Prof. ST Hsieh
Director, US-China Energy Industry Forum
March 31, 2022
Biden administration is bogged down by high inflation rate that Democratic will face a major defeat in the mid-term election and that will render Biden as a real lame-duck President for the next two years. A major index of inflation is the record-breaking high gasoline price. As the Ukraine war drags on and US led severe economic sanctions against Putin have rampaged the global economy, especially energy price. Putin has demanded EU pays Russian gas by rubles as of today, March 31, 2022. Putin will not completely cut-off Russian energy export to EU anytime soon. But the stress is already on global energy market.
Biden’s announcement of releasing SPR at a rate of one million barrels per day for the next six months from May, is unprecedented. There are other options to tame the US gasoline prices and will examine the pros and cons when more details of the SPR releasing is available. It is clear the one-million barrels per day will have marginal impacts:
- US daily oil consumption is around 20 million barrels per day.
- By sanctioning Putin, effectively three million barrels of crude oil per day is wiped off global market.
- The OPEC+ is sticking to its production plan with marginal increase.
Biden to Draw Down Oil Reserves in Bid to Ease Gas Prices
U.S. will tap record 180 million barrels over six months; oil industry says president should instead remove barriers to energy investment
Updated Mar. 31, 2022 4:00 pm ET
WASHINGTON—President Biden will tap up to 180 million barrels of government oil reserves to help tamp down near-record high fuel prices, an unprecedented government intervention into oil markets following Russia’s invasion of Ukraine.
In remarks from the White House Thursday, Mr. Biden framed high energy prices as a wartime issue that requires a robust and wide-ranging response. The oil release—about 1 million barrels a day for six months starting in May—would be the Biden administration’s third, and by far the biggest-ever drawdown from the country’s emergency stockpile of roughly 568 million barrels.
Mr. Biden said he would also invoke the Defense Production Act, a Korean War-era national security mobilization law, to boost domestic output of minerals used in batteries for electric vehicles and other clean-energy technology.
And he called on Congress to pass a new law that would push oil companies to drill faster when they have leases on federal lands, including by imposing fees on companies for unused leases.
“The action I’m calling for will make a difference over time,” Mr. Biden said. “But the truth is it takes companies months, not days, to increase production…This is a wartime bridge to increase oil supply until production ramps up later this year.”
U.S. crude prices dropped about 7% Thursday on the news, but the effect on retail gasoline prices, which lag the crude market, remains to be seen.
The Organization of the Petroleum Exporting Countries, meanwhile, decided again Thursday to stick with a production plan it has arranged with Moscow in which members will raise their collective oil output by a modest 432,000 barrels a day. The Biden administration has repeatedly asked OPEC to boost output even faster, to no avail.
Mr. Biden’s remarks drew criticism from the oil industry, which said that he unfairly blamed U.S. energy companies for not pumping more oil in response to shortfalls stemming from the Russian invasion and the economic rebound from the Covid-19 pandemic.
“The best thing the White House can do right now is to remove barriers to investment in American energy production and infrastructure,” Mike Sommers, leader of the American Petroleum Institute, said in a statement. “Unfortunately, today we heard more mixed signals about developing affordable, reliable and secure American natural gas and oil.”
The Bryan Mound Strategic Petroleum Reserve in Freeport, Texas, is one of four U.S. facilities that hold a total of about 568 million barrels of oil.PHOTO: ADREES LATIF/REUTERS
Charging companies for unused leases would add to rising costs that oil producers face because of inflation and supply-chain delays, said Tyler Glover, chief executive of Texas Pacific Land Corp., a big landowner in the Permian Basin in West Texas.
Mr. Biden’s speech comes after months of attempts to ease rising energy prices, with little to show for it.
Polls show voters frustrated by rising prices at the pump and several congressional Democrats have been concerned about tough reelection campaigns and the prospects of losing control of the House and Senate after the midterm elections in November.
Prices for crude to be delivered this year fell on news of Mr. Biden’s plan, but many futures contracts for deliveries in 2024 rose, reflecting broad expectations that the benefits of a reserve release may be short-lived.
Mr. Biden said he didn’t know when or by how much his moves might trickle down into lower gasoline prices for consumers.
“There’s no firm answer,” he said, adding that the timeline and impact would also depend on the number of barrels U.S. allies decide to release. “It is hard to tell…but it will come down.”
The decision to release oil from the U.S. Strategic Petroleum Reserve was made by the president after consulting with allies and partners, the White House said. Administration officials said they expected other countries to also tap reserves, with possible announcements as soon as Friday.
A 180 million barrel release would be nearly four times as large as any other release from the government’s emergency stockpile, according to analysts at ClearView Energy Partners LLC. The U.S. has already made two releases since November that totaled 62 million additional barrels than previously scheduled for release.
This newest release, if completed in full, would leave U.S. government reserves with less than 400 million barrels, their lowest level since 1984, according to data from the U.S. Energy Information Administration. They had almost 700 million barrels—near their peak—as recently as 2017.
Those reserves were falling even before Mr. Biden’s orders because at the peak of the shale drilling boom in the U.S., Washington lawmakers from both parties decided to start selling some of the reserves as a source of cash to balance budgets and modernize the reserve’s infrastructure. It led several analysts to warn that it could weaken the strategic reserve, also called by its acronym SPR, if it is eventually needed.
The newest drawdown could leave the country with fewer options going forward if the Russia-Ukraine conflict gets worse or prices rise further.
At current import and export rates, a drawdown of this size would leave U.S. reserves with not much more than the 90 days of supply required under its membership in the International Energy Agency, the Paris-based energy watchdog, according to calculations from RBC Capital Markets
“The government has no further SPR bullets,” the bank’s analyst Michael Tran said in a note to clients.
And that might come with only little short-term gain for U.S. consumers, several industry leaders and analysts said. The amount of oil the Biden administration plans to release could reduce gasoline prices by 5 to 10 cents a gallon in the short-term, with little long-term impact, said Andy Lipow, president of Lipow Oil Associates in Houston.
“An SPR release is a one-time measure to bridge a supply disruption but does nothing to get more supplies out of the ground to replace Russian supplies,” Mr. Lipow said.
Oil market participants are only now beginning to feel the true impact of reduced Russian supplies, which many western companies have shied away from purchasing.
“Russia is a problem that is too big for the SPR to solve,” said Bob McNally, who served as an energy adviser to President George W. Bush and is now an analyst at Rapidan Energy Group. “Gasoline prices are mainly influenced by crude oil prices. And crude oil prices are going to go higher as long as the Russia risk remains and intensifies.”
The government will also need to buy new crude eventually to replenish its reserves, which could itself cause prices to rise or become an expensive proposition if the war lingers on.
Some analysts have predicted worst-case scenarios of crude prices hitting near or beyond $200 a barrel if conflict with Russia keeps its oil off the market.
“It is a loan of oil to the market rather than a new source of supply,” said Callum Macpherson, head of commodities at Investec, noting that the U.S. would need to replenish its spent oil reserves at a later date, driving up prices for longer-dated oil contracts.
Pump prices across the U.S. are still close to the average $4.33 a gallon record high they hit earlier in March, a pressure point for the president as he attempts to balance the needs of war in Ukraine with those of U.S. consumers weary of inflation.
Mr. Biden has been trying to help consumers, whom polls show are frustrated by rising prices at the pump. Some Democrats in Congress face a difficult reelection and have pushed for legislation to suspend the federal gas tax.
Mr. Biden’s economic advisers have privately discussed a gas-tax holiday, people familiar with the conversations said, but some have raised doubts that it would be an effective way to lower prices.
Russia’s attack on Ukraine helped push the price of oil to over $100 a barrel for the first time since 2014. Here’s how rising oil costs could further boost inflation across the U.S. economy. Photo illustration: Todd Johnson
A gas tax holiday would also take money away from the highway trust fund, and may not be directly passed on to consumers by oil companies and retailers.
“You cannot write a law that requires them to pass it on, that’s just the way it is,” House Speaker Nancy Pelosi (D., Calif.) said.
She said the idea of some sort of rebate or direct payment to consumers was more appealing to her, but she said that Democratic leaders haven’t formulated details on it.
In the Senate, some Democrats have proposed legislation to stop collecting the federal gas tax of 18.4 cents a gallon through the end of the year, but it has met a cool reception from other party members as well as Republicans. Opponents have called it a gimmick, with GOP lawmakers pushing for more domestic energy production as a way to push down prices.
The administration’s actions so far have focused on getting more crude on the market, but those efforts have often been frustrated by other market forces ultimately leaving gasoline prices around record highs for a month. Producers around the world have been reluctant to increase despite pleas from Mr. Biden and other Western leaders.
Analysts said it is clear Mr. Biden is taking a novel, aggressive path to drive down prices even before there is an actual shortage in the market. Rising demand has outpaced supply this year and the U.S. has banned Russian oil, but that oil is largely still making its way to market. Prices have been rising on fears of potential shortfalls to come, either from war-related disruptions or expanding economic sanctions against Russia.
It is “a break from prior policy of using stockpile releases to backfill a major supply disruption or refinery outages,” Helima Croft, head of global commodity strategy at RBC Capital Markets, said in a note to clients. “The (reserve) release is being used as a tool to blunt the impact of these foreign policy decisions for U.S. consumers.”
The scale of the reserve release could have unintended consequences for oil markets, such as creating logistical bottlenecks at the U.S. oil industry’s export hubs on the Gulf Coast, according to a research note from Goldman Sachs. That could also make it harder for U.S. shale oil producers to increase their own output, the bank’s analysts said.
Will Horner, Summer Said and Natalie Andrews contributed to this article.
Appeared in the April 1, 2022, print edition as ‘Biden Taps Oil In Bid to Curb Prices at Pump’.