If you, unlike Michigan Democratic senator Debbie Stabenow, have bought gasoline lately, there’s a good chance that you’ve seen a sticker on the gas pump with a picture of President Biden saying, “I did that.” Typically, those stickers are placed by customers, not gas station owners, and for that reason, I’m against them: they violate the owners’ property rights.
But I’m more interested here in the substantive question: did Joe Biden “do that”? My answer is “somewhat.” It wasn’t Biden alone. The Federal Reserve had some role, and the recovery from the pandemic had a large role. But the many actions Biden took before Vladimir Putin’s invasion of Ukraine and some of his actions afterwards have certainly caused the price of oil and gasoline to rise. Biden didn’t do all of “that.” Other governments have contributed to the problem, and various US government restrictions in the oil and gasoline markets have also contributed.
These are the opening two paragraphs of David R. Henderson, “What Caused Gas Prices to Jump?” Defining Ideas, June 30 2022.
Another excerpt:
One factor is Biden’s and many European governments’ response in the oil market to Vladimir Putin’s invasion of Ukraine. They have colluded to keep Russian oil off the market. The Russian government has responded by selling oil to China and India that it would have sold mainly to European consumers. This could be just a game of musical chairs, with the qualification that the number of chairs equals the number of players. In such a case, the overall effect on the world oil market would be small. But the collusive agreement seems to be holding up. Why do I say that? Because the prices that Russia is charging China and India are deeply discounted from world prices. If the collusion had broken down, the prices would be close to equal. The EU and Biden have effectively segmented the world oil market. Chinese and Indian consumers move down their demand curve at the lower prices they pay, buying more than they would have, and we other consumers are bidding over a diminished supply. So, the EU and Biden have definitely contributed to the higher price of oil since the Russian invasion.
Interestingly, Biden admits that his and the EU’s actions have increased oil prices. In a June 22, 2022, speech, Biden stated:
We cut off Russian oil into the United States, and our partners in Europe did the same, knowing that we would see higher gas prices.
Read the whole thing.
UPDATE: Thanks to Jeff Hummel for checking my paragraphs on money and inflation and to Ben Zycher for giving me the data on consumption over the year 2021. The Department of Energy’s Energy Information Administration is WAY behind and the International Energy Agency (IEA) is the one that had the data.
READER COMMENTS
Brendan Long
Jul 1 2022 at 7:35am
If people in China and India are paying Russia significantly less than other countries normally would for oil, doesn’t that mean the sanctions are having the intended effect (reducing the amount of money Russia can spend on murdering people)? It seems weird to treat this as an “admission” by Biden when that was the goal.
Vivian Darkbloom
Jul 1 2022 at 8:01am
I don’t think you are approaching this from the correct perspective. The question is not whether China and India are currently paying Russia less than the US and the EU are paying for oil. The question is what would the price Russia gets for oil be were it not for the sanctions? (Generally, that would be the global price). If, as Biden has stated, the US and the EU are paying more than would otherwise be the case, that might quite likely mean that China and India are paying Russia the same as they would without the sanctions and the differential is simply because other countries are paying more.
I don’t have an answer as to what the price of oil would be absent the sanctions (and/or the war) but I’m pretty sure that your approach to this issue is flawed.
Thomas Lee Hutcheson
Jul 1 2022 at 9:13am
Since elasticity of demand for petroleum is low, sanctions that prevent Russia from selling petroleum could reduce total supplies of petroleum depending on the elasticities of supplies from other producers. And therefore depending on how much less petroleum Russia sells as a result of the sanctions its total income could go up. To make sanctions work to actually reduce Russia’s income, the West should also work to increase the elasticity of supply, for example getting Iranian production back on stream, and in the US case, selling from the Strategic Petroleum reserve.
vince
Jul 1 2022 at 1:20pm
End sanctions on Iran in order to continue sanctions on Russia? Futility.
Vivian Darkbloom
Jul 1 2022 at 2:35pm
According to this source, global oil production is higher than it was than when the war and the sanctions started:
https://ycharts.com/indicators/world_crude_oil_production
Absent sancdtions, the market for oil, a fungible commodity, is global. Even with sanctions, if China and India are buying more from the Russians they need to purchase less from other producing countries. This also affects the global price. It’s not clear to me that the price movement is due solely to current oil needs, but rather the fear that future supplies could be affected. Other *estimates* indicate Russia’s oil production is only slightly lower than it was prior to the sanctions. If China and India continue to buy oil at lower than current global market prices, Russia’s production is likely to increase. Again, I suspect Russia is getting paid more than they were prior to when the war and the sanctions started. They have every reason to increase production in order to finance their war.
Vivian Darkbloom
Jul 1 2022 at 2:39pm
And, according to this source, China’s purchases of Russian oil have increased significantly. While the article states that Russia had to “slash prices”, I think this needs to be corrected for the baseline. The correct answer is that they have not been able to *raise* prices as much as other global producers. My guess is that the sanctions have increased the global prices of oil with the Russians also benefitting, albeit less than other producers.
https://www.reuters.com/markets/commodities/chinas-may-oil-imports-russia-soar-55-record-surpass-saudi-supply-2022-06-20/
vince
Jul 1 2022 at 5:23pm
So the question is whether the sanctions are ineffective. Russia may have lost no revenue. Less oil to the West, more oil to its neighbors India and China.
Inflated energy prices to consumers in the West. Who is profiting?
Jim Glass
Jul 2 2022 at 3:50pm
Hi Vivian. How’s Economistmom these days?
I don’t have an answer as to what the price of oil would be absent the sanctions (and/or the war) but…
Yes, myriad factors affect oil prices.
One thing nobody here has mentioned yet is how lucky the rest of the world is that China’s economy is being hammered by its property-market crisis and bizarre Covid mega-lockdowns. If China’s demand for oil was booming instead of busting…
David Henderson
Jul 1 2022 at 11:52am
Response to Brendan Long:
Yes, they are having the intended effect.
But they’re also having the effect I laid out. I don’t think it’s “weird,” when trying to explain phenomenon B, to point to cause A and then to point out that one of the perpetrators admits the point. It’s especially not weird when that perpetrator keeps saying that the higher price is due to Putin when he knows that’s not true: it’s due to his and the EU’s response to Putin.
Philo
Jul 1 2022 at 2:20pm
The higher price of oil (relative to general inflation) is due to Biden’s and the EU’s response to Putin’s actions. But they can say, “Putin *caused us* to respond thus,” which would make Putin the ur-cause, after all. This is plausible enough that you should not say, about Biden, “he knows that’s not true.”
David Henderson
Jul 1 2022 at 2:40pm
Philo, Would you generalize about that way of thinking about causes?
So, for example, someone gets pissed off at a government official because he thinks the government official violated his rights. He then assaults the official on the street. Could he say that the official caused himself to be assaulted? I would say no, but I think you would have to say yes.
Kevin Corcoran
Jul 1 2022 at 4:22pm
That depends on what you mean when you say that X “caused” Y to do Z. I can think of two different ways “caused” can be meant in this sort of statement. One could say that with “cause” meaning something like “provided the motivation”, so the statement becomes “X motivated Y to do Z.” In this case, it would be “Putin’s behavior motivated the Biden administration to impose these various sanctions.” If you mean “cause” in this weaker sense, then fair enough, but I think it would be better to use the clearer and more accurate “motivated” instead.
But “cause” can also be meant in another, stronger sense, to mean something more like “compelled.” In this sense, saying gravity causes a hammer to fall is to say gravity compels the hammer to fall. If you mean “cause” in this stronger sense, I’d have to disagree. Putin didn’t *compel* the Biden administration to respond in this particular way – the administration *could* have done otherwise. Whether or not you think the administration’s choices are on net a good idea, it would still be false to say that these choices were caused by Putin. These policies were, at best, motivated by Putin’s behavior, but ultimately caused by the Biden administration, for better or worse.
Jim Glass
Jul 2 2022 at 3:40pm
“doesn’t that mean the sanctions are having the intended effect (reducing the amount of money Russia can spend on murdering people)? “
That’s not an intended effect of the sanctions. As I’ve noted elsewhere, the intended effects were clearly stated when they were first imposed. Everybody here seems intent on ignoring them.
The decision for Europe to stop importing Russian oil came later, with the goal of ending “most” imports by the end of 2022. The intent of this is to stop the Europeans from funding Putin’s war. After all, Putin fights a war against Europe while Europe relies on Putin for energy — Putin can still blackmail Europe, Europe still funds Putin’s war against it. Not a good place!
That’s the purpose of the European oil import cutoff.
Thomas Lee Hutcheson
Jul 1 2022 at 7:39am
This is reasonable, but does not get very far into what if anything anyone should DO (and in particular UNDO) about the price of gasoline.
1.Roll back new restrictions on off shore leases? To the extent that they are based on net CO2 emissions reductions, yes.
2. Sell petroleum for the Strategic oil reserve? Yes. It would be a good speculative, money -making move.
3. Get to a deal with Iran to remove sanctions? Yes
4. Reduce the tax on gasoline? If replaced by a road user charge, yes.
However, only #3 is much affected by the price of gasoline. The others should or should not be done regardless of the price of gasoline.
J. Scott Frampton
Jul 1 2022 at 8:35am
I think the stimulus packages during the pandemic did have an effect on the inflation we have today; how much, that is a much more detailed discussion. However, I wonder what shape we would be in now if we did not do the stimulus packages… My bet is that we would be in a much greater quandary than the current inflation situ.
Thomas Lee Hutcheson
Jul 1 2022 at 9:02am
I think the various “stimulus” packages — better though of as “relief” packages — had almost nothing to do with above-target inflation. I think that is the result of the Fed’s mis-calculation of what the result of the settings of its policy instruments and messaging would be. Now I’ll grant that the relief packages were one of the things that were going on to make the Fed’s calculation difficult.
Jose Pablo
Jul 2 2022 at 10:46am
It was not the fact that there were stimulus packages. That was very likely the right policy. The problem was the size of the stimulus packages.
“Too much of a good thing” kind of problem
It was not that difficult to anticipate the “size problem”. Summers did it pretty well, loud and clear.
Scott Sumner
Jul 1 2022 at 2:58pm
I don’t understand the claim that the sanctions are having the “intended effect”. Russia oil revenues have soared to record levels, vastly enriching Putin. Is that the intended effect?
https://www.nytimes.com/2022/06/13/climate/russia-oil-gas-record-revenue.html
David Henderson
Jul 1 2022 at 5:54pm
The way to measure whether the sanctions are effective is to check the difference between the prices received by Russian producers and the world price. There’s quite a large delta. That says that the sanctions are effective.
You’re right that Russian oil revenues have soared but that’s because of higher world prices, which are due only in part of the Biden/EU collusive agreement; they are also due to increasing world demand. So without the sanctions, Russia’s oil revenue would be even higher.
Of course, I’m not arguing that this justifies sanctions. I’m against the sanctions.
Jim
Jul 2 2022 at 5:58pm
I’m against the sanctions.
What would you prefer?
David Henderson
Jul 10 2022 at 9:14am
I saw this, Jim.
I would prefer no sanctions. I want the U.S. to stay out of it.
Jim Glass
Jul 2 2022 at 12:50pm
I don’t understand the claim that the sanctions are having the “intended effect”.
Well, the Russian auto manufacturing industry is dead, d-e-a-d. That’s thousands of jobs lost. Although they are responding by bringing back that Soviet favorite, the Lada. Featuring!…
Russian civilian air transport is shrinking amid an existential crisis as Russia has no aircraft not reliant on western parts and maintenance. Aeroflot’s main maintenance hub is in Germany. Maybe even more significantly, Russia is a railroad nation and its railroads face a similar problem as its modern railroad operating and control equipment comes from the west. (Disappearing cars, planes, railroads — Russia’s 11 time zones are a lot to cross by horse cart.)
Russia oil revenues have soared to record levels, vastly enriching Putin.
And he has nothing to spend it on. Imports have collapsed. Russian imports from China are down 40%(!), from Taiwan and South Korea down 70%. “No chips for you!”
Including for your military. All Russian high-grade military equipment from the drones being shot down in Ukraine on used western tech. No more. There are reports of Russian military factories shutting down to re-gear downward to use chips made for kitchen appliances.
The Russian central bank itself says the nation faces years of “reverse industrialization”.
Isn’t “Look how much gold I have piling up in my castle!” the mercantilist fallacy?
Is that the intended effect?
It’s very strange: The intended effects of the sanctions were clearly stated by the White House and EU when they were first imposed. Why has nobody referred to them in this whole discussion wondering about their intended effect? Surely the effectiveness of the sanctions should be judged by their stated intended effect.
The intended effects of the sanctions are to degrade Russia’s ability to fight the war over the long run, reduce its ability to start another such war in the future, and deter other nations from taking such actions.
So … how are they doing?
vince
Jul 2 2022 at 1:17pm
Per the original article “So, if we’re going to blame the entities that caused inflation, they are, in order, the Federal Reserve, Donald Trump, and Joe Biden.”
But the article suggests the biggest problems were Biden’s $1.9 trillion spending and his hostility toward long-term oil production. And it then thanks Senator Manchin for stopping Biden’s Build Back Broke.
vince
Jul 2 2022 at 3:43pm
Ooops, my post shouldn’t have been attached to the Jim Glass comments. I hit reply after reading his on-target response. Effectiveness of sanctions shouldn’t be measured on the reduction in optimum profit. It should be measured on its purpose–get Russia out of Ukraine.
Jose Pablo
Jul 2 2022 at 10:39am
Putin’s Russia should be left out of the civilized world. Basically, the same way that Hitler’s Germany should had been left out of the civilized world much sooner.
No matter the price. It is worth doing it.
Having said so, the pricing model behind your reasoning sounds weird:
a) If Russia oil production can be so easily diverted to the Chinese and Indian markets, why this should result in a reduction of price?
The oil “spot” market is a limited part of the total market. Oil pipelines, different qualities and sulfur content (not so “commodity” after all) and long-term contracts mean that global oil markets were “segmented” well before the war.
And, even just looking at the spot market, the oil that Russia, according to your model, is now selling to China and India, is oil that other producers cannot sell and so, has to find its way back to other markets.
b) If the elasticity to oil consumption is such that an increase in prices result in an increase in revenue. The Russians (the whole OPEC+ cartel) were doing a terrible job pricing oil before the war. They should have increased prices back then in order to maximize their revenue.
OPEC+ are mostly terrible countries from the human rights standpoint but they are terribly good at pricing oil. Basically, they do that (knowing the elasticity of oil) for a living. Were they leaving revenue on the table before the war? I very much doubt so.
Jim Glass
Jul 2 2022 at 6:10pm
“Colluded”? An odd choice of words. My first dictionary reference is “collusion: secret or illegal cooperation or conspiracy, especially in order to cheat or deceive others.” I don’t think this really fits the case.
Moreover by planning to stop buying Russian oil by year end the Europeans are not keeping anything “off the market”. They just aren’t buying it themselves. But moving on….
Maybe, maybe not. There’s a serious question about how fungible Russian oil really is. As per the recent comment…
If Russia oil production can be so easily diverted to the Chinese and Indian markets, why this should result in a reduction of price?
Well …Russia has western oil fields with pipelines that run west to Europe, and eastern oil fields with pipeline that run south to China. But there is no connection between them. If Europe really stops buying Russian oil by year end — the target, it hasn’t happened yet — to get that unsold oil to China would require a 3,000 mile pipeline that doesn’t exist.
The alternative is using ships, a whole lot of ships, to sail that oil via a great circle route through the Indian Ocean to India and China. Russia not being much of a maritime nation, that is a costly logistical problem by itself — and then there is the requirement of insurance!
No nation lets any uninsured oil tanker near its waters. Exxon Valdez cost about $4 billion (circa 1990 dollars). And all the insurers are western, and maritime insurance has just been added to the sanctions list. Achhh! So it looks like Russia will have to somehow self-insure the tankers. Going cold turkey into the maritime industry on this scale is pretty challenging. (And if just one of those tankers should “hit a rock” during wartime … does Ukraine have naval commandos?)
And there’s more. The eastern pipelines to China can’t carry more than they can and basically already are. So if Russia wants to increase exports from the east to China … more ships.
But that’s not likely to be a problem for long because Russia can’t maintain its eastern Siberian fields and pipelines. (Remember, it has GDP smaller than NY State.) That’s why firms like Haliburton and Schlumberger were doing it — and they’ve all left. The oil infrastructure is going to start failing like the car industry and airlines. The US EIA estimates Russian oil production will be down 11% in 2023.
So it’s not at all a nice liquid fungible market for Russian oil. And it does all look rather suboptimal for Putin. What will the net effect on world oil prices be? I have no idea.
Hey, what if the Chinese economy gets up off its back and goes from bust to oil demand boom? That might have a bigger effect. Who knows?
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