Relief at the gas pump coupled with this past week's news that businesses continue to hire at a rapid rate have lessened economists' fears that America is heading into a downturn.
The economy could be in for another serious shock later this year, one that could send the country into a recession.
The White House is worried that a new round of European penalties against Russia could cause energy prices to go up again and plunge the US and other economies into a deep recession. There is a severe food crisis afflicting countries around the world.
To prevent that outcome, U.S. officials have latched on to a never-before-tried plan aimed at depressing global oil prices, one that would complement European sanctions and allow critical flows of Russian crude onto global markets.
Europe, which consumes more than two million barrels of Russian oil each day, is set to impose a ban on those imports at the end of the year. While Mr. Biden pushed Europe to cut off Russian oil as punishment for its invasion ofUkraine, some forecasters, along with top economic aides to the president, now fear that such policies could result in huge quantities of Russian oil.
If oil prices go up to $200 per barrel or more, it will translate to $7 a gallon for gasoline in the US, according to analysts. As consumers and businesses pull back spending in response to higher fuel prices and as central banks try to tame inflation, global growth could slam into reverse.
The potential for another oil shock to puncture the global economy has driven the administration's attempts to persuade government and business leaders to sign on to a global price cap on Russian oil.
It is a new attempt to force Russia to sell its oil at a steep discount. Administration officials and Mr. Biden say the goal is to starve Moscow's war machine of funding and to relieve pressure on energy consumers around the world.
Russia relies on financing, ships, and insurance from Britain, Europe, and the United States to get its oil to market. Russia would be cut off from most of the European oil market if the European penalties are constructed. If those measures were strictly enforced, Moscow would no longer be able to transport its oil.
If the Russian oil is sold for no more than a price set by the United States and its allies, the European ban will not be affected. It would allow Moscow to keep moving oil. Russia would have to sell the oil to other countries at a discount if it were going to France or Germany.
I'm worried about the outlook. With persistently high inflation, rising consumer prices and declining spending, the American economy is showing signs of slowing down. There are other measures that signal trouble.
The consumer is confident. In June, the University of Michigan's survey of consumer sentiment hit its lowest level in its 70 year history, with nearly half of respondents saying inflation is hurting their standard of living.
There is a housing market. Construction of new homes is slowing due to decreased demand. As interest rates rise and real estate companies lay off employees, these trends could continue.
There is a substance called copper. A commodity seen by analysts as a measure of sentiment about the global economy because of its widespread use in buildings, cars and other products is down more than 20 percent since January.
There is oil Because of supply constraints caused by Russia's invasion of Ukraine, crude prices are up this year, but they have recently started to fall as investors worry about growth.
The bond market is a place to buy and sell bonds. Long-term interest rates in government bonds have fallen below short-term rates. It shows that bond investors think the economy is going to slow down.
Some economists and oil industry experts don't think the plan will work, either as a way to reduce revenues for the Kremlin or to push down prices at the pump. They warn that the plan could be used by Russia and its allies to evade taxes. Moscow could not sell at the cap.
The finance ministers from the Group of 20 nations, including Russia, will meet in Asia next week to discuss the cap. There will be no contact between the Americans and the Russians.
Even some skeptics think that the price cap could keep enough Russian oil flowing to avoid a recession.
There are indications that the cap proposal is helping to assure traders that the world will not lose millions of barrels of Russian oil at the end of the year.
The cap on trans-Atlantic video calls has been pressed by other administration officials. They are stressing recession risks in talks with other countries, private insurers and a host of other officials over how to structure and carry out the price- cap plan, which leaders of the Group of 7 nations endorsed in principle this past week at a meeting in the German Alps.
The deputy Treasury secretary said in an interview that they want to be aware of the downside risk at the pump. The price cap reduces the risk of a global downturn and it also reduces the price of one of the most important things for the global economy going forward.
There have been dark clouds over the economy. In a note to clients this past week, researchers at High Frequency Economics estimated that a recession is already underway in Europe, Britain and Japan.
The American economy has not yet hit a recession, despite what could be its second consecutive quarter of negative growth, according to aides to Mr. Biden. Their case has been helped by the continued strength of the labor market, which added 372,000 jobs in June.
There are reasons for optimism in the dip in global oil prices this past week, which should translate into relief in the weeks to come from the $5 a gallon prices that drivers have been paying in many states this summer. The national average price for a gallon of gas was $4.70 by the end of the week, down from its summer high of $5.
The surge in gas prices earlier this year was a direct result of the Russian invasion and the West's response to it, led by Mr. Biden, who moved swiftly to ban imports of Russian oil to the United States.
Russia has continued to sell oil at elevated prices, even accounting for the discounts it is giving to buyers like India and China, which did not join in the oil sanctions, as the price cap proposal acknowledges.
The cap proposal is an attempt by the West to dictate the price Moscow can command for its oil exports.
If the Russian oil is steeply discounted, the cap plan will work. If the oil is sold for no more than the cap, Russia can still ship it with Western backing. The price that Moscow would get for its oil would be high enough that it would still make money, but it would be less than the current price.
The effort would need insurers and financing companies to be involved. Many countries outside Europe would purchase discounted oil. Administration officials are confident that a well designed cap would drive down prices even if some countries refuse to sign on.
The officials say that the plan could bring down global oil prices by reducing the risk of a future supply disruption.
The plan is ripe for evasion and will still provide Russia with a lot of energy revenue. It's possible that a low cap would cause Moscow to refuse to ship discounted oil and instead pay to cap wells and stop production.
"It's another half-measure idea, as opposed to making the tough decision to actually stop purchasing Russian crude and using secondary sanctions," said Marshall S.Billingslea, who was the assistant Treasury secretary for terrorist financing in the Trump administration.
According to Steve Cicala, an economist who studies energy and environmental regulation, the price cap will not affect global oil prices. He said that if a refinery buys Russian oil at a discount it will sell it at a higher price than the global market will allow.
Mr. Cicala said that there was a misconception that the price of gasoline would go down if the price cap was put in place. It isn't the case.
Mr. Cicala said that the cap could prevent the kind of price spike that administration officials are worried about.
He said it was keeping the oil out of the ground that kept the global recession at bay.
Alan Rappeport reported.
All Rights Reserved © 2024
