Energy prices are soaring everywhere, prompting governments to consider support measures to mitigate the financial strain put on consumers’ wallets. But these costly policy tools might add to inflationary pressures and hinder central banks’ tightening efforts, according to one market analyst.
Federal and state governments are still exploring various mechanisms that could be employed to cushion the blows from higher oil and gas prices.
The White House has reportedly considered multiple tools to alleviate the pain at the pump, including suspending the 18.3-cent federal gas tax and shipping gas cards to Americans to help offset $4-per-gallon gasoline prices. But the administration faced opposition from congressional committees.
President Joe Biden announced that he would release 1 million barrels of oil per day from the nation’s strategic petroleum reserves for the next six months. But some disputed the efficacy of this initiative, as the United States consumes about 17 million barrels per day.
Several states have also looked into similar relief efforts, such as eliminating or suspending gas taxes. California may also give drivers with up to two cars per household $400 debit cards.
Across the world, many governments have introduced or mulled over fiscal support proposals.
In Canada, the Ontario government cut the gasoline tax, giving drivers roughly 6 cents per liter in savings. British Columbia officials approved extending to motorists a one-time relief rebate of $110.
Mexico slashed taxes on gasoline sales to zero and maintained subsidies to keep prices from spiraling out of control. This has also sparked an unintended consequence of U.S. drivers crossing the border and filling up their tanks.
Overseas, French leaders introduced a cap on the price of natural gas, and they’re studying a potential fuel-voucher program and a decrease in the electricity tax rate.
Earlier this year, the UK offered households approximately $400 in assistance to help pay for skyrocketing energy bills. The German government approved billions in aid to combat surging electricity prices.
Ireland recently trimmed the excise duty on petrol and diesel until August. Portugal reduced the special tax applied on fuels.
Stopping Central Banks’ Inflation-Busting Policies?
While these initiatives would ensure consumers experience some relief, they could continue to exacerbate the current inflationary environment, affecting central banks’ tightening to fight inflation.“On the other hand, subsidies are a form of economic stimulus, which are being inserted into economies that are already overheated. This could blunt central banks’ fight against inflation. And subsidies will put a dent in public coffers at a time that countries are trying to reduce pandemic support and square their accounts.”
Fiscal policies helped households at the height of the public health crisis, according to Tandon. But it’s crucial that governments “tread cautiously in trying to ameliorate post-pandemic price problems.”
“Another general rule is that oil-producing countries can more easily subsidize domestic gasoline prices when oil prices are high,” the study authors wrote. “This doesn’t happen in the U.S., however, because the government doesn’t control the cost of oil or gasoline like countries that are members of OPEC (Organization of Oil Exporting Countries) countries do. The same holds true for several other large oil producers, including Canada and Norway.”
That said, others have contended that these types of measures would lift consumer demand, further adding to higher prices. This would possibly negate some of what central banks are presently doing since government stimulus or relief would inject more money into the economy at a time when there’s an abundance of cash.
Last month, the Federal Reserve raised interest rates by 25 basis points for the first time since 2018. The Federal Open Market Committee is widely expected to pull the trigger on a 50-basis-point increase at next month’s two-day policy meeting.
Crude futures slumped on April 5 as the May West Texas Intermediate contract fell below $103 per barrel on the New York Mercantile Exchange.
When crude prices increase or decrease by 10 percent, the cost of gasoline will respond by about 7 percent, according to Kiplinger.
