What does Janet Yellen know that the rest of us don’t? Absolutely nothing …. but it’s curious to see the White House acknowledging the obvious. While Russia uses its energy exports as a weapon in the economic war between the West and Moscow and OPEC refuses to step up production, the price of oil will begin rising as fall and winter hits the northern hemisphere.
Joe Biden’s Treasury Secretary tried to float this out as a potential issue in the next few weeks, although she tried to couch it in terms that let Biden off the hook:
Yellen told CNN’s Dana Bash on “State of the Union” that gas prices could rise due to the European Union largely halting Russian oil purchases this winter and banning provision of services that allow Russia to ship oil by tanker.
“It is possible that that could cause a spike in oil prices,” Yellen said.
But Yellen noted a western price cap proposal was designed to balance curbing Russian oil revenues helping fund its war in Ukraine, while maintaining some access to Russian oil to “hold down global oil prices.”
“So I believe this is something that can be essential,” she said. “And it’s something that we’re trying to put in place to avoid a future spike in oil prices.”
The Group of Seven nations, which includes the U.S., Canada, France, Germany, Italy, Japan and the United Kingdom, agreed to a price cap on Russian oil earlier this month. The nations did not say exactly what the cap would be yet.
Curiously, no one appears to have clipped this pre-spin video. Perhaps no one wants Yellen on the video record, as this argument is mainly nonsense. The West plans to take Russian exports off the legitimate market without any new oil supply to replace it. What does Yellen think will happen? Unless demand craters, of course that would result in higher oil prices — and yet another dramatic boost to inflation, which is being driven by dumb stimulus policies while doing nothing for production on a much wider range of consumables than just energy.
The “price cap” effort is nonsense, too. Norway, one of the world’s major oil producers, has opposed it as it would also apply to European producers:
Norway’s prime minister has again warned against a price cap on Norwegian gas sold to the European Union, arguing this would not solve Europe’s energy problems, newspaper VG reported on Friday.
Norway, which is not an EU member, has become the union’s largest supplier of gas after Russia’s export cutbacks in the wake of the Ukraine war, giving the Nordic nation record income from its petroleum industry as prices soared. Russia calls its actions in Ukraine “a special military operation.”
At an emergency meeting in Brussels on Friday, EU energy ministers asked the European Commission to propose broad gas price caps, even as the EU executive itself poured cold water on the feasibility of such an idea.
Norway again scoffed at it this morning:
Yellen and the EU want to keep prices down by imposing price controls. All that does, however, is further impede supply as producers either cut back or end production as prices fail to meet actual value. Price controls had similar effects in the 1970s, when they led to rationing and shortages rather than higher prices. And in the end, the price controls did nothing to contain inflation in the long run anyway.
So yes, gas prices will go back up when the US and EU adopt supply-limiting policies. Those economics are simple to understand, and yet the world leaders in charge at the moment — especially at the White House — seem incapable of grasping simple economics. There are two ways to lower prices: reduce demand or increase supply. The demand for oil is not just impossible to lower, the coming winter will make it even more acute. The only other way to lower demand for oil is a broad recession, which is likely coming anyway but will be a political disaster for current leadership when it hits.
What about the other option — increasing supply? The only G-7 nation capable of doing this at the necessary scale and with the needed speed would be the US. Biden and Yellen have other ideas in mind, however. Remember this?
At roughly the same time, Liz Truss positioned the UK to scale up production by ending their ban on fracking. At least one Western leader paid attention in Econ 101.
If Yellen is sending out a warning on gas prices now, you can bet that they already know what’s coming when Europe has to use oil rather than natural gas for heating and electricity this winter. After bragging about eliminating roughly half of the price increase that Biden’s policies forced at the gas pump, their refusal to incentivize scaled-up production as a strategic assault on Russia’s oil exports will see those prices going back up soon. The Byzantine plans to cap oil prices won’t stop it — and the White House knows it, which is why Yellen offered what is essentially a trial balloon for their eventual Putin did it spin.
Reporting from Hot Air.