The president can’t banish inflation. They do however have a powerful tool to ease the pain caused by high gas prices: The Strategic Petroleum Reserve.
President Joe Biden has leaned more than any of his predecessors on the emergency oil stockpile to lower high pump prices, which voters loathe.
The SPR is a network of underground storage caverns that hold vast quantities of crude oil. This can be used to release it during hurricanes and other breaking-the-glass events. Biden has been open about this since February’s invasion of Ukraine by Russia.
Since Biden’s January 2021 election, the SPR has seen a drop in oil content by about a third (36%). This has resulted in the SPR’s emergency oil stockpile being at its lowest level since June 1984, a time when both US energy demand and the US economy were significantly lower than it is today.
Biden isn’t done yet. A senior administration official Tuesday night said that the president will announce the sale of 15 million more barrels from SPR on Wednesday.
Biden made it clear to his advisors that he is ready to authorize future oil market releases if necessary.
This Wednesday’s sale is not entirely new. It is part of an earlier announced plan to release 180,000,000 barrels of crude oil in six months. The record-setting emergency release was announced in March but was a little behind schedule. The administration is now on track to reach the 180 million mark, but it may take longer than expected.
Are SPR releases effective?
SPR headlines rattle an already fragile energy market, which is currently at risk of a possible recession. US oil prices fell 3% to $82.82 Tuesday. This is a return to levels that were last seen before rumors about OPEC+’s controversial production cut. Analysts blamed the SPR news for the selloff.
The oil price decline alone should keep gasoline prices under control, analysts claim.
It’s difficult to quantify the impact of the SPR release on oil prices. However, experts in the oil industry said that Biden’s strategy was effective and helped to mitigate the blow from the war in Ukraine as well as the lackluster supply from both OPEC+ (and the US) oil producers.
“Kudos!” They have done an amazing job in achieving their goal to lower energy prices,” said Michael Tran (managing director, of global energy strategy, RBC Capital Markets).
Although gas prices are not cheap, a gallon of regular gasoline costs an average of $3.87 in the US on Tuesday. However, they are still well below the record of $5.02 set back in June.
“It has proven effective so far,” stated Tom Kloza, global head for energy analysis at Oil Price Information Service. He noted that oil prices had not fallen to 2008’s all-time highs. “You must credit the SPR for this. The administration is laser-focused only on gasoline.
Midterm elections loom
Kloza stated that he believes there is a better 50/50 chance of gas prices dropping back to $3.67 per gallon, their most recent low. Kloza said that US policy is not to be credited. He cited market forces and recession fears, as well as the reopening or closure of maintenance-affected refineries.
“I don’t believe they should do anything before 2023,” Kloza stated that the market does most of the work for the White House. “I believe gasoline will go lower,” Kloza said.
Oil market observers don’t realize that the latest announcement about SPR sales comes just weeks before voters head off to the polls for the crucial midterm elections.
Andy Lipow, president and CEO of Lipow Oil Associates, stated that “Given that the midterm elections are just weeks away, and the OPEC cuts, the Biden administration wants to ensure that energy prices don’t top of mind.”
Lipow expressed frustration with the oil industry’s inability to get additional oil production, despite complaining about high prices.
Firepower has declined
Biden’s aggressive emergency releases have also reduced the SPR, possibly limiting the government’s ability to respond to future shocks.
The reserve isn’t a shale of oil. It is more like a reserve fund for rainy days and each release leaves less oil to be used in the next crisis, however, and whenever it may arise.
The administration will detail its efforts to replenish the emergency reserve. This will provide market participants with an important indicator of the extent of federal action in the past six months.
Biden will announce that when oil prices fall between $67 and $72, the administration will repurchase crude oil to meet its emergency reserve.
According to the senior official, this will be a “signal for producers” in that it will help “moderate” and stabilize prices both when they are high and low.
This plan is also intended to counter criticisms about Biden’s unprecedented reserve releases. Officials said that it demonstrates the administration’s intention to replenish when market conditions are most favorable.
The official stated that the SPR was a vital national security asset. He also noted that it remains the largest reserve in the entire world.
Despite recent emergency sales the SPR still has more than 400,000,000 barrels of oil. This is considerable firepower that could help in the months ahead to deal with disruptions caused in part by the conflict in Ukraine.
The official stated that 400 million barrels were a lot.
Kloza, an OPIS analyst, stated that he is not concerned about the shrinking SPR because, more than decades ago, the United States of America and Canada can dramatically ramp up production if necessary (and if incentivized with higher prices).
Kloza stated, “Sometimes reserves can become archaic.” “I would not worry about it until the level drops quite a bit.”