Policy

Yellen: ‘Virtually impossible for us to insulate ourselves’ from soaring gas prices

Treasury Secretary Janet Yellen answers questions from Sen. Elizabeth Warren (D-Mass.) during a Senate Finance Committee hearing to examine President Biden’s FY 2023 budget on Tuesday, June 7, 2022.
Greg Nash
Treasury Secretary Janet Yellen answers questions from Sen. Elizabeth Warren (D-Mass.) during a Senate Finance Committee hearing to examine President Biden’s FY 2023 budget on Tuesday, June 7, 2022.

Treasury Secretary Janet Yellen said American consumers will be at the mercy of oil companies this summer as gas prices are expected to reach levels associated with crude oil at $160 a barrel, according to an analysis released Monday by Goldman Sachs.

Speaking to the Senate Finance Committee on Tuesday, Yellen took heat from Republicans for inflation that’s near 40-year highs, with gasoline prices up almost 50 percent over the last year.

In May, a gallon of gas cost more than $4.50, up from around $3 in May of last year, according to a national average compiled by the U.S. Energy Information Administration. This month, it’s at $4.86 a gallon, up 25 cents in just the last week.

In California, gas is now more than $6.30 on average, and it’s above $5 a gallon in 10 states.

Crude oil, from which gasoline is made, is trading now at $117 a barrel on the New York Mercantile Exchange, up about 65 percent from around $70 a barrel this time last year.

“Given the global nature of these markets, it’s virtually impossible for us to insulate ourselves from shocks like the ones that are occurring in Russia that move global oil prices,” Yellen said.

“During the pandemic, I think that oil producers didn’t anticipate the strength of the recovery, and the fact that oil prices would recover,” she added. “They certainly do have incentives now to increase oil production.”

The former Federal Reserve chair received criticism last week when she said during an interview on CNN that she had been “wrong” about the trajectory of inflation — which many analysts had deemed “transitory” but which has proven to be a much more persistent feature of the economy since the coronavirus pandemic.

Inflation in the U.S. has been felt the hardest in the energy sector, where consumer energy prices have risen more than 30 percent in the last year, more than three times the increase in consumer prices generally, according to the latest figures from the Department of Labor.

Those energy hikes aren’t showing any signs of letting up, according to the most recent forecast from Wall Street investment bank Goldman Sachs.

“Updating our supply and demand expectations, we now forecast that Brent [crude] prices will need to average $135″ per barrel for the second quarter of 2022 through the first quarter of 2023, “up $10 vs. prior forecast,” Goldman Sachs researchers wrote in a Monday note.

“This represents summer retail prices reaching levels normally associated with $160 crude prices (due to strong refining utilization, gas prices and USD),” the note said.

In order to bring prices down, Yellen iterated a plan outlined by President Biden last month that will see the Federal Reserve increase interest rates and sell off some of its assets while encouraging further deficit reduction and making targeted interventions to help reduce costs for consumers.

“There’s a lot that Congress can do to ease the cost burdens that households are experiencing,” Yellen told Finance Committee ranking member Mike Crapo (R-Idaho). She pointed to the Biden administration’s supply-side tactic of releasing a million barrels of oil from the U.S. petroleum reserve.

She also said it was important for the U.S. to leave fossil fuels behind as a source of energy, since they contribute to greenhouse gas emissions that raise the temperature of the planet in addition to dragging on consumer pocketbooks.

“Investing in clean energy and renewables would reorder the dependence on global oil markets, which are subject to geopolitical risk and could bring down utility bills,” she said.

While Fed rate hikes of around 50 basis points through the rest of 2022 are expected to rein in inflation by year’s end, it’s only one of several issues looming over the global economy.

The World Bank warned Tuesday about the possibility of “stagflation” — the combination of diminished growth and weaker money that plagued the U.S. economy in the 1970s.

“Global growth is expected to slump from 5.7 percent in 2021 to 2.9 percent in 2022 — significantly lower than 4.1 percent that was anticipated in January. It is expected to hover around that pace over 2023-24,” the international lending organization said in the statement accompanying a report on the global economic outlook.

“The current juncture resembles the 1970s in three key aspects: persistent supply-side disturbances fueling inflation preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation,” the statement continued.

The World Bank pointed specifically to the fact that “energy markets are clouding the global growth outlook.”

Despite high gas and energy prices and the gloom they portend for the world economy, “people are still fueling up,” Andrew Gross, a spokesperson for auto service AAA, said in a statement.

“At some point, drivers may change their daily driving habits or lifestyle due to these high prices, but we are not there yet.” 

Updated at 5:25 p.m.

Tags Biden crude oil energy costs goldman sachs inflation Janet Yellen Janet Yellen Joe Biden oil companies pain at the pump rising energy costs
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