Analysis-Biden’s subdued reaction to OPEC+ cuts foreshadows economic slowdown, carries risk

When OPEC+ decided to cut oil production earlier this month, President Joe Biden responded with a subdued reaction. This is in stark contrast to his previous statement about the consequences Saudi Arabia, the head of the oil cartel, would face when it lowered output in October. The cautious response from the Biden administration reflects their belief that the production cut may not impact the US and global economy as much as last year’s cuts. Last year’s cuts caused rapid inflation due to the COVID supply chain disruption and surging demand. However, the job market has cooled down with inflation, and gasoline prices have stabilized at lower levels. Furthermore, U.S. oil production is approaching record highs, and the economy has reached a more predictable and less volatile phase.

The OPEC+ move could complicate President Biden’s efforts to tame inflation and dampen gasoline prices in the US. The high energy prices are currently driving inflation, prompting the Federal Reserve to impose a series of rate hikes and stir up fears of a recession. The voluntary cuts in oil prices could further exacerbate global inflation, leading to a more hawkish stance on interest rate hikes from central banks worldwide.

The Biden administration’s actions indicate that they may have fewer tools this summer to combat high energy prices, primarily because the nation’s strategic reserves have been drawn down to historic lows after the smog-reducing rules on summer gasoline were lifted. The US administration relied heavily on the oil industry to step up production of oil and refined petroleum products like gasoline and diesel, and discussions with refiners about expanding capacity or limiting fuel exports have dried up since last summer, according to oil executives. Additionally, inventories are down compared to last year, which could lead to higher gas prices ahead of the busy summer driving season.

The anticipated increase in oil prices as a result of the voluntary cuts could fuel global inflation. This could prompt a more hawkish stance on interest rate hikes from central banks worldwide. Therefore, there is a considerable risk associated with President Biden’s subdued response to OPEC+ cuts as it foreshadows an economic slowdown.