President Biden has competing priorities, and they complicate his efforts to avoid a Russian invasion of Ukraine while keeping energy inflation under control. Its current policy is unlikely to keep the price of oil and gas low, absent a last-minute attempt to ease tensions on the Russian-Ukrainian border.
An invasion by Russia is “becoming a basic assumption in Western capitals,” RBC Capital Markets analyst Helima Croft wrote in a note sent Wednesday evening.
One of the reasons Biden has limited options is that the United States is no longer the primary driver of oil prices, as it has been for much of the past decade.
An increase in oil production in the United States since 2008 and a decline in oil imports have given the United States greater bargaining power with foreign countries over the past decade. Oil imports have steadily declined to about eight million barrels a day last year from nearly 14 million a day in 2005. And more of the oil and refined products Americans use come from Canada, including political relations with the United States are relatively straightforward. In 2008, OPEC accounted for nearly half of US oil imports. But its share fell to 11% in 2020, with Canada accounting for 52%.
Energy independence has given the United States more political power, allowing officials to take more aggressive positions in negotiations with oil-producing countries. These countries have less leverage if the United States can meet their own energy needs. But several factors — some within Biden’s control and some not — have affected that bargaining power.
Energy companies were already cutting output growth before the pandemic and are now slowly restoring it, largely due to pressure from investors, not government. Banks and investors were tired of funding oil drilling projects that ended up losing money, so most oil companies pledged to drill only their best wells and return more money to investors. U.S. oil production has fallen to less than 12 million barrels a day from highs of around 13 million barrels at the start of 2020.
But Biden’s rhetoric around the energy industry and some of his actions have also hampered the industry’s momentum. Biden took office with the goal of imposing new limits on U.S. oil and gas drilling, as part of a plan to slow climate change. His efforts have been mixed – a judge overturned his limits on oil and gas permits on federal lands, but the president succeeded in killing off Canada’s Keystone Pipeline, a move his opponents say will deter other companies from expand oil and gas infrastructure in the country.
With U.S. oil production slowly rising, the Biden administration has pleaded with OPEC to try to get those countries to increase production — an uncomfortable position for the president and one that leaves him with fewer diplomatic options in other areas.
“Faced with a clear and present threat of $100 oil, the White House will likely have to significantly sweeten the offer to the Saudis; potentially providing enhanced defense support to help counter the continued security threat posed by Houthi attacks,” Croft wrote. “At a minimum, President Biden may have to make a call to the Saudi Crown Prince.”
Biden attempted to drive down oil prices by announcing that the United States would sell oil from its Strategic Petroleum Reserve with other countries. But the effect of this decision was short-lived.
Now Biden and Europe appear to have limited options in their attempts to prevent Russia from invading Ukraine or interfering in that country’s politics. The Ukrainian Foreign Minister already critical Biden’s comments which he said implied the United States would not resist a “minor incursion” by Russia with sufficient strength.
Russia accounts for the largest share of European Union gas imports. This year there was a severe natural gas crisis that forced prices to record highs. Europe’s diplomacy may be limited by the region’s weak energy hand and the lack of readily available natural gas supplies elsewhere in the world.
This plays Moscow’s game.
“With the exception of [Russian gas pipeline] Nord Stream 2, Washington policymakers are signaling they will seek to exempt energy from the crippling financial sanctions package currently in the works,” Croft wrote. “However, there is a clear expectation that Moscow will seek to militarize energy exports in order to change the decision calculus in Western capitals.”
Write to Avi Salzman at [email protected]