One of the many ironies of the Just Stop Oil movement is that, for the past year, their protests have been positively correlated with the price of oil. If you were tempted to indulge in a little schadenfreude, you might think that the infinitely annoying movement is putting money in the pockets of the world’s biggest fossil fuel producers.
The reality, however, is much grimmer. What has landed us here is a combination of three of the Biden administration’s signature policies — its aggressive support for ESG, its proxy war against Russia, and its sabre-rattling approach to China. The result is that the US is now in an energy chokehold right when the country needs as many options as possible.
After nearly two years of biting inflation, developed nations are starting to believe that the beast of relentlessly rising prices has been tamed. But as oil prices again barrel towards $100 — with one industry CEO predicting it could reach a devastating $150 — that could be about to change. Earlier this month, Saudi Arabia announced that it would extend a July production cut of one million barrels a day through the end of 2023. On its own, this news is bad enough. What makes it worse is that the Saudis are now apparently coordinating energy policy with America’s enemy number one, Russia, which has cut 300,000 barrels a day for the same period.
For Joe Biden, the timing couldn’t be worse. He is polling neck and neck with Donald Trump, and is facing an onslaught of challenges from House Republicans related to the business dealings of his son, Hunter. But from a policy point of view, the news is far more serious. The causes of surging oil prices trace back to structural changes Biden made to the economy, combined with now intractable foreign policy commitments, which, this late in the game, cannot be easily undone.
Those decisions go back to Biden’s very first day in office. On 20 January 2021, the new president signed an executive order revoking a permit required for the Keystone XL, an extension of an existing pipeline that would have transported an extra 830,000 barrels per day from Canadian oil fields to refineries in Texas. The move had its roots in Biden’s campaign strategy, which positioned Biden as a “climate change pioneer”. According to the text of Biden’s executive order: “The United States and the world face a climate crisis. That crisis must be met with action on a scale and at a speed commensurate with the need to avoid setting the world on a dangerous, potentially catastrophic, climate trajectory.” The Keystone XL pipeline “disserves” American interests, Biden said.
The media bolstered the decision, arguing that, with oil then trading at around $60 per barrel, the pipeline was not economically viable. But it would take just five months for oil to rise 50% to around $80, and a little more than a year for the price of oil to double to about $120 per barrel, pushing inflation up significantly. More importantly, Biden’s executive order and the decision by developers to abandon the pipeline signalled a shift in the policy winds on US energy and oil exploration. With the price of oil rising and the government taking an aggressive ESG-minded position on domestic exploration and development, oil producers went from investing in technologies such as new shale extraction methods to a new mode of profit-taking, where innovation is stopped in favour of extracting the profit from previous years’ investments.
When Biden signed the order, there was little or no inflation on the horizon. By the spring of that year, when inflation jumped to 4% and kept rising — with oil prices tracking it, resulting in a 50% jump in prices at the pump — the administration seemed to grow desperate. In November 2021, Biden began tapping the Strategic Petroleum Reserve, a reservoir of oil meant to weather the country through war. This began with an initial release of 50 million barrels (out of a total capacity of 714 million), in the hope that the move would lower fuel prices and curb inflation. It didn’t. Over the course of the subsequent year, Biden would release another 180 million barrels of oil from the SPR, leaving the SPR at its lowest level in four decades.
If the White House appeared desperate in the winter of 2021, the following spring would bring about a series of events that would make the most powerful government in the world look like a third-rate power. In March last year, hoping to secure a promise by Gulf producers to increase production, Biden reached out to Mohammed Bin Salman, the de facto ruler of Saudi Arabia, and the UAE’s Sheikh Mohammed bin Zayed al Nahyan. Astonishingly, both men declined to take the call.
While Opec+ lives up to its role as the world’s most powerful oil cartel, there generally has been enough wiggle room for American presidents to influence Saudi production. This is partly because, for the past three decades, Saudi Arabia has been more of a reformed American ally than a leverage-pushing adversary. The Saudis lowered prices in response to a lobbying effort by President George W. Bush in 2004 — a success quickly spun by the anti-Bush media as a Saudi attempt to interfere in US elections and “buy” the president — and again in 2008. Most importantly, whether or not they complied, and in some cases they didn’t, they were willing to hear the American president out.
The reasons for Biden’s fall from the Gulf’s graces can be traced back to his role in leading aspects of foreign policy in the Obama White House. Specifically, Obama relied on Biden to advance and pass the nuclear deal with Iran which, in exchange for the removal of US sanctions, would see Iran slowing development of its nuclear programme and open it to international inspections. The Saudis, along with other Gulf allies, considered the deal a betrayal that endangered their national security.
After Trump scuppered the deal, Biden campaigned on reinstating it. In the context of Biden’s other Gulf-related campaign pledge — to turn Saudi Arabia into a “pariah” — and the barrages of missiles falling on Saudi Arabia from Iran-backed rebels in Yemen (which Trump also permitted without any significant action), the move seemed to double down on Obama-era fecklessness, leading to Saudi Arabia and UAE’s decision to not only refuse to increase oil production but to not pick up the phone.
By last October, Biden’s administration had no choice but to U-turn as it came out calling for an increase in US oil production. “You should be using these record-breaking profits to increase production and refining,” Biden said at an October 2022 press conference. That, however, was no longer possible. The stock of cheap, easy-to-access shale had been pulled out of the ground, exhausting the country’s ability to continue ramping up production. And the Keystone pipeline extension that would have brought nearly one million barrels a day from Canada to Texas had been cancelled — by Biden.
While the administration was attempting to retrofit its energy policy, it was formulating the most aggressive economic response to a foreign war in memory. In April 2022, two months after Russia invaded Ukraine, the administration unleashed what it accurately characterised as “unprecedented sanctions” against Russia. Biden claimed that, already, the sanctions were achieving the administration’s intended effect of “devastating” Russia’s economy.
Biden had resisted taking the most drastic economic step of banning Russian banks from Swift, a key component in the international banking system that allows banks in different countries to transact with each other. Biden cited oil prices as one reason, since without the ability to purchase Russian oil in dollars via Swift, Western allies would effectively be removing the country’s oil production from the global pool.
Yet while the US media reported on 25 February 2022 that Biden had rebuffed calls, including from some Democrats, for the Swift ban, the the very next day, the White House and its European allies announced that a number of Russian banks would indeed be blocked from it. A White House official told CNN that the move, which Biden had nixed just 48 hours earlier at a press conference, was an “unprecedented act of global sanctions coordination”.
Predictably, within days, the price of oil had risen by 25%. It would continue to rise, eventually hitting a decade-high at $120 per barrel. But beyond oil prices, the sanctions culminating in the Swift ban presented another risk, this one strategic. On a G7 call prior to the decision, some allies of the economic block voiced the fear that, as the Financial Times reported, “removing Russia from Swift would accelerate efforts by it and China to create rival payment systems that did not use the US dollar”.
It took only a few weeks for China to capitalise on exactly this vulnerability. In March, China and Saudi Arabia began talks concerning settling oil transactions between the two countries in renminbi. By the end of the year, China turned this into an international strategy as President Xi Jinping “opened the door to trading crude oil and natural gas” in renminbi, as S&P Global reported in a December market insight report.
At the time, there was intense scepticism regarding whether China would be able to pull this off in a meaningful fashion — and for good reason. China’s capital controls, its fixed currency and a relatively shallow and illiquid capital market, relative to the dollar, have made investors wary of parking their capital in renminbi-denominated accounts.
But that was before the US leveraged the dollar as an economic weapon against a country it was not even at war with. Today, the picture is changing. In March, China completed its first liquefied natural gas trade in yuan, in this case with the UAE. The yuan is now the dominant currency for China’s own cross-border payments, a first in the country’s modern history. Brazil and Argentina announced this year they would allow renminbi payments in transactions with China. Perhaps most significantly of all, over the past year, China has paid for almost all its Russian oil in its own currency.
In case China did not have enough reason to attempt a restructuring of global trade, Biden, in the midst of Chinese efforts to shift international payments to the yuan, publicly stated that the US would respond with military force if China were to invade Taiwan. This was a break with decades of US policy, and while the administration walked back the claims the next day, it would not take a leap of imagination on the part of Chinese officials to wonder how the US would leverage the country’s role as the backbone of global trade to alter the balance of power.
This is not evidence of the kind of de-dollarisation that China and other nations have sought for decades. But it does signal a new approach to strategic relations between countries such as China and Russia — and one that has come at the severe cost of America’s ability to influence oil prices. China and Russia are now not just allies, but economically bound to each other. Russia is no longer isolated but at the centre of a new axis of power. Worst of all, even the most extreme sanctions and complete weaponisation of the dollar have proved, if not ineffectual, then at least unable to achieve their strategic aims.
And, of course, winter is coming. With oil prices soaring, the US unable to meaningfully increase production, and Ukraine mired in a faltering counter-offensive, it seems that Biden’s most virtue-signalling policies will have the effect of simultaneously limiting the country’s options on trade, energy and foreign policy. The smart move would be to tap out by walking back one (if not all) of these policies. But with the US careening into an election year and Democrats alarmed by a slate of recent polls, for Biden failure may be the only option.