The White House divulged late on Tuesday its plan to release 15 million barrels of crude oil from the strategic petroleum reserve to be delivered in December, as the last tranche of the emergency 180 million barrel release that the Biden Administration announced in March.
Also this week, President Biden said there would be “consequences” for Saudi Arabia’s decision as a member of OPEC+ to reduce its oil production in response to market conditions, which is OPEC+’s official motive for the move.
One of the possible “consequences” would be further limits to arms sales to the Kingdom, as suggested by Democratic legislators. Another, per an NBC report from Tuesday, is to discourage U.S. companies from expanding their business ties with Saudi Arabia.
Meanwhile, U.S. oil production continues its slow growth, not least because of the various challenges that drillers are experiencing, including the all-pervading effects of inflation, a labor and equipment shortage, and continuing supply chain problems.
The picture does not look bright for U.S. energy security. In fact, one might argue that the Biden administration’s actions so far this year have compromised this security and continue to compromise it.
The unprecedented release from the strategic petroleum reserve has brought the United States’ emergency supply of crude oil to the lowest level since 1985, at less than 445 million barrels, from 612 million barrels before the release program began.
This is not particularly good news for a country that consumes almost 20 million barrels of oil daily. The reason it is not good news is that 445 million barrels of oil mean the U.S. only has enough in its strategic reserve for about 22 days in case of an actual emergency. Many analysts – and some legislators – have called on the White House to stop using the SPR for purposes it was not meant to be used for. Yet, with midterms around the corner, it would be hard for any administration to ignore fuel prices and the fact that after a substantial decline during the summer—thanks in no small part to the SPR release—they are climbing again.
Some have argued that the SPR is obsolete because the U.S. is the biggest oil producer in the world and a net exporter. But as Robert Rapier pointed out in this Forbes article, in addition to all this, the U.S. is also one of the biggest importers of crude. Any disruption in imports would have a devastating effect on U.S. oil prices if it weren’t for the cushion that the SPR provides by simply existing.
Speaking of imports, Saudi Arabia is one of the top suppliers of the U.S. with crude oil. Oddly enough, as of last year, it was the fourth-largest U.S. oil supplier after Canada, Mexico, and Russia. Now that Russian oil has been banned, the Saudis have moved to third place, with the latest EIA data showing daily imports of some 541,000 barrels.
After the ban on Russian oil—and refined products—fuel prices in the U.S. spiked, and it took months, luck, and more than 100 million barrels of SPR oil to bring them down. If the diplomatic escalation with the Saudis continues, exports of oil from the Kingdom might end up affected at the worst possible time for the Biden administration.
The latest signals from both sides are not exactly promising. Biden has taken to the SPR again, Senators are calling for punishment for the Saudis, and a Saudi prince and distant relative of the de facto ruler of the Kingdom, Crown Prince Mohammed, has just threatened Washington with a jihad.
Now more information about the roots of the rift is emerging, too, and the outlook becomes even more discouraging. CNBC reported this week that the White House had asked the Saudis to delay its decision to reduce production by a month. The information comes from an official statement by the Saudis defending the decision to cut output.
Claims of coercion among other OPEC+ made by Pentagon Press Secretary John Kirby have not helped clear the air between Washington and Riyadh. Soon after the claims were made, a number of OPEC members rushed to declare the OPEC+ decision was unanimous, and nobody was coerced.
SPR depletion, an escalating diplomatic rift with its third-biggest oil supplier, and local production growth challenges: the picture doesn’t look well. At the same time, White House Press Secretary Karine Jean Pierre said at yesterday’s media briefing that U.S. oil production is on track to hit a record high this year, so maybe not all is bleak.
What’s actually bleak is the absence of many options on Biden’s table for dealing with gasoline prices. U.S. refineries need imported oil to operate. Attempts at supply diversification by softening relations with Venezuela have so far failed. The Iran deal seems to have stalled again. And Canada and Mexico can’t export enough, judging by the latest U.S. oil import numbers.
The SPR release cannot continue indefinitely. In fact, the reserve will soon enough need to start being replenished, but the White House said it will wait until prices fall to between $67 and $72 per barrel. This may take a while given the upcoming EU embargo on Russian oil that comes into effect on December 5 and will apparently affect non-EU importers of the commodity, too.
In short, the Biden administration is not in a good place when it comes to ensuring the energy security of the country. And whether or not U.S. oil production will reach a record or grow moderately as industry executives expect will be more or less irrelevant in the current supply security context. After all, OPEC could always cut more output and earn more from higher prices.
By Irina Slav for Oilprice.com
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