Why fuel taxes won't drop until supply issues reopen

Why fuel taxes won't drop until supply issues reopen

Americans still look prepared to hop into cars for summer road trips, including the upcoming Fourth of July holiday, despite soaring gasoline prices and high inflation taking a toll as they fill up their tanks.

President Joe Biden called on Congress Wednesday to temporarily suspend federal taxes on gasoline and diesel, while encouraging U.S. oil refining companies to produce more supplies to relieve the burden of high prices on consumers.

What does a federal gas-tax suspension mean for energy prices?

The JPMorgan analyst said fuel prices won't drop until supply-side issues, including an acute shortage of refining capacity, have been addressed in a Wednesday client note.

The administration will use all appropriate federal government tools to increase refining capacity, including the Defense Production Act, to order refiners to bring back some of their shuttered plants back online, said JP Morgan s Natasha Kaneva, Ted Hall and Prateek Kedia, in the bank's global commodities research team. The Biden administration could consider ways to keep refineries that plan on closing in the near future to remain open, helping to avoid an even more severe shortage of capacity in 2023. In the past, it took an average of six to 12 months for shuttered refineries to restart, according to the commodities team. The national gas price average is $4.94 per gallon, compared to $3.50 in February.

Biden will be calling on Congress to impose a gas tax. Some states have enacted gas-tax holidays. Before the Biden administration imposed sanctions on Russian energy imports in an attempt to undermine the Kremlin's ability to fund its war against Ukraine, the US imported more than 300,000 barrels of vacuum gas VGO from Russia in the past two years, according to JP Morgan. VGO is an intermediate feedstock to increase gasoline production from refineries. JPMorgan suggested that the US should find alternatives, including trading with Venezuela, to boost capacity.

According to the report, China could increase supply by about 500,000 barrels per day by persuading its quotas of transportation fuels exports. China, the second-largest refiner world-wide, is on track to achieve a net-zero target by removing cargo exports of transportation fuels before 2025. By 2030, the country's emissions need to be reduced by 45% and reach net-zero by 2050.

While the Biden administration has backed policies and taken executive action to lower gasoline prices, the JPMorgan team said those only provide temporary relief for U.S. consumers and will likely encourage Americans to drive more, leading to a stronger demand growth and higher gas prices.