Proposed US 'gas tax holiday' unlikely to support oil market in long term, Rystad says

Consultancy says the best way to rebalance supply and demand is to let the market work itself out

A petrol station in California. US President Joe Biden called on Congress to suspend the federal petrol tax for three months. Bloomberg
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The US government's proposed “gas tax holiday” will help consumers in the short term but it is unlikely to support the rebalancing of the market in the long term, according to Oslo-based consultancy Rystad Energy.

On Wednesday, US President Joe Biden called on Congress to enact a three-month federal petrol and diesel tax holiday and also urged states to provide more relief for drivers by suspending their state fuel taxes, as prices across the country continue to hit new highs.

Average petrol prices in the US stand at about $5 a gallon, or 4.54 litres, according to data from the AAA motoring website, more than doubling from January amid rising oil prices globally, years of underinvestment in the energy industry and a lack of US crude refining capacity.

US crude refining capacity is currently running at a monthly average level of 96 per cent in June and has fallen by about 1 million barrels per day since early 2020 because several refineries were closed or converted, according to the US Energy Information Administration.

US refinery inputs will average 16.7 million bpd during the second and third quarters of 2022, lower than the 2019 refinery inputs average of 17.3 million bpd, the EIA said.

“I fully understand that the 'gas tax holiday' alone is not going to fix the problem, but it will provide families some immediate relief,” Mr Biden said.

However, the long-term impact of the move is “questionable and could, paradoxically, be detrimental”, said Rystad Energy analyst Claudio Galimberti.

“Lower prices would marginally boost demand ahead of the busy summer driving season, potentially pushing the market even more out of balance than it currently is as supply constraints remain a struggle. The best mechanism to rebalance supply and demand is to let the market work itself out,” he said.

“If the administration is concerned about the impact of gasoline prices on consumers, a more effective strategy would be to provide cash directly to consumers with the freedom to decide how to spend it, rather than reducing gasoline taxes.”

The Biden administration has been considering the proposal for months while it faces increasing pressure over rising petrol prices. The US leader's approval ratings also continue to slump before mid-term elections in November.

Congressional approval would be needed to suspend the tax of 18.4 cents per gallon of petrol, which has never been suspended to date.

The petrol and diesel tax was first introduced in 1932 at a cent a gallon before rising to 18.4 cents in 1993, where it has stayed since.

Revenue from the federal petrol and diesel tax goes to the Highway Trust Fund, the major source of federal funding for motorways, roads and bridges.

Suspending the federal tax would cost the fund $10 billion in revenue, but the White House said other revenue could be diverted to it.

Despite any interim measures, extreme volatility in global oil prices is “now the norm” and will continue to be for some time, as refinery utilisation remains tight and high inflation and recessionary fears deter operators from ramping up supply in the short-term, said Rystad Energy analyst Louise Dickson.

“The fear that higher inflation will trigger an economic slowdown is valid, given the increasingly dedicated hawkish monetary policy by the Fed [US Federal Reserve] and ECB [European Central Bank], and there are already technical signals of a recession materialising,” Ms Dickson said.

“However, very few market participants are already calling for a recession to materialise in the third quarter of 2022, so the economic slowdown concerns should not, in theory, negatively impact the oil price for next month as supply-demand dynamics remain bullish.”

Brent, the global benchmark for two thirds of the world's oil, rose by about 67 per cent last year as developed economies recovered from the coronavirus pandemic.

The benchmark rose to a notch under $140 a barrel after Russia's military offensive in Ukraine led to western sanctions on Moscow, but it has since given up some of the gains and has traded above $100 a barrel in the first half of this year.

Brent was 0.06 per cent lower, trading at $111.7 a barrel at 3.17pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.20 per cent, trading at $106 a barrel.

“Physical supply remains tight, crude and product inventories are at record lows and refineries remain strained in delivering products to the market as economies open and demand more transport fuels, adding further support to immediate crude demand,” Ms Dickson said.

On one hand, supply from Opec+ is constrained and US oil growth remains limited, while on the other, despite the looming twin threats of inflation and recession, the impact on oil demand yet to be visible in the market.

Last week, Opec maintained its forecast that world oil demand would exceed pre-pandemic levels in 2022, and kept its forecast for this year at 3.36 million bpd, unchanged from the previous month's forecast.

“Until we see material signals of demand weakness, the actual downward price risk to the market in the near term is any surprise supply comebacks, whether from Russia or from Opec+ in reaction to Russia’s market expansion through heavily discounted oil or, in other words, a price war,” Ms Dickson said.

Updated: June 23, 2022, 12:30 PM