Four-bucks-a-gallon Biden Creating Energy Crisis

Financial crisis may follow with demise of dollar

Acting impetuously to look tough is seldom good statecraft. But that is what Joe Biden has done, and he is leading us to an energy crisis, and perhaps one day, a financial crisis.

The price of oil has now spiked to around $110 a barrel, up from $66.50 on December 1. Americans are only beginning to feel the full extent of the pain this entails. The average price of a gallon of regular is now $3.73 across the USA, up nearly 20 cents in the past week and a full dollar from this point last year. Mid-grade is over $4 a gallon, and regular will soon follow as gasoline prices lag oil by about two weeks.

Higher oil and gasoline prices don’t just make it more expensive to fill up the car or pay the heating bill. They raise the cost of food and everything else that requires energy to produce.

Why is this happening? Have the Russians shut down the 10 million barrels of oil they produce each day, more than half of which they export? Have they blown up their own pipelines in Belarus that carry Russian crude to Europe, or the smaller-volume pipelines for crude that transit Ukraine? Have exports from North America or the Middle East been physically disrupted?

The answer to all of those questions is no. And yet the spike in cost is not just an added risk premium from speculators bidding up the price. Russian oil isn’t being delivered, at least not in the quantities it was before the war. While the Biden administration claims it designed sanctions on Russia not to impact oil, that is not reflected by reality. So broad and hasty are the restrictions, which include sanctions on major Russian banks and the country’s central bank, that oil traders and consumers are unwilling to accept Russian crude for fear of being targeted by the vengeful federal government.

With oil supplies as tight as they are, the loss of perhaps 3 million or more barrels per day of Russian crude is debilitating. It doesn’t help that the USA is producing 1.5 million barrels per day less than before the coronavirus crisis. Unbelievably, on February 20, the Biden administration halted all new oil drilling on public lands and in federal waters. That decision came after a year of bullying investors to avoid investments in traditional energy. Biden and his enablers in Washington just don’t care about what you pay.

Other spare capacity might come from the Middle East. But Biden and Congress have made it a point to alienate Middle Eastern partners like Saudi Arabia and the United Arab Emirates for over a year. Washington decided to make a pariah of the man who effectively runs Saudi Arabia, Crown Prince Mohammed bin Salman. Biden blew kisses at Iranian-backed Houthi insurgents in Yemen who occasionally rain missiles down on their neighbors, while high-minded moralists on Capitol Hill threw up obstacles to selling Arab allies the advanced arms they want to defend against the mullahs in Iran who aspire to nuclear status. Now Biden is lecturing them over remaining neutral in the war. It should come as little surprise that these governments have declined to act even though Biden is begging them to increase their own production of oil.

But isn’t this cost worth paying if it helps the beleaguered population of Ukraine? Unfortunately it won’t do that, nor will it hurt the Russians much beyond the short term. Ukraine’s fate is probably sealed and the USA has no vital interests there; our involvement gives rich Europe another excuse not to pay to defend itself. Moscow may have to sell its oil at a discount in the near term, but eventually Europeans will do what they always do and put their morality aside to purchase cheap Russian energy—especially with Biden already sending more U.S. troops to defend Europeans who want to spend their money on welfare states instead of defense.

China will buy Russian oil and gas in much greater quantities; Beijing was already planning to do so before the war. One of China’s greatest vulnerabilities is that much of its oil comes from the Middle East through the Malacca Strait off Singapore, which can be controlled by the U.S. Navy in a conflict. Ending this risk by bringing oil and gas overland from Russia and gaining financial influence over its northern neighbor appeals to Beijing.

The price of oil will only come down if oil traders can buy Russian crude, or if there is a recession that cuts demand. By refusing to climb down and allow the former, Biden and his zealots make the latter more likely. Thanks to Biden’s high inflation and grotesque incompetence, the Atlanta Federal Reserve Bank recently predicted the current quarter will have zero growth.

Worse, energy crisis may give way eventually to long-term financial crisis because Biden has judged there to be political upside in having the most aggressive pissing match possible with Moscow. Washington took the unprecedented act of freezing—effectively stealing—Russia’s foreign-held reserves in dollars and cut off the central bank from dollar-denominated transactions. This step was not lost on China, which has $2 trillion in U.S. Treasury securities, or other governments that want to end the dominant position the dollar has held in international finance since 1944. Creating an alternative to the dollar has just been shifted from the “nice-to-do” pile of work to the “must-do” pile in a dozen foreign capitals. Similarly, cutting Russia off from the SWIFT mechanism of moving funds across borders will only enshrine China’s CIPS as a growing alternative.

The impact of the loss of dollar’s status would be devastating for the USA. Our ability to maintain our lifestyle through the crises of 2008 and 2020 and blow trillions on losing wars and paying people not work is due in large part to the dollar. Because the pool of dollars is so big, we can create new ones out of thin air with little consequence. Pour a cup of hot water in a cool bucket and it will make a noticeable difference. Pour a cup of hot water in a giant pool and it will not.

If the dollar is no longer the reserve currency, that pool will shrink dramatically. We will no longer be able to create dollars without consequence. A fate to contemplate is Great Britain’s long financial decline in the decades after World War II once the pound sterling was repeatedly undermined. And far from preparing for a rainy day, we have maxed our national debt to higher levels than even France, and can no longer rely on loose monetary policy with inflation already here.

Biden’s reckless actions are subjecting Americans to immediate pain at the pump that may lead eventually to sustained economic stagnation. Is it worth it for our politicians to be able to say they were tough?