President Biden announced last Thursday that the government would release 180 million barrels of oil from the Strategic Petroleum Reserve over the span of six months, averaging around 1 million barrels a day. This move is part of the administration’s efforts to address rising oil prices on the back of inflation due to the war in Ukraine.
“This is a wartime bridge to increase oil supply until production ramps up later this year. And it is by far the largest release from our national reserve in our history,” the President said.
According to Biden, there are two roots to the skyrocketing gas prices. First was the pandemic, which shot down the demand for oil, causing production to go down worldwide. After things began to open up, oil demand rebounded much faster than the supply.
“The second root is Vladimir Putin,” said Biden. Gas prices hovered at around $3.30 a gallon at the beginning of the year and rose by almost a dollar to $4.20 in less than three months, according to the President.
“Our prices are rising because of Putin’s actions. There isn’t enough supply,” he explained. “And the bottom line is: If we want lower gas prices, we need to have more oil supply right now.”
The White House says the decision was made in close coordination with US allies, including countries in Europe. There has been no official confirmation whether these countries will tap their own reserves, but Biden said he expects them to release 30 to 50 million barrels combined.
Biden also intends to use the revenue from the release to restock the reserves once prices begin to settle. This could potentially provide incentives to increase production in the future.
This latest development follows a coordinated release of 60 million barrels from Western allies earlier this month, half of which is provided by the US. Other allies include Britain, Germany, the Netherlands, Japan, South Korea, and other members of the European Union.
Biden also announced another release of 50 million barrels last November, which at that time was the largest release from the reserve. However, both moves did not yield a significant drop in oil prices as they were likely negated by the sanctions imposed on Russian energy.
“While stock releases will help to keep a lid on prices in the short term, we think it will take an increase in global production to spark a sustained fall in prices,” said Commodities Economist Edward Gardner at Capital Economics.
The United States’ Strategic Petroleum Reserve is located in underground storage caverns in Louisiana and Texas. The reservoir was formed in 1974, following a major energy crisis in the 1970s. As of March 25, the reserves held approximately 588 million barrels.
The US consumes about 20 million barrels of oil daily, with global consumption averaging at approximately 100 million barrels. The release intends to put more oil into the market, hopefully bringing prices down for the consumers.
Following Biden’s announcement of the release of 180 million barrels of oil, Brent Crude went down by 5.4% ending at around $107 a barrel, while US oil benchmark West Texas fell by more than 7%, closing at about $100.
Eyes on Oil Companies
During his address, Biden took the time to once again warn oil companies from profiteering and exploiting their customers during these difficult times.
“No American company should take advantage of a pandemic or Vladimir Putin’s actions to enrich themselves at the expense of American families,” he said.
Biden pointed out that some companies direct their profits to investors’ payout rather than reinvesting it into their facilities to produce more oil.
“It’s time to step up for the good of your country, the good of the world; to invest in immediate production that we need to respond to Vladimir Putin; to provide some relief for your customers, not investors and executives,” Biden said.
The President also called on Congress to “make companies pay fees on wells from their leases that they haven’t used in years and on acres of public lands that they are hoarding without producing.”
Biden has been adamant that it is not regulations that are holding back local oil companies to increase production, citing that there was more than enough land approved for oil and gas production.
“Companies that are producing from their leased acres and existing wells will not face higher fees. But companies that continue to sit on non-producing acres will have to choose whether to start producing or pay a fee for each idled well and unused acre,” said a White House fact sheet.
Is It a Political Move?
A release of 180 million barrels of oil that would possibly make oil prices go down makes mixed headlines for the Biden administration and the Democrats who eye the midterm elections in November. It may be seen as a method of driving oil prices down, while it may also be seen as a desperate move by the President to control gas prices at the expense of the reserves. Last year’s rising inflation was already an issue that was hampering public support for Democrat leadership, with the Republicans criticizing the White House for the increased cost of living.
Note that Biden’s approval ratings fell to the lowest levels of his presidency four days ago, when an NBC News survey found that 40% of Americans approved of his actions as president. 71% of the respondents believed that the country is “off on the wrong track.”
The Government Will Reap Rich Profits from the Sale of Oil From the Reserve
Oil in the Strategic Reserve is bought by the government when the price per barrel is low and then sold to refiners when the price per barrel is high. There is also a deal where the oil from the SOR is given to a refinery on the promise that it will later return the oil to the reserve plus an additional amount charged as interest. Outside of the rhetoric about greedy oil companies whose own margins are in the 5-6% range annually, no one is calling the government greedy when it profits greatly from the sale of oil to the consumer market and gets a second bite f the apple with federal excises taxes applied to each gallon of gasoline a consumer buys at the pump.
Will it be Enough to Drive Down the Price of Oil?
Experts in the oil industry are saying a drastic drop in the price of oil is unlikely with the addition of just 1 million barrels a day coming into the US supply at market prices. The US consumes about 20 million barrels of oil a day so an additional 1 million barrels from the SOR represents just about 5% of daily consumption.
What Would Really Lower Gasoline Prices at the pump?
We could have 50 million barrels of oil a day coming into the US and it wouldn’t lower the price of gasoline because oil has to be made into gas and diesel and the US is short on refining capacity.
According to the latest annual report by the American Fuel & Petrochemical Manufacturers published in August 2021,
“Total U.S. operable refining capacity is now 18.1 million barrels
per calendar day (bbl/cd), down 690,000 bbl/cd from 2020.
There are 1291 operable refineries in the United States, down
six compared to 2020. Five refineries in the continental U.S.
and one refinery in the U.S. territories closed in the past year.
As of January 1, 2021, 125 of the 129 refineries were operating
with a capacity of 17.7 million bbl/cd.”
If the US is consuming nearly 20 million barrels of oil every day and refineries can only turn 18.1 million barrels of it a day into gasoline, there is a daily shortfall of nearly 2 million barrels a day in refining capacity. This more than anything else drives the cost of gasoline at the pump. The US also lacks significant storage facilities for gasoline to be stored in winter when driving tappers off a bit and fed back into supplies in the Spring and Summer when consumer demand for gasoline increases.
The reasons for lagging refining capacity and a lack of gasoline storage facilities are both due to government regulations. The last refinery built new from the ground up in this country with significant capacity is a Marathon Oil facility in Garyville, Louisiana. It came online in 1977 with an initial distillation unit capacity of 200,000 barrels per day, and as of January 1, 2021, it had a capacity of 578,000. Other refineries trying to expand have to endure an expensive and lengthy process of permitting to increase capacity that teeters on them not doing so because it takes so long to recoup the government fees and the time involved. Increasing gasoline storage capabilities is also pretty much off the table due to environmental and safety regulations as a single ounce of gas leaking into the ground at a storage facility would be considered an environmental catastrophe. This inability to store gasoline means that when a storm, accident, or upgrade shuts down a refinery, there is no way to make up for the shortfall, and gas prices surge.
President Biden’s speech today said nothing about easing restrictions on new refineries or expanded capacities or expanded storage capacity for gasoline to feed into the consumer market when supply disruptions occur.