Oil prices experienced their largest weekly losses in over two years following President Joe Biden’s announcement to release some 180 million barrels of oil from the U.S. Strategic Petroleum Reserve (SPR). The 6-month, 1 million barrel per day (bpd) injection is the largest in U.S. history and marks the third time Washington has tapped into Department of Energy (DOE) emergency reserves in the past half-year. Prices for West Texas Intermediate (WTI) and Brent crude benchmarks dropped 4% after the Thursday briefing and settled around a 13% loss last week, opening today at $98.95 and $104.08, respectively.
While I have been critical of SPR releases conducted primarily for political gain or short-term market manipulation, in this case, the White House is justified. This is one of many proactive steps that must be taken to punish Moscow for its heinous actions against Ukraine, ease global supply shortfalls, stabilize roiled markets, and provide relief for Americans suffering at the pump. High oil prices give Putin’s war machine a lifeline, earning revenue from exports to China, India, and, ironically, Europe (for now).
Biden’s historic SPR release is no silver bullet, but the 1 million barrels will add between 1.0% and 1.5% to global supplies daily. Put another way, 180 million barrels is roughly two full days of global demand (or nine days of total U.S. consumption).
“This is a wartime bridge to increase oil supply into production,” said Biden in his address…. “It is by far the largest release of our national reserve ever to provide a historic amount of supply for a historic amount of time, a six-month bridge to the fall.”
The length of the release reveals that the administration is anticipating a protracted conflict in Ukraine. This could be bad news for Biden, who currently faces his lowest approval ratings to date, hovering near 40%. Furthermore, roughly the same percentage of Americans blame the president’s economic policies for the price spike at the pump rather than Putin’s invasion. There is some truth to this criticism. Russia accounts for less than 9% of U.S. petroleum liquid imports – a negligible amount. Then again, oil markets are global and fungible, meaning that rising prices impact all consumers – be they from legitimate supply shortfalls or market anxieties.
Biden is also not being helped by oil producers – global and domestic – who should be using these price signals to pump more oil at a greater profit. On March 31, OPEC+ nations, including Russia, met and determined that the organization would only increase oil production targets to 432,000 barrels per day. The alliance’s refusal is partly due to actions by presidential administrations that have worsened relations between OPEC members and the U.S. These actions include Biden releasing an intelligence report that implicated the Saudi Crowned Prince in Jamal Khashoggi’s murder, claims that the U.S. is not providing enough security assistance to Saudi Arabia and UAE against Houthi fighters in Yemen, and sanctions against Iran and Venezuela.
Like American firms who have yet to rise to the occasion, OPEC seems content to watch oil prices climb before turning on the taps.
There is also apprehension about increasing production by oil companies at home due to investors’ expectations. The leadership of major shale corporations, including Pioneer Natural Resources CEO, has echoed this sentiment. A Dallas Fed Energy survey found that 59% of executives from 132 energy firms believe investors are hindering expansion efforts by lobbying for ‘fiscal constraint’ over the ‘no-holds-barred production’ over the past decade that bankrupted so many U.S. shale companies when prices collapsed in 2014. Those companies that see a profit-making opportunity will also require some time to meaningfully ramp up production, as the easiest to produce reserves and the majority of ready-to-go “drilled but uncompleted” wells (DUCs) have long been used up.
But there is some good news for Biden: The SPR crude oil will likely be sold at or near the current market’s elevated prices, and as a result, the Department of Energy (DOE) will presumably profit off the crude oil currently being stored at the SPR. The DOE paid approximately $30/bbl for SPR crude, but prices are now hovering at $100/bbl. Thus, the DOE could potentially see a profit of between $60 to $70/bbl from the upcoming SPR release, or about $12 billion for the sale of 180 million barrels over the next six months, which the White House says will be used “to restock the Strategic Petroleum Reserve in future years.”
Furthermore, the International Energy Agency (IEA) agreed on April 1 to coordinate its own oil reserve release, though the volumes have not yet been confirmed. IEA last presided over the largest coordinated oil release in its history on March 1 of nearly 62 million barrels, about half of which was contributed by the United States.
While Biden does stand to gain politically from tapping the SPR, his reasoning and actions are justified. Lower crude prices help America and her allies and simultaneously limit Putin’s ability to make war.
With assistance from James Grant and Jacqueline Evans
