WASHINGTON — Relief at the gas pump coupled with this past week’s news that businesses continue to hire at a blistering clip have tempered many economists’ fears that America is heading into a downturn.
But while President Biden’s top aides are celebrating those economic developments, they are also worried the economy could be in for another serious shock later this year, one that could send the country into a debilitating recession.
White House officials fear a new round of European penalties aimed at curbing the flow of Russian oil by year-end could send energy prices soaring anew, slamming already beleaguered consumers and plunging the United States and other economies into a severe contraction. That chain of events could exacerbate what is already a severe food crisis plaguing countries across the world.
To prevent that outcome, U.S. officials have latched on to a never-before-tried plan aimed at depressing global oil prices — one that would complement European sanctions and allow critical flows of Russian crude onto global markets to continue but at a steeply discounted price.
Europe, which continues to guzzle more than two million barrels of Russian oil each day, is set to enact a ban on those imports at the end of the year, along with other steps meant to complicate Russia’s efforts to export fuel globally. While Mr. Biden pushed Europe to cut off Russian oil as punishment for its invasion of Ukraine, some forecasters, along with top economic aides to the president, now fear that such policies could result in huge quantities of Russian oil — which accounts for just under a tenth of the world’s supply — suddenly taken off the global market.
Analysts have calculated that such a depletion in supply could send oil prices soaring to $200 per barrel or more, translating to Americans paying $7 a gallon for gasoline. Global growth could slam into reverse as consumers and businesses pull back spending in response to higher fuel prices and as central banks, which are already raising interest rates in an effort to tame inflation, are forced to make borrowing costs even more expensive.
The potential for another oil shock to puncture the global economy, and perhaps Mr. Biden’s re-election prospects, has driven the administration’s attempts to persuade government and business leaders around the world to sign on to a global price cap on Russian oil.
It is a novel and untested effort to force Russia to sell its oil to the world at a steep discount. Administration officials and Mr. Biden say the goal is twofold: to starve Moscow’s oil-rich war machine of funding and to relieve pressure on energy consumers around the world who are facing rising fuel prices.
To transport its oil to market, Russia draws on financing, ships and, crucially, insurance from Britain, Europe and the United States. The European penalties, as currently constructed, would not only cut Russia off from most of the European oil market but also from those other Western supports for its shipments. If strictly enforced, those measures could leave Moscow with no means of transporting its oil, at least temporarily.
The Biden administration’s proposal would not affect the European ban, but it would ease some of the other restrictions — but only if the transported Russian oil is sold for no more than a price set by the United States and its allies. That would allow Moscow to continue moving oil to the rest of the world. The oil now flowing to France or Germany would go elsewhere — Central America, Africa or even China and India — and Russia would have to sell it at a discount.
8 Signs That the Economy Is Losing Steam
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Worrying outlook. Amid persistently high inflation, rising consumer prices and declining spending, the American economy is showing clear signs of slowing down, fueling concerns about a potential recession. Here are other eight measures signaling trouble ahead:
Consumer confidence. In June, the University of Michigan’s survey of consumer sentiment hit its lowest level in its 70-year history, with nearly half of respondents saying inflation is eroding their standard of living.
The housing market. Demand for real estate has decreased, and construction of new homes is slowing. These trends could continue as interest rates rise, and real estate companies, including Compass and Redfin, have laid off employees in anticipation of a downturn in the housing market.
Copper. A commodity seen by analysts as a measure of sentiment about the global economy — because of its widespread use in buildings, cars and other products — copper is down more than 20 percent since January, hitting a 17-month low on July 1.
Oil. Crude prices are up this year, in part because of supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to waver as investors worry about growth.
The bond market. Long-term interest rates in government bonds have fallen below short-term rates, an unusual occurrence that traders call a yield-curve inversion. It suggests that bond investors are expecting an economic slowdown.
Some economists and oil industry experts are skeptical that the plan will work, either as a way to reduce revenues for the Kremlin or to push down prices at the pump. They warn the plan could mostly enrich oil refiners and could be ripe for evasion by Russia and its allies. Moscow could refuse to sell at the capped price.
Treasury Secretary Janet L. Yellen plans to push for more support for the cap when she meets with fellow finance ministers from the Group of 20 nations — including Russia’s — in Asia in the next week. The American delegation will have no contact with the Russians, a Treasury official said.
But even some skeptics say that the price cap could, if nothing else, keep enough Russian oil pumping to avoid a recession-triggering price spike.
Administration officials say privately that there are signs in oil markets that even in its infant stages, the cap proposal is already helping to reassure traders that the world could avoid abruptly losing millions barrels of Russian oil per day at the year’s end.
Other administration officials have pressed the case for the cap in trans-Atlantic video calls and in-person meetings across European capitals like Brussels and London. They are stressing recession risks in talks with other countries, private insurers and a host of other officials over how to structure and carry out the price-cap plan, which leaders of the Group of 7 nations endorsed in principle this past week at a meeting in the German Alps.
“We definitely want to be mindful of the downside risk and the fact that people’s costs are too high” at the pump, Wally Adeyemo, the deputy Treasury secretary, said in an interview. “We think one of the most effective things we can do to deal with the concerns we have is implementing the price cap — because it reduces the risk of global downturn and it also reduces the price of one of the most important things for the global economy going forward.”
Dark clouds have gathered over the global economy in recent weeks. Researchers at High Frequency Economics estimated in a note to clients this past week that recessions are already beginning across Europe, Britain and Japan.
Mr. Biden’s closest economic aides insist the American economy has not yet hit recession, even as it struggles through what could be its second consecutive quarter of negative growth. Their case has been buoyed by the continued strength of the labor market, which added 372,000 jobs in June and has not yet slowed as many forecasters had predicted.
Administration officials also see reasons for optimism in the dip in global oil prices this past week, which should translate into meaningful relief in the weeks to come from the $5 a gallon prices that drivers have been paying in many states this summer. The average national price per gallon fell to just under $4.70 by the end of the week, 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 swiftly to ban imports of Russian oil to the United States and coordinate similar bans among allies.
In some ways, the price-cap proposal is an acknowledgment that those penalties have not worked as intended: Russia has continued to sell oil at elevated prices — even accounting for the discounts it is giving to buyers like India and China, which did not join in the oil sanctions — while Western drivers pay a premium.
At its core, the cap proposal is an attempt to use the West’s influence over Russian oil shipments to dictate the price Moscow can command for its oil exports.
The cap plan seeks to keep the Russian oil moving to market, but only if it is steeply discounted. Russia could still ship its oil with Western backing if that oil is sold for no more than a price set by the cap. Negotiators are working to set that price, which would be high enough to ensure Moscow would still profit off its oil sales but lower than the price it is commanding now, of about $30 below the global price.
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Job gains continue to maintain their impressive run, easing worries of an economic slowdown but complicating efforts to fight inflation.
Insurers and financing companies would need to join the effort to make it work. So would many of the countries outside Europe that would buy the discounted oil. But even if some countries refuse to sign on, like China and India, administration officials are confident a well-designed cap would drive down prices anyway — because no country wants to pay more than it has to for any vital commodity.
Ideally, the officials say, the plan could bring down global oil prices by reducing the risk of a future supply disruption, which traders may be factoring into their decisions.
Some experts doubt the plan will work, saying it is ripe for evasion and will still provide Russia with plenty of energy revenue. There is also the chance that a low cap would induce Moscow to refuse to ship any discounted oil, instead paying to cap wells and halt production.
“It’s another half-measure idea, as opposed to making the tough decision to actually stop purchasing Russian crude and using secondary sanctions,” said Marshall S. Billingslea, who was the assistant Treasury secretary for terrorist financing in the Trump administration.
Steve Cicala, a Tufts University economist who studies energy and environmental regulation, said the price cap could dent Russian revenues but is unlikely to affect global oil prices. Instead, he said, refineries that buy Russian oil at a discount will sell that oil at a much higher price set by the global market, pocketing a windfall in the process.
“There’s a misconception that if we implement the price cap, then the price that people will pay for gasoline is going to fall,” Mr. Cicala said. “That’s not the case.”
But, Mr. Cicala added, the cap could well succeed at keeping Russian oil flowing — and thus, preventing the sort of price spike that administration officials are so worried about.
“It’s ultimately keeping the oil coming out of the ground,” he said, “that avoids the global recession.”
Alan Rappeport contributed reporting.