WASHINGTON — The relief at the gas station, combined with news last week that businesses continued to hire at a breakneck pace, eased many economists’ fears that the U.S. was heading for a recession.
But while top aides to President Biden are celebrating these economic developments, they are also concerned that the economy could suffer another severe shock later this year, which could tip the country into a debilitating recession.
White House officials worry that a new round of European penalties aimed at curbing the flow of Russian oil by the end of the year could send energy prices soaring again, hitting already struggling consumers and sending the U.S. and other economies into a severe contraction. This series of events could exacerbate the severe food crisis that has plagued countries around the world.
To prevent such an outcome, U.S. officials have implemented an unprecedented plan to drive down global oil prices — a plan that would complement European sanctions and allow Russian crude to continue to flow into global markets at deep discounts.
Europe, which continues to consume more than 2 million barrels a day of Russian oil, will impose a ban at the end of the year, along with other measures to complicate Russia’s efforts to export the fuel globally. While Mr. Biden has urged Europe to cut off Russian oil as punishment for its invasion of Ukraine, some forecasters, as well as the president’s top economic aides, are now concerned that such a policy could lead to a glut of Russian oil — a slightly lesser share of Russian oil One-tenth of the world’s supply – suddenly withdrawn from global markets.
Analysts have calculated that such a supply depletion could send oil prices soaring to $200 a barrel or more, meaning Americans pay $7 a gallon for gasoline. Global growth could reverse abruptly as consumers and businesses scale back spending as fuel prices rise and central banks, already raising interest rates to tame inflation, are forced to raise borrowing costs.
The possibility of another oil shock hitting the global economy, and perhaps Mr. Biden’s re-election prospects, has prompted the administration to try to persuade government and business leaders around the world to sign a global price cap on Russian oil.
This is a novel and untested effort to force Russia to sell its oil to the world at deep discounts. Administration officials and Mr. Biden say the goal is twofold: to starve Moscow’s oil-rich war-funding machine and relieve pressure on energy consumers around the world who face rising fuel prices.
To get its oil to market, Russia draws on financing, ships and, crucially, insurance from Britain, Europe and the United States. The European penalties currently enacted would not only cut Russia off from much of the European oil market, but also cut off other Western support for its shipments. If strictly enforced, these measures could make it impossible for Moscow to transport oil, at least temporarily.
The Biden administration’s proposal would not affect the European ban, but would ease some other restrictions — but only if the Russian oil being shipped doesn’t sell for more than the price set by the United States and its allies. This will allow Moscow to continue shipping oil to the rest of the world. Oil that now goes to France or Germany will go elsewhere — Central America, Africa and even China and India — and Russia will have to sell it at a discount.
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Some economists and oil industry experts doubt the plan will work, either as a way to reduce Kremlin revenue or as a way to keep oil prices down. They warned that the plan could mainly enrich refineries and that Russia and its allies were ripe for circumvention. Moscow could refuse to sell at the cap price.
Treasury Secretary Janet L. Yellen plans to garner more support next week in Asia with finance ministers from the G20, including Russia. A Treasury official said the U.S. delegation would not engage with the Russians.
But even some skeptics say that, if nothing else, a price cap could keep enough Russian oil pumped to avoid a recession-triggering price spike.
There are signs in the oil market that, even in the early stages, the cap proposal is already helping traders reassure that the world can avoid a sudden loss of millions of barrels a day of Russian oil by the end of the year, government officials said privately.
Other government officials have made demands for the cap during transatlantic video calls and in-person meetings in European capitals such as Brussels and London. They underscored recession risks as they negotiated with other countries, private insurers and many other officials on how to structure and enforce the price cap plan, which G7 leaders approved in principle at a meeting last week. German Alps.
“We absolutely have to be mindful of the downside risks and the fact that the cost is too high for people,” Wally Adeyemo, deputy finance minister, said in an interview. “We believe that one of the most effective things we can do to address our concerns is to implement a price cap – because it reduces the risk of a global recession and also lowers the price of one of the things that matter most to the global economy. Move forward.”
Dark clouds have hung over the global economy in recent weeks. In a note to clients last week, researchers at High Frequency Economics estimated that recessions have already begun in Europe, Britain and Japan.
Biden’s closest economic aides insist the U.S. economy is not yet in a recession, even as it struggles to weather what could be a second straight quarter of negative growth. Their view was supported by continued strength in the labor market, which added 372,000 jobs in June and did not slow as many forecasters had predicted.
Administration officials also see reasons for optimism for the drop in global oil prices over the past week, which should translate into meaningful relief in a few weeks from the $5-a-gallon price drivers in many states paid this summer. By the end of the week, the national average price per gallon fell to just under $4.70, down about 30 cents from its summer high.
The surge in gas prices earlier this year was a direct consequence of the Russian invasion and the West’s response to it, led by Mr Biden, who moved quickly to ban Russian oil imports to the United States and coordinated similar bans among allies.
In some ways, the price-cap proposal acknowledges that the penalties are not working as intended: Russia continues to sell oil at high prices — even considering the discounts it offers to non-joined buyers like India and China in oil sanctions — while Western drivers pay a premium.
At the heart of the cap proposal is an attempt to use Western influence over Russian oil shipments to determine the prices Moscow can set for its oil exports.
The cap plan is designed to keep Russian oil on the market, but only if it is significantly discounted. Russia can still ship oil with Western support if the oil does not sell for more than the price set by the cap. Negotiators are working to set a price that will be enough to ensure Moscow can still profit from its oil sales, but below its current price, which is about $30 below global prices.
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Insurance companies and financing companies need to work together to make it work. The same goes for many countries outside of Europe that buy discounted oil. But even if some countries refuse to sign up, such as China and India, government officials believe a well-designed cap will drive down prices anyway—because no country is willing to pay more for any vital commodity than it must.
Ideally, the plan would depress global oil prices by reducing the risk of future supply disruptions, which traders are likely to factor in their decisions, officials said.
Some experts doubt the plan will work, saying it is ripe for evasion and would still provide Russia with a lot of energy revenue. A low cap could also lead Moscow to refuse to ship any discounted oil, paying instead to shut up wells and stop production.
“It’s another idea of a compromise rather than making the hard decision to actually stop buying Russian crude and using secondary sanctions,” said Marshall S. Billingsley, assistant Treasury secretary for terrorism financing in the Trump administration. Marshall S. Billingslea) said.
Steve Cicala, an economist at Tufts University who studies energy and environmental regulation, said the price cap could dent Russia’s revenue but was unlikely to affect global oil prices. Instead, he said, refiners that bought Russian oil at a discount would sell it at a much higher price set by the global market, earning a windfall in the process.
“There is a misconception that if we put price caps in place, then people will pay less for petrol,” Mr Sikara said. “But in fact, it’s not.”
But, Mr Cicala added, the cap is likely to succeed in keeping Russian oil flowing, preventing the kind of price spikes government officials are so worried about.
“Eventually getting the oil out of the ground averted a global recession,” he said.
Alan Rappeport contributed reporting.