April 3, 2024 - 11:50am
The price of fuel at American filling stations, which had fallen sharply from the peak set in 2022 after Russia invaded Ukraine, is once more on the rise. Given the talismanic significance of gas in the country’s politics — many Americans treat it as a virtual proxy for overall inflation — Joe Biden has a new headache to contend with as he runs for re-election.
His options for keeping a lid on prices are limited. He already depleted the strategic petroleum reserve in 2022 to help bring prices down. As for boosting supply, there’s already been a ramp-up of US production, but further expansions may be limited. Though flush with cash, the oil majors are actually reducing some capacity as the global economy moves towards decarbonisation. With long-term supply expected to rise more slowly than in the past, any leaps in demand are bound to drive up prices. So, as gas prices approach $4 a gallon, Biden has been reduced to telling the Ukrainians to stop bombing Russian oil refineries, something that serves their war efforts but does little for his electoral prospects.
At the root of all this is a growing economy which, itself fuelled by continuing rises in asset prices, is driving demand upwards. Bubbles, from dotcom to housing to crypto to AI, all supercharge demand for energy. In the case of the tech bubbles, the sheer cost of running the servers behind the mobile devices, crypto-mining computers and new AI applications is driving up electricity consumption.
Although prices came down after the Fed began raising interest rates in 2022, once its chairman Jerome Powell gave the bulls license to run late last year by saying interest rates would soon fall, the newest inflation began. Nor has it been confined to energy and asset prices. Commodities have been on a tear as well: the S&P Commodity Index has risen nearly 10% since the start of the year, which will further feed into the inflation pipeline.
Although an uptick in inflation would be a problem for Biden, it could be an even bigger one for Powell. One can be forgiven for assuming the Fed has in recent years come to see enriching asset owners — or, most recently, underwriting government borrowing — as part of its mandate. But, officially, it’s required to help deliver full employment and low inflation — and if it were to have but one job, it would be the latter.
Yet, despite persistent signs of inflation’s stubbornness, Powell remains zen-like. One has to wonder why. The chorus of criticism of his “all shall be well” message is rising, with former treasury secretary Larry Summers speaking for many when he recently said Powell’s “itchy fingers” make little sense in a growing economy with full employment and sticky inflation. So Powell has rather staked his reputation on being right about his call. If he’s wrong, history will be hard on him.
His contemporaries may be even harder. In the run-up to the 2020 election, then-President Donald Trump took to criticising Powell for responding too slowly to the pandemic. As we head towards November, it’s possible the episode will repeat itself on the other side of the political aisle. Should the inflation figures in the next few months fail to deliver the cooling Powell says is coming, asset markets may revolt and talk of interest-rate cuts could be put on ice.
The Biden camp’s get-out-of-jail card might then be to say the administration delivered the strongest economy ever, only to have Powell’s Fed nix it. Of course, that tactic may prove no more effective for Biden than it did for Trump four years ago.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Subscribe“The Biden camp’s get-out-of-jail card might then be to say the administration delivered the strongest economy ever … “
Except that it is a house built on sand, or on a shifting pile of quite insurmountable debt.
Biden, in 3 years has run up greater debt than any other President in history.
Trump is responsible for a portion of it – but at least had Covid and the closing down of the whole US economy as an excuse.
US National Debt currently stands at over $34 TRILLION – simply servicing that debt costs considerably more each year than is spent on defence. By 2030 servicing that debt pile will cost 50c of every dollar raised in taxes. In 10 years, servicing that debt will cost more than the total tax take that’s currently raised.
It is definitionally unsustainable, yet Biden continues to spend like a divorcee going out for one last spree on their soon-to-be-ex’s credit card.
Anyone who looks at that and imagines the economy has been well-managed is a fool.
As to Gas prices – Joe’s Green Agenda completely undermined America’s energy security and was the reason for the drastic hike in US gas prices – one of the biggest contributory factors for the inflation spiral. Under Trump the US was entirely energy self-sufficient and receiving huge revenues from selling the excess.
Joe’s Green Agenda completely undermined America’s energy security and was the reason for the drastic hike in US gas prices
Dems and Biden are classical commies
Undermining our energy security was a goal, as is the non-existent border, the runaway crime, and a lot of other things that normal people see as bugs.
I stopped reading at that having just put my palm through my face.
Ooh, painful.
Never mind the border, the targeting of political opponents and random citizens who don’t agree with the administration, inflation as a whole, or the war machine. Gas prices will be his undoing. If Biden is re-elected, legitimately or not, the nation deserves what follows.
Why no mention of the huge impact on electrical ebnergy demands made by the switch to electric vehicles? The power required by the AI servers etc. is small beer compared with the projected demands on the US grid for charging electric cars, and for which the current grid is greatly underpowered.
The Biden administration has also set EV mandates for the trucking industry starting in 2027. It doesn’t get as much attention, but the results will be economic catastrophe. EV trucks are about 30% more expensive, they haul less freight because the batteries are so heavy and they go much shorter distances. Prices for everything will shoot through the roof. And the impact on the grid will be equally disastrous.
Why no mention of the cheapest energy on earth? Natural gas, known as “natty” in the States to differentiate it from car fuel, today costs just 0.47p per kWh on the wholesale market. Cheap natty means cheap leccy, as well as cheap feed stock for many industrial purposes. All of which helps the cozzie livs by more than cheap oil.
And according to Michael Shellenberger among others, its use is responsible for the reduction of CO2 production in the last 2 decades. Nordstream anyone?
Economics is a funny sort of thing. Economics necessarily focuses on policy, rather than discovery of fundamentals. So it’s not a science. It’s more like engineering, where fundamental principles are applied to accomplish something in the real world. But there are no such principles to apply.
So economics is to large degree a pseudoscience that uses the trappings of science, like dense mathematics, but only for show. As Nassim Taleb said, “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.”
That means Jerome Powell and his ilk are really just politicians. The Federal Reserve can’t control the adaptive complex system that is our economy any more than Joe Biden and his executive branch, and they can’t do it at all. There are no knobs they can turn that will produce a desired result.
The best we can do is to do what we should have done during the pandemic–do little from the top down and focus on aiding bottom-up solutions. Let the market work. Have a market economy rather than a control economy. In politics, though, that’s hard to do.