Last week, the White House caused a splash by announcing that President Biden was ready to release more crude from the strategic petroleum reserve.
That would be on top of the largest-ever release of 180 million barrels, approved earlier this year as a tool for bringing down retail fuel prices. Back then, experts warned this tool could hurt its wielder. Now, the danger seems to be even greater.
“We remain very able, very vigilant: if we need to deal with additional challenges with supply, with affordability, we’ll have additional opportunity with the SPR if we need to do more sales into the future beyond that December time period,” one senior administration official told the Financial Times this week.
This makes further sales from the SPR virtually a certainty: analysts expect prices to rise in December after the European Union embargo on Russian crude comes into effect, which will happen on the 5th of the month.
With OPEC+ reducing output by about a million barrels daily from November, this means that the supply of crude globally will tighten in the coming months. And when supply tightens, prices rise.
Many see Biden’s latest move as a way of earning credit for the Democrat government ahead of the midterm elections. Biden himself says there is no political motive behind the SPR release strategy. And Goldman Sachs analysts just said this week that SPR releases would have only a modest effect on prices.
In a note last week, they wrote that they expected the White House to release another 16 million barrels in 2023 “from FY2023 Congressionally mandated sales” but that those sales, first, would depend on oil prices and, second, would only have a limited impact on prices of less than $5 per barrel.
The biggest problem with using the SPR as a way of regulating oil prices is that, being a strategic reserve, it would be dangerous to draw too much from it. Another 16 million barrels on top of the 180 million approved for release this year should not make a major difference in inventory levels, but observers are already getting nervous about those levels.
At a little over 400 million barrels, the current amount of oil in the SPR is not enough for a month of consumption in case of emergency. One might point out that the U.S. cannot consume only locally produced oil for any length of time, which makes the SPR redundant, but it could certainly trade it for other blends should such a need arise.
It seems not everyone is really buying the assurance that there is no political motive for the new release plans. Indeed, as early as the original reserve release plan, many commentators in the media argued that with it, Biden wanted to try and make sure the Democrats win the midterms or at least do not lose them very badly because of high retail fuel prices.
“After the Opec meeting and with the midterms in mind, the administration needed to be seen doing something — and that seems to be announcing more SPR barrels that were already planned,” Energy Aspects’ Amrita Sen told the FT this week.
What this means is that the administration is, for all its talk of all tools on the table, severely short of actual tools. There must be awareness in the White House that the SPR is a double-edged sword, and wielding it is quite risky. Yet they are wielding it for lack of a better option.
There is only one other tool on that White House table that is even riskier: an export ban. The idea has only been mentioned in a general way, with assurances that nobody is seriously considering it, although some legislators have called for precisely that: ban exports, and keep prices low for Americans.
Critics have pointed out that the likelihood of success from the use of that tool is rather low, with Goldman analysts warning earlier this month that a ban on exports could push both oil and fuel prices sky-high and still create shortages at home.
It is, then, a question of choosing the lesser evil. And the lesser evil appears to be releasing additional barrels from the strategic petroleum reserve “responsibly where it makes sense to stabilize markets,” per Deputy Energy Secretary David Turk, as reported by Reuters.
So, while OPEC tightens supply, the U.S. will stand ready to continue boosting it from its strategic reserve. And it will have to be careful not to deplete this reserve too much because the more oil released now, the more oil will need to be purchased later to replenish the reserve.
It is perhaps not the most elegant way of solving the gasoline price conundrum that has made life harder for the Biden administration this year. But it appears to be the only realistic way of trying to solve it. The alternative is even more unpalatable.
By Irina Slav for Oilprice.com
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