Will tapping the US Strategic Petroleum Reserve lower oil prices?
President Joe Biden tried to deliver a Thanksgiving gift for US drivers on Tuesday, announcing the country’s largest-ever release of stored oil in a bid to drive down petrol prices.
It was a striking move for a leader who put climate change at the centre of his legislative plan, and as a candidate said the US must “transition from the oil industry”.
What was announced?
The US said it would release 50m barrels of oil from its roughly 600m-barrel Strategic Petroleum Reserve — an underground stockpile created in the wake of the 1970s oil crises.
The UK, India, South Korea, Japan and China also agreed to release oil stocks. Britain’s planned release is for up to 1.5m barrels. India will release 5m barrels. Volume from the others is not yet known: Energy Aspects, a consultancy, said it expected more details from China to emerge in a few days, to create distance from the US announcement.
The US sum covers about half a day of worldwide oil demand of about 100m barrels a day. About 32m barrels will be delivered between mid-December and the end of April 2022 in a swap with oil companies, which then must return an equivalent volume by 2024. The other 18m barrels accelerate sales that Congress had already authorised.
Other efforts to tame petrol prices, including requests for Saudi Arabia and the Opec+ producer group to pump more oil, have so far fizzled. The administration first signalled the possibility of tapping the strategic reserve at a Financial Times conference last month, when Jennifer Granholm, US energy secretary, said a release was “under consideration”.
Announcing plans to unleash more fossil fuels before this month’s COP26 climate conference would have been politically awkward, said analysts. The administration also needed time to negotiate with partner countries.
In the meantime, inflation has emerged as a pressing domestic issue. Republicans have pounced, blaming Biden’s climate policies for gasoline prices that are about 60 per cent higher than a year ago.
“Given the unprecedented economic shock of the pandemic, the dislocations in recovery and the current concerns about inflation, it’s understandable why the administration would take this step,” said Jason Bordoff, co-founding dean of the Columbia Climate School.
Will it drive down prices?
The oil market expected a bigger stock release than the one the US announced. Crude rose in response on Tuesday, with the international benchmark Brent settling up 3.3 per cent at $82.31 a barrel.
“Threatening it and talking about it seemed to be quite good,” said Jamie Webster, senior director of the BCG Center for Energy Impact. “But as you can see from the prices . . . it’s not really having an effect that anybody was hoping for.”
Amrita Sen, Energy Aspects’ director of research, said the release was “a symbolic move” that would have little longer-term impact. The release could take six months, the oil would have to be replenished and most of it is “sour”, high-sulphur crude when the market is tighter in “sweet” grades, she said.
Traders will now focus on the Opec+ meeting on December 2. The Saudi Arabia-led producer group has been increasing supplies by 400,000 b/d each month as it restores output that it cut last year. But it could now pause those increases, say analysts.
Opec did not respond to requests for comment. “All market developments will be reviewed at next week’s ministerial meeting,” said a person familiar with the group’s position.
How will the geopolitics play out?
Until Tuesday’s announcement, America’s largest oil release came during the 2011 civil war in Libya, when crude oil prices threatened to spike above $120 a barrel. The International Energy Agency co-ordinated that release and it was backed by Saudi Arabia.
The IEA was not involved in this one and some European countries objected to using emergency stockpiles for political reasons, according to a person familiar with their position. The White House turned to big Asian consuming countries instead, underlining a shift in market forces since industrialised countries created the IEA after the 1973-74 oil crisis.
The release may also mark a new twist in US relations with Opec+. It was Donald Trump that cajoled Saudi Arabia and Russia, during the throes of last year’s brutal oil-price crash, to slash production in a bid to prop up prices and save the American shale patch from collapse. Now the US is asking for the opposite.
The SPR release will not have improved the mood in Riyadh. “The Saudis don’t seemingly like being backed into a corner,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.
She does “not entirely rule out” that the kingdom may scale back planned Opec+ production increases — a move that she said could then prompt congressional Democrats to revive so-called Nopec legislation targeting the group for cartel behaviour.
What could the US do next?
The federal Energy Information Administration said even before Tuesday’s announcement that oil and petrol prices were likely to decline next year anyway.
If not, “the president has got a lot of tools that he is looking at — and those tools remain on the table”, Granholm said on Tuesday.
A ban on crude oil exports, which were first liberalised during the Obama administration, is one remote possibility, analysts said. Reducing the biofuel component in petrol blends is another option.
More rhetoric about collusion or market manipulation by US oil producers is also plausible. The Biden administration has already sought to investigate potential price gouging and urged the industry to increase production.