats argue that such actions are overdue.
“In my view, quite a lot of intervention is appropriate in this market,” said Sen. Sheldon Whitehouse (D-R.I.). “You are not as government interfering in the marketplace. You are counteracting the anti-competitive effects of a cartel. Even if you are a free marketeer, it is fair game to knock down anti-competitive, cartel-driven practices.”
It is a potent argument and one that resonates with voters, who blame oil companies for high prices. But the United States has a history dating back to the Nixon administration of trying to use regulations to control prices at the pump. Knittel chronicled in a detailed academic paper how those efforts backfired, leading to oil shortages and long lines at gas stations in the 1970s.
The countries right now tinkering with aggressive market interventions are facing the same dilemma all over again. Before Russia invaded Ukraine, the Hungarian government imposed price controls capping the cost of gas at $4.80 per gallon. Shortages followed. Drivers there are now prohibited from purchasing more than 13 gallons of fuel per day.
“Gas prices are set based on a world oil market, and it is tough for any one country to have an appreciable impact on that market in a short time period,” Knittel said. “The way to stop this is a rallying call for federal legislation that reduces demand for oil over the long term. So next time prices go up like this, it won’t hit us as hard.”