Letting Out the Oil
Terry H. Schwadron
April 1, 2022
Whether you believe that covid, the war in Europe or Joe Biden’s energy policies are driving the price of gas at the pump, we all agree the prices are high — and that there is an expectation, correct or not, that our government should be doing something about it.
So, yesterday, the White House did: The Biden administration announced what amounts to a massive release of the nation’s strategic oil reserves in a serious nod to American unhappiness about gas prices.
The White House plan is to release a million barrels of crude oil a day for 180 days, a sustained commitment that had immediate effects on worldwide oil pricing. Still, the effect on what we see at the pump is unclear because oil prices depend on global trading prices.
The U.S. Strategic Petroleum Reserve holds about 588.2 million barrels of oil and refined products. This could reduce that by a third. Just for reference, the United States consumes about 20 million barrels of oil products a day, and there was an increase in consumption between 2020 and 2021.
We hold oil reserve for rainy day emergencies that, in recent years, have included interruption in supply lines and pipelines, as occurred last year, or natural disasters like that the shutdown of refineries during hurricanes or frozen plants.
Obviously, the announcement came as the sanctions against Russian oil purchases to punish that nation for invading a sovereign Ukraine continue to roll out. Interruptions in supply result, naturally, in higher prices.
But just as clearly, this is a move that bristles with international and domestic political concerns. It is an open question whether allies will follow suit and release oil from their reserves or whether voters will recognize a move in their behalf.
Immediate Effects
The announcement did have some immediate effects.
The worldwide oil prices, which have been surging since the fighting in Ukraine began, fell on average 6% overnight. Nevertheless, the average price of gasoline is $4.23 a gallon, according to AAA, the driving association, still up more than an average 60 cents a gallon as a month ago.
Prices were already relatively high from the effects of covid, supply line issues and inflation. And, of course, though global prices for wholesale oil have dropped, the retail prices have not, leading to some criticism of the oil industry and its middlemen.
Republicans, including Donald Trump, who said yesterday that Biden would empty the strategic tanks, blame Joe Biden’s energy policies across the board, alleging that he has stopped oil and gas drilling on private and public lines, stopped a big pipeline project and favored development of solar and alternative energy sources.
Meanwhile, of course, the United States still is a net energy exporter. And the White House has no effective control over the price of gas and other fuels that heed a global trading exchange.
The OPEC Plus nations, which include Russia, decided yesterday to forgo calls for increasing production to account for any sanctions, sticking with previously agreed upon plans of modest monthly increases. In a statement, the group insisted that they are for or “a well-balanced market” and dismissed any needs arising from temporary disruptions, apparently meaning war in Europe.
The U.S. purchased about 800,000 barrels a day of Russian oil, or a relatively tiny amount. The effects of shutoff in Europe are far more severe. But China and India are buying much of that now instead.
Longer-Range Effects
Emergency crude oil is stored at the Strategic Petroleum Reserve in underground salt caverns at four major oil storage facilities in Texas and Louisiana. The White House says it is coordinating the release with the International Energy Agency and has told allies and partners about the measure. It will have to be replaced when global prices are more favorable.
Releasing so much at once raises a host of questions.
· Other emergencies. Whether committing so much strategic oil to immediate usage could leave our country with a new problem as natural disasters loom?
· Drilling. How do our requests to other nations to increase oil production and demands for more drilling now fit in with climate change?
· Supply lines. Some analysts are suggesting that the large discharge could cause “congestion” on the Gulf Coast, keeping new oil production from fields in West Texas out of pipelines and storage tanks.
· Other sources. Will U.S. release of these reserves dissuade OPEC nations from pumping more, as asked?
· Politics. Does any of this policy shift affect actual on-the-ground politics for Biden?
The White House announcement also included more sanctions against Russia and some additional energy news.
Biden said he will use the Defense Production Act to authorize support for the production of minerals and other materials critical for batteries necessary for Electric Vehicles. These will include lithium, nickel, cobalt, graphite, and manganese.
The Biden administration also renewed blame for some companies that it alleged are holding back domestic energy production. It said it would begin imposing fees for firms that “sit on non-producing acres” on federal lands with “idled wells.”
The immediate answers are posing more long-term questions.
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