Why Goldman Sachs Thinks Biden Has Gasoline Problems

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OPEC controls a third of the world’s oil production.

MAZEN MAHDI/AFP via Getty Images

Goldman Sachs

has a couple of problems with Washington’s push for OPEC to produce more oil so that prices fall at the pump—the Delta variant and the very real possibility that the whole idea could backfire.

The Biden administration wants Americans to pay less to fill up their tanks because higher gas prices are an in-your-face reminder that inflation is rearing its ugly head.

And shoppers aren’t happy about paying more. A new number out Friday on consumer confidence missed economists’ estimates by a mile Friday. The University of Michigan consumer sentiment index came in at 70.2; the expectation was 81.2.

Already this year, crude and gas prices are up about 40%. A gallon of regular unleaded pierced the $3 a gallon in May, a level not seen since 2014.

But what ultimately matters to OPEC, which controls a third of the world’s oil production, isn’t gas prices or Americans worried about inflation. It’s OPEC.

The Saudi-led cartel—Saudi Arabia produces about a third of OPEC’s output—sees the Delta variant quite possibly decimating demand, Goldman analyst Damien Courvlin wrote in a report, released late Thursday.

OPEC, Courvlin explained, doesn’t want to increase output just to turn off the taps if the economy pulls back. Starting up production costs money.

And even if OPEC were to increase production—soon enough to drop prices fairly quickly—Courvlin believes investment needed by non-OPEC producers would slow down. “Ultimately, we forecast that [OPEC] spare capacity will be fully normalized by Spring 2022, and reaching that point faster would simply lead to a slower draw in inventories but a further lack of investment among higher cost producers,” he wrote.

Without investment in non-OPEC supply, Courvlin predicts even higher prices down the road.

That leaves Biden with a conundrum. Doing nothing, which Goldman thinks might be the best choice, or risk even higher prices at the pump.

Courvalin does think OPEC will increase output by year’s end if the economy stays on the rails. “An additional hike in [OPEC] quotas appears increasingly necessary given recent supply disappointments globally,” he wrote, referring to non-OPEC production gains that have come in below his forecasts so far this year.

Washington could try bring down gas prices other ways: increasing the federal gas tax, instituting ethanol mandates and cutting distribution costs. Those, though, are much more complicated and politically fraught. Ethanol mandates, for instance, involve farmers and corn acreage. The gas tax hasn’t budged since 1993. And states have their own gas taxes.

The market doesn’t seem convinced that the Biden appeal will work. Energy stocks in the

S&P 500

are flat for the week. The S&P 500 is up 0.6%. The

Dow Jones Industrial Average

has added about 0.9%.

William Murphy

William Murphy

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