Biden price hike? The nexus of foreign policy and economic crisis

The Biden administration’s agenda is in crisis. Kitchen table issues, like high food and gas prices as well as an economic slowdown, are threatening his domestic agenda. With uncertain prospects for the midterm elections, legislative efforts related to climate change, and many other issues are in existential jeopardy. Biden’s foreign policy regarding Russia and Ukraine is part of the problem — especially his use of sanctions.

Even with substantial notice of Russia’s invasion of Ukraine, the Biden administration did not seem to consider the impact that spillover effects of war — and of the U.S. response — would have on the global economy, which was still reeling from the pandemic. 

While Biden is not responsible for Russia’s brutal invasion, he is responsible for the effects of Washington’s policy and in a position to help address the negative effects of the war in general. And the war and Western sanctions on Russia have had quite an effect, causing energy prices to skyrocket, driven by speculation and some disruption in the supply of Russian oil and gas. 

The invasion also worsened continuing problems in international supply chains from the pandemic and also caused others, such as severely disrupting markets for food. These issues have taken a toll on Americans. 

Gas prices illustrate this well. Although down somewhat from their early summer highs, prices are still around $1.20 higher than in January. These high gas prices are a significant driver of inflation. In the latest release of the Consumer Price Index, gas prices contributed 2.1 percent to yearly inflation; six months ago, this was just 1.4 percent. And, in general, prices climbed faster in 2022 than in 2021. They rose by an average of 0.51 percent in the first half of 2021 and 0.53 percent in the second half (about 6.3 percent and 6.7 percent, respectively, at an annual rate), yet during the first six months of 2022 — encompassing the prelude to, and then the invasion of Ukraine — this jumped to 0.78 percent per month (9.8 percent annually). 

This imposes a high cost, especially on the most vulnerable Americans. And while high gas prices can catalyze low-carbon alternatives, they can also be counterproductive in a car-dependent society such as the United States, eroding political support for action on climate change and making previously uneconomical drilling projects more viable. 

The White House response has been underwhelming. Biden recently said that Americans will face high gas prices for “as long as it takes” to beat back Putin’s advance in Ukraine, but also that the administration is doing “everything [it] can to reduce this pain at the  pump.” Yet not much has been accomplished that will put lasting downward pressure on the price of gas. Measures to encourage a switch to clean energy are positive but won’t bear fruit for years. Promoting new offshore drilling won’t either, and it’s a dangerous step in the wrong direction. 

Other policies, like a gas tax holiday and rebate cards, don’t seem to be moving forward and have their own downsides. A strongly worded letter to U.S. oil executives asking for relief hasn’t appeared to yield any results.

Other domestic tools to address inflation might be counterproductive. The Federal Reserve, led by Jerome Powell, who was recently reappointed to his post as chair by Biden, has set expectations for a series of interest rate increases aimed at slowing down the economy to lower prices. However, as economists and elected officials have noted, these hikes might plunge the country into a recession, hurt workers, and crucially, do nothing to address the underlying issues driving inflation, which are shortages and commodity and energy prices.  

Biden’s global solution is to appeal to Saudi Arabia to increase oil production, which requires backtracking on several promises. Importantly, although the Saudis are happy to extract concessions from the Biden administration, they do not have the capacity to produce a significant amount of additional oil in the short term. Since January, the Saudis have only increased production by about half a million barrels per day, or about 5 percent. 

The Biden administration also extensively lobbied for, and celebrated, an increase in oil production by the group known as OPEC Plus at the beginning of June. However, this quota adjustment — totaling 1.3 million barrels per day — was simply moving forward with already scheduled increases and may not even be able to be filled. Moreover, the White House’s celebration is deeply ironic because the decision required Russia’s approval — whose oil industry the United States aims to cripple. This strategy does not make sense.

So, what can Biden do about these problems? To start, Biden should understand that his policies affect far more than Americans, and he should look at what is happening in the rest of the world. The situation is quite grim.

Europe, following Washington’s lead in attempting to isolate Russia, is struggling to limit its dependence on Russian natural gas. The eurozone is headed toward economic calamity. Much of the developing world is in more dire straits, at the mercy of high food and energy prices and the Federal Reserve’s efforts to fight off inflation in the United States. Some 345 million people worldwide now face acute hunger. Higher US interest rates don’t help, causing capital flight and plunging countries into currency and debt crises. Protests have erupted all over the world. 

Despite this challenging situation, Biden has several tools at his disposal simply by reforming his own foreign policy. For example, Trump-era sanctions on Iran and Venezuela — paradoxically more stringent than the sanctions on Russia — could be relaxed. This could yield a modest boost in production in the short term, and possibly up to 2.5 million more barrels per day in 12–24 months. There is little reason to believe that there are real and significant downsides to Biden easing these sanctions; in Venezuela, they are deeply unpopular among even opposition groups; the Iran Deal, which Trump left abruptly, was a signature diplomatic achievement of President Obama. 

In this context, increasing world oil production, breaking with illegal and immoral foreign policy, and supporting allies in Europe is win–win. 

Next, Biden could reconsider his policies toward Ukraine and Russia more broadly. Sanctions on Russia have failed to achieve their intended goals and instead have thrown the world into crisis as collateral damage. Biden has spun this as a fight between democracy and authoritarianism, but this is backfiring too: most of the world is uninterested in complying with the sanctions or picking a side. Polling shows that even the American public prefers that Biden address the issues that matter to them than become further involved in what the administration itself has said will be a long war. 

So as the invasion enters its sixth month, and as Russia becomes further entrenched in Ukraine, many experts are urging the administration to work to end the war through diplomacy — or at least to limit the impact and risks of the war on Ukraine and the world. 

Both rejecting Trump’s playbook in Venezuela and Iran and taking a different posture toward the war in Ukraine would be concrete steps Biden could take to relieve much of the suffering around the world as a result of the Russian invasion of Ukraine. He could also mobilize support for the world by supporting a new issuance of Special Drawing Rights via the International Monetary Fund to help deal with the food, energy, and debt crises that won’t disappear overnight. 

But what’s clear is that more sanctions are not the answer; they rarely are. This time they could well throw the world into further chaos. With Western plans to cap the price of Russian oil on the horizon, let’s hope Biden charts a more responsible course — one that recognizes that what’s best for the world is also in his own political interest. Americans, and the rest of the world, will be better off.