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Will the use of the US Strategic Petroleum Reserve lower oil prices?

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On Tuesday, President Joe Biden tried to give a Thanksgiving gift to American drivers, announcing the release of the country’s largest storage of oil in history to drive down gasoline prices.

For a leader who put climate change at the core of his legislative plan, this is an amazing move. As one candidate said, the United States must “transform from the oil industry.”

What was announced?

The United States said it would release 50 million barrels of oil from its strategic oil reserve of approximately 600 million barrels—an underground reserve established after the oil crisis in the 1970s.

Britain, India, South Korea, Japan and China also agreed to release oil stocks. The planned release of the UK is as high as 1.5 million barrels. India will release 5 million barrels of oil. The volume of transactions in other countries is not yet clear: Consulting firm Energy Aspects said it expects China to announce more details in a few days to distance itself from the US statement.

The sum of the United States covers approximately half a day of the global oil demand of approximately 100 million barrels per day. Between mid-December and the end of April 2022, approximately 32 million barrels of oil will be exchanged with oil companies, and then the equivalent amount must be returned by 2024. Another 18 million barrels accelerated sales that Congress has authorized.

The locator map shows the U.S. Gulf Coast, where the location of the U.S. Strategic Petroleum Reserve is highlighted by an orange circle along the Texas/Louisiana coast. Major cities such as New Orleans and Houston are also marked.

Why now?

So far, other efforts to curb gasoline prices, including requests from Saudi Arabia and OPEC+ producer organizations to produce more oil, have failed. Last month, US Secretary of Energy Jennifer Granholm (Jennifer Granholm) stated that the government first hinted at the possibility of using strategic reserves at a Financial Times meeting.

Analysts said that announcing plans to release more fossil fuels before this month’s COP26 climate meeting would be politically embarrassing. The government also needs time to negotiate with partner countries.

At the same time, inflation has become an urgent domestic issue. Republicans slammed Biden’s climate policy for blaming gasoline prices for about 60% higher than a year ago.

Jason Bordoff, co-founding dean of the Columbia Climate Institute, said: “Given the unprecedented economic shocks brought about by the pandemic, the chaos of recovery, and current concerns about inflation, the reason for the government’s taking this step is Understandable.”

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Will it drive down prices?

The oil market expects that the release of stocks will exceed the stocks announced by the United States. Crude oil prices rose on Tuesday, with the international benchmark Brent crude oil rising 3.3% to US$82.31 per barrel.

“It seems good to threaten it and talk about it,” said Jamie Webster, senior director of the BCG Energy Impact Center. “But as you can see from the price… it didn’t really produce the effect anyone hoped.”

Amrita Sen, head of research at Energy Aspects, said the release is a “symbolic move” and will not have any long-term impact. She said that the release may take six months. When the market supplies “sweet” crude oil, oil must be replenished, most of which are “acidic”, high-sulfur crude oil.

Traders will now focus on the OPEC+ meeting on December 2. This producer group headed by Saudi Arabia has resumed last year’s production cut while increasing its monthly supply of 400,000 barrels per day. But analysts say it can suspend these growth now.

OPEC did not respond to a request for comment. “All market developments will be reviewed at the ministerial meeting next week,” said a person familiar with the group’s position.

The line chart of West Texas Intermediate crude oil (USD/barrel) shows that as the world gets rid of the pandemic, U.S. oil prices have risen

How will geopolitics develop?

Before the announcement on Tuesday, the largest oil release in the United States occurred during the Libyan Civil War in 2011, when crude oil prices could surge above US$120 per barrel. The International Energy Agency coordinated the release and received support from Saudi Arabia.

According to a person familiar with the matter, the IEA was not involved in this matter, and some European countries opposed the use of emergency stocks for political reasons. The White House turned to Asian consumer powers for help, emphasizing the shift in market power since the industrialized countries created the IEA after the 1973-74 oil crisis.

This release may also mark a new turning point in the relationship between the United States and OPEC+. It was Donald Trump who coaxed Saudi Arabia and Russia into cutting production in the throes of last year’s brutal oil price plunge to support prices and save the US shale region from collapsing. The United States now requires the opposite.

The release of SPR will not improve the mood in Riyadh. “The Saudis don’t seem to like being pushed into the corner,” said Helima Croft, head of global commodity strategy at Royal Bank of Canada Capital Markets.

She “not completely ruled out” that Saudi Arabia might curtail the OPEC+ program’s increase in production-she said this move may prompt the Democratic Party of Congress to restore the so-called Nopec legislation, which targets cartels by the organization.

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What can the United States do next?

The Federal Energy Information Administration even announced on Tuesday that oil and gasoline prices might fall next year.

If not, “the president has a lot of tools he is considering – and these tools are still on the table,” Granholm said on Tuesday.

Analysts said that it is unlikely that the crude oil export ban will be lifted for the first time during the Obama administration. Reducing the biofuel content in gasoline blends is another option.

More talk about collusion or market manipulation by US oil producers is also reasonable. The Biden administration has tried to investigate potential price fraud and has urged the industry to increase production.

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