When President Joe Biden ordered the release of 50 million barrels of oil from the U.S. Strategic Reserve to help lower energy costs, he was targeting an increasing burden on millions of Americans embarking on a Thanksgiving trip.
The measure announced on Tuesday, carried out in rare coordination with several other countries, is one of the few things a presidential administration can do in an attempt to reduce the political pressure and threat of rising inflation. The likelihood of providing significant relief in the near future, however, is likely low. Yet any help to lower fuel prices, however modest, would be welcomed by many Americans.
Here’s a look at what’s involved:
WHAT IS THE OIL RESERVE?
The Americas Strategic Petroleum Reserve holds approximately 605 million barrels of oil in underground salt caves in Texas and Louisiana. It was created following the Arab oil embargo of the 1970s to store oil that could be exploited in an emergency. But the dynamics of the global oil industry have changed dramatically in recent years: the United States now exports more oil than it imports.
There is a limit to what can be released at one time. In the past, the government released about 1 million barrels per day. At this rate, the promised influx of 50 million barrels of crude could last about two months.
WHY DID BIDEN PRESS THE RESERVE?
The idea is that by putting more oil on the market, the prices will go down. It hasn’t happened yet. But depending on what’s going on in the rest of the world, there’s still a chance it will work.
Oil prices edged up after the announcement. Traders anticipated the news and may have been disappointed with the details, said Claudio Galimberti, senior vice president of oil markets at Rystad Energy.
The immediate price reaction is not the final judgment on the effectiveness of this effort, said Jim Burkhard, vice president of IHS Markit. It will really be in the months to come.
The effectiveness of the move depends on several factors.
The OPEC oil cartel and its allies will meet in about a week to decide whether to increase production or slow it down, a strategy the group often uses to raise prices. Earlier this month, Biden had hoped that the OPEC countries, led by Saudi Arabia, would agree to significantly increase production. But they only made modest increases.
If OPEC decides next week that it wants higher prices, its members could take the oil off the market. Overnight, they might just make up for it, Burkhard said. So that’s a big question mark, that’s how they react to it.
The assembled Biden coalition of India, China, Japan, South Korea and the UK to exploit their strategic oil reserves is unprecedented, Galimberti said. In total, the group could put 70 to 80 million barrels of oil on the market, he estimates.
It’s sort of a coalition of oil importers, he added. But can they really supplant, or can they really be a rival to OPEC-plus? The answer is absolutely no. This is because the group of importers uses their strategic oil reserves, which are limited. On the other hand, OPEC and its allies have oil reserves that can last for decades. So there is no comparison between the two, said Galimberti.
SHOULD GASOLINE CHEAPER?
What many consumers want to know is what will happen to gasoline prices at the pump. There are many factors that go into the price of gasoline. Refineries buy crude oil in advance, so they always work with more expensive oil, and states have different tax rates that impact the price. Nonetheless, if OPEC does not respond by cutting production, the influx of oil could cause the price of gasoline to drop by 10 to 15 cents per gallon, said Kevin Book, managing director of Clearview Energy Partners. Even if the price drop doesn’t happen, Biden can make a case for what he tried.
Really what we were talking about were the most price sensitive consumers in the economy, Book said. They might not show up in the GDP numbers or recessions, but they show up in the vote count as marginal voters, who may or may not respond in the next election cycle, and I think if we do there come on, that’s really what it is.
WHY IS OIL IMPORTANT?
The future of oil and gas in the United States is a political flashpoint and a source of tension, especially as businesses and government agencies grapple with climate change and the transition to sources of oil and gas. cleaner energy.
On the one hand, the US oil and gas industry has been praised by some political leaders for creating energy independence. Where the United States once relied heavily on imports, other countries now depend on the United States for oil. It’s also a provider of jobs: the oil and gas industry employs more than 10 million people in the United States and contributes about 8% of the country’s gross domestic product, according to the American Petroleum Institute. Any impact resulting from Biden’s release of oil from strategic reserves will likely be short-lived unless coupled with policy measures that encourage the production of U.S. energy resources, the API said in a statement.
Companies that supply oil benefit from higher prices. But consumers don’t like these higher prices being passed on at the pump.
The larger drama is this new variable in the oil market: it’s the tension between aspirations for decarbonization and the practical concern of having low gasoline prices, Burkhard said. And there is a conflict between these two forces. And that is why would continue to see dislocations between demand and supply.