Im-Politic: Major U.S. Ukraine Policy Puzzles on the Home Front Remain Unsolved

Tags

Biden, Democrats, gasoline, Iran, Iran deal, Iran nuclear deal, JCPOA, oil, oil prices, Our So-Called Foreign Policy, rural areas, Russia, sanctions, taxes, Ukraine, Ukraine invasion, Ukraine-Russia war, Vladimir Putin

Maybe you readers can help me out here, because I am really confused about what President Biden and other Democrats are saying about the biggest political and ethical issues surrounding his Ukraine war-related decision to ban oil imports from Russia and its likely effect on gasoline prices.

On the one hand, Mr. Biden and his party have portayed the higher oil prices as a sacrifice that Americans should be proud to pay in order to support Ukraine’s unexpectedly stout resistance to the Russian invasion, and one that the nation will agree to pay.

On the other hand, these Democrats have taken to blaming the higher pump prices on the Russian aggression itself, to the point of pushing the social media hashtag #PutinPriceHike.

Unquestionably, the Russian dictator’s decisions are ultimately responsible for the recent shake up in the global oil market that’s driven up prices for oil and all its derivatives (like gasoline) the world over. But now that he’s taken these steps, it seems that some fundamental consistency should be displayed in the Democrats’ case for the response they favor. For example, they could tell the public something like, “Yes, our response to the Russian attack will raise the price of oil. But higher pump prices are a sacrifice we should be proud to make for the cause of global security and freedom.” Why haven’t they?

Something else noteworthy about the stance of the President and his party. The effect of higher oil prices is the epitome of a regressive tax. In other words, because Americans at all income levels will face the same percentage increase when they pump gasoline (and when they heat their homes, if they rely on oil). So the bite on household budgets is deepest for the poorest and shallowest for the richest of us.

Higher oil prices will also surely kneecap any Democratic hopes of improving their political performance in rural America. After all, residents of the nation’s small towns and farming areas use much oil for transportation than their urban counterparts. So do the enormous number of voters in the suburbs, who played such a big role in Mr. Biden’s victory in 2020.

And let’s not forget an mammoth irony about higher U.S. and world prices for oil – as well as natural gas, another major Russian export. As has been widely observed, without steps that dramatically reduce the volume of Russian sales  globally, the more importers pay per barrel, the more revenue flows into Vladimir Putin’s treasury – and war machine. The same goes for Saudi Arabia and Venezuela, along with Iran if the President succeeds in his apparent aim of negotiating a deal aimed at preventing Tehran from building a nuclear weapon in part by lifting economic sanctions on its economy.

Whatever you think of President Biden’s approach to the Ukraine war, it should be clear that it can’t succeed for any length of time until firm support on the home front is secured. These unsolved puzzles and outright contradictions make clear how far his administration remains from achieving that essential goal. 

(What’s Left of) Our Economy: #PutinPriceHike? Not Even Close – Yet

Tags

baseline effect, Biden administration, CCP Virus, coronvirus, COVID 19, energy, fossil fuels, gasoline, inflation, lockdowns, oil, Putin, sanctions, stay-at-home, Ukraine invasion, Ukraine-Russia war, Wuhan virus, {What's Left of) Our Economy

According to the Biden administration, it’s the #PutinPriceHike. That is, don’t blame anything Washington has or hasn’t done for the the bulk of the high gasoline prices Americans have been paying lately. Instead, blame Russian dictator Vladimir Putin, his aggression against Ukraine, and the global oil market turmoil it’s triggered.

The trouble is, if you look at these prices in a comprehensive, statistically legitimate way, scapegoating Putin in this case isn’t justified yet. But the same methodology shows that Mr. Biden and his aides are off the hook, too – at least until recently.

Critics (see, e.g., here) have countered the Biden claims by noting that strong U.S. gasoline inflation predates the Ukraine war and even Russian military buildup by many months, and they’re right. As known by RealityChek readers, however, that’s far from the whole story. In particular, they’re ignoring the impact on gasoline and other prices of the ongoing aftermath of the CCP Virus pandemic, the brief but sharp recession created by the disease and related lockdowns and voluntary behavioral changes, and ongoing stop-start U.S. economy that’s still resulting.

In other words, they’re ignoring the “baseline effect” caused by the economic shocks of the 2020 pandemic year in particular. These drove economic activity down to such low levels, and kept it there so long, that any major return to normal (and therefore normal prices) is going to produce unusually lofty inflation stemming from a catch-up effect. Therefore, it won’t be possible to determine the role of other contributors to inflation in gasoline or any other goods and services until this baseline effect fades significantly and finally disappears. And therefore, scapegoating Biden for soaring gasoline prices pre-Ukraine buildup isn’t justified, either.

RealityChek reported yesterday that the latest official U.S. figures show that the baseline effect has ended for headline inflation, and looks on the way out for core inflation (which strips out food and energy price. And roughly the same is true for gasoline prices.

The table below shows their monthly year-on-year percentage changes for last year (2020-21) in the middle column and for pandemic-dominated 2019-2020 (in the righthand colum). The numbers begin in March because March, 2020 was the first month in which the virus began significantly affecting the economy.

Gasoline price annual percentage changes      2020-21             2019-20

March:                                                               22.58                 -10.05

April:                                                                 49.68                 -32.03

May:                                                                  56.51                 -33.67

June:                                                                  45.42                 -23.41

July:                                                                   41.93                -20.12

Aug.:                                                                  42.76                -16.67

Sept.:                                                                  41.93                -15.43

Oct.:                                                                   49.52                -18.15

As is evident, starting in March, 2020, gasoline prices began nosediving from their levels of 2019, and steep annual drops continued (though at a slower pace) through October. It’s easy to understand why. The combination of lockdowns and stay-at-home behavior caused automotive travel to crater, and national demand for gasoline naturally plummeted as well. Further, that’s clearly a big part of the reason why during the following March-October period, gasoline prices prices skyrocketed on the same annual basis. They were returning to normal from an artificially low base. And as a result, it’s wrong to blame the Biden administration exclusively or even mainly for this hot gasoline inflation.

From that point, however, the Blame Biden case gets stronger. The above table stops in October, 2021 because November was when the Putin military buildup began – and according to the Biden argument, gasoline prices really began taking off. What happened to annual gasoline prices increases from then until the end of  2021, and how strong was the baseline effect? Here are the numbers for November and December, with the 2020-21 annual increases in the middle column and the 2019-20 increases in the righthand column:

Gasoline price annual percentage changes      2020-21             2019-20

Nov.:                                                                  57.76                 -19.53

Dec.:                                                                  49.34                 -15.34

The strong 2020-21 yearly price increases continued for these two months. But the baseline effect (from the big 2019-20 price drops) weakened. In fact, the December, 2019-20 annual 15.34 percent annual gasoline price decline was the smallest such figure since March, 2019-20’s 10.05 percent. And the annual increase for the following March (22.58 percent) was less than half December’s 49.34 percent.

What about this January and February? For these months, of course, the comparison years are 2021-22 (whose increases are presented in the middle column) and 2020-21 (in the right hand column).

Gasoline price annual percentage changes      2020-21             2019-20

Jan.:                                                                   40.02                  -8.90

Feb.:                                                                   38.01                   5.42

So the story for the first two months of this year – between the start of Putin’s buildup and the (late February) invasion – is that annual increases slowed, but the baseline effect vanished much faster. Indeed, between February, 2020 and February, 2021, gasoline prices actually rose. So the administration’s #PutinPriceHike claims hold much less water.

Blaming Putin will become more credible going forward, as sales of Russian oil worldwide are curbed by sanctions. Since the global oil market is so thoroughly integrated, U.S. oil supplies will be crimped and upward price pressures will strengthen. But this is also the point at which other major administration policies will rightly attract attention for their role in spurring torrid gasoline inflation. They include in particular measures and rhetoric that throughout the President’s term have convinced oil and other fossil fuel providers that their industries’ growth will keep facing ever greater policy obstacles, and whose cumulative effect has undercut their ability to ramp up output quickly to fill the Russia gap.(See, e.g., here and here.)

All of which means that, as is the almost always the case with major economic trends and developments, recent gasoline price inflation has many causes, not one. And they can change profoundly in their nature and respective importance with the kinds of changing circumstances that have shaken the global oil and U.S. energy policy landscapes since the CCP Virus pandemic began. Let’s all hope, therefore, that American leaders across the political spectrum begin spending more time developing effective responses to oil price inflation, and less on bombarding each other and the rest of us with facile talking points.

(What’s Left of) Our Economy: The Trickle of Savings from Cheap Oil

Tags

an economy built to last, cheap oil, consumers, consumption, gasoline, GDP, growth, spending, {What's Left of) Our Economy

We just got some good news about the impact of cheap oil on American consumers in 2014, and the likely effects in 2015. In the process, we got an important lesson in presenting data in context.

According to no less than AAA, last year, cratering oil prices saved Americans $14 billion on motor fuel, and the total could reach $75 billion this year. What’s not to like?

But these figures also warn against viewing cheap gas as a game-changer for the U.S. economy.  The reason? In the third quarter of this year – during which the economy grew by an excellent annualized 6.27 percent before inflation – consumer spending was running at an annualized rate of just over $12 trillion. So the gasoline savings equaled less than 0.12 percent of that total.

Even if the gasoline savings do hit the AAA’s most optimistic $75 billion level, they would only amount to 0.62 percent of the 2014 consumer spending total. And if the growth of overall consumer spending matched this year’s 4.20 percent pre-inflation rate over the third quarter of 2013, the cheap oil effect will be even smaller proportionately.

The $75 billion in gasoline savings is of course a bigger (21.50 percent) share of the annualized $348.7 billion in consumer spending growth from quarter to quarter. But it’s only a little over a tenth of the $727.5 billion in total annualized growth during that period.

Moreover, the gasoline savings will only boost growth if they result in even more spending on goods and services generated domestically.  As indicated in this previous post, that’s far from the case.  In fact, even if consumers simply substituted non-gasoline spending for spending on other domestic output, the growth effect would be nil. And every dollar of imports bought with these savings, or put into the bank or under the mattress, actually slows growth.

Further, the gasoline bonanza may actually move America farther from President Obama’s goal of creating “an economy built to last” – i.e., less reliant on binge-borrowing and buying, and financial gimmickry, and more on turning out conventional goods and services. For although cheap gas might in theory boost spending on net on domestic goods and services, it’s at least as likely that it will reduce the value of domestic energy production – and leave the economy more consumption-heavy than ever.