Saleha Mohsin
Wed, March 9, 2022
(Bloomberg) -- The Biden administration is leaning on American consumers to help pay the price of its rapidly intensifying economic pressure campaign against Russian President Vladimir Putin.
The White House’s announcement Tuesday to ban U.S. imports of Russian fossil fuels marked the latest move against Russia. It also made for another way for the war in Ukraine to affect Americans at filling stations and grocery-store checkout lines.
U.S. gasoline prices hit a record high on Tuesday, according to AAA, with the average price of regular unleaded at $4.17, up 55 cents in just a week and driven by global oil prices surging to their highest levels since 2008.
The U.S. campaign carries some political peril for President Joe Biden as Democrats head into November midterm elections with control of Congress at stake and Republicans already seeking to saddle his party with blame for inflation, especially rising energy prices.
Biden acknowledged the ban on Russian oil is a decision that “is not without cost here at home.” He said it was “Putin’s war” that was hitting American consumers, and vowed to mitigate the consequences.
U.S. officials are in talks with counterparts in Venezuela as they consider waiving some sanctions, which would allow the South American nation to sell more oil on global markets. Such a step would mark a softening in the U.S.’s stance toward a regime it has previously called corrupt and undemocratic.
Back at home, the Biden administration has stopped short of directly asking U.S. energy producers to boost production to ease the pain Americans are facing at gas stations.
“It takes time to meet demand,” Wally Adeyemo, the deputy secretary of the U.S. Treasury, said on Tuesday -- indicating consumers should be braced for higher prices for now. “These high costs aren’t something that only impacts Americans,” he said, adding that much of the global economy is gripped by inflation.
Adeyemo highlighted that American consumers have so far been resilient amid the spike in inflation.
“What’s impressed me about the American people is that they have shown they are willing to pay a price to protect democracy,” he said in an interview.
But it’s not certain how long that will last.
Russia’s invasion of Ukraine has sparked a feverish run-up in the prices of just about every commodity -- from oil to grains and metals -- and that will inflict even more financial pain on consumers already struggling with rampant inflation.
The U.S. relies on Russia and Ukraine for key energy and agricultural products. The two nations’ combined wheat, barley and maize exports make up 21% of the global total, and their supply of sunflower oils account for 60%. Wheat prices hit an all-time high on Tuesday. An unprecedented surge in nickel saw the London Metal Exchange suspend trading.
Oil prices hovered around $128 a barrel as investors price in risks of total economic isolation for Russia. Bloomberg Economics estimates that, at $120 a barrel for crude, inflation could accelerate to an annual 9% by April, and end the year near 7%.
“There’s no question that the U.S., at some point, will need to decide how much economic cost we’re willing to shoulder in exchange for imposing those costs on the Russians,” said Dan Katz, a former adviser at the Treasury during the Trump administration who is now at Amberwave Partners.
A March 7 Quinnipiac University poll found that 71% of Americans would support a ban on Russian crude oil, even if it means higher U.S. prices at the pump. But the survey didn’t ask respondents about specific prices they’d be willing to tolerate.
The spike in prices will be a backdrop for midterm elections in November, likely hurting the Democratic Party’s chances of keeping control of Congress. Inflation has colored Americans’ view on where the nation is heading, with consumer sentiment at its lowest level since 2011.
Soaring costs, though, have hidden the powerful jobs recovery from the depths of the pandemic shutdowns. Unemployment has fallen to 3.8%, well below the 6.4% average of the last economic expansion. Households also benefited from a historic expansion in federal support for families, with stimulus checks and enlarged child-tax credit payouts.
Much of that comes from the American Rescue Plan, which Biden signed into law one year ago.
Federal Help
On a Tuesday trip to Memphis, Tennessee, Adeyemo celebrated the one-year anniversary of that rescue package, which he credited with ensuring that the U.S. economy and its consumers are in a “position of strength.”
“When we look at our peers, our recovery is stronger than theirs because we made strong investments,” Adeyemo said.
Adeyemo spent the day in Memphis meeting with city and county officials who he said created the “strongest” program to distribute federal funds, providing $43.1 million in 16,000 cash payments to residents and landlords, helping tenants pay rent and avoid eviction.
More than $25 billion from Treasury’s Emergency Rental Assistance Program has been spent or earmarked. The remaining portion of the $46 billion pandemic-relief initiative will be distributed by mid-2022, according to Adeyemo. In meetings with Tennessee officials, Adeyemo highlighted that the Biden administration has approved leftover funds from the $350 billion State and Local Fiscal Recovery Fund can be used to invest in more affordable housing.
The support for households in that legislation may help insulate the economy from the geopolitical crisis and reduce the risk of a recession.
“The hit to consumers’ wallets from the run-up in gasoline prices will be noticeable -- but not come close to killing the expansion,” according to Stephen Stanley, chief economist at Amherst Pierpont.
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