The US is tapping the Strategic Petroleum Reserve, The White House said Tuesday, confirming weeks of speculation.
The move, conducted in tandem with China, Japan, India, South Korea and the UK, is a message to OPEC and allied producers, whose refusal to stray from an existing plan to gradually increase output has rankled Washington at a time when US consumers are coping with the highest inflation in decades.
“American consumers are feeling the impact of elevated gas prices at the pump and in their home heating bills… because oil supply has not kept up with demand as the global economy emerges from the pandemic,” a somewhat poorly-written White House press release read. Gas prices are the highest in seven years in the US (figure below).
The Department of Energy is releasing 50 million barrels from the SPR in order to “lower prices for Americans and address the mismatch” between demand and supply.
“This release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the United Kingdom,” the White House declared, noting that the move was “weeks” in the making.
Somewhat amusingly, the press release alluded to the distinct possibility that the decision may already be in the price. “We are seeing the effect of this work on oil prices,” the administration said, adding that “over the last several weeks as reports of this work became public, oil prices are down nearly 10%.”
“High oil prices not only raise concerns of protracted inflation but also dent approval ratings of politicians. When that’s the case the end justifies the means – hence the coordinated effort, led by the US, to intervene in the natural functioning of the market,” PVM’s Tamas Varga and Stephen Brennock remarked.
What a shame it is when someone intervenes in the “natural functioning” of a market beholden to a cartel.
“Flooding the market with extra barrels from inventories is not equivalent to releasing them from the ground,” Varga and Brennock went on to say. “The former has to be replaced some time in the future and therefore its effect should be brief.”
US lawmakers are divided on the decision. In a letter to Biden on Monday, House Democrats urged the White House to take decisive action to ensure “affordable and reliable energy for American families.” In addition to the SPR release, some Democrats want Biden to ban exports. “A ban on US crude oil exports will boost domestic supply and put downward pressure on prices,” the same letter said. Analysts and economists doubt that assessment.
Other members of Congress aren’t convinced. “Instead of tapping into the [SPR] – which is reserved for response to national emergencies – President Biden should instead remove the restrictions he placed on drilling, which caused US gas prices to rise,” Republican Michael Guest reckoned, in a letter signed by a dozen lawmakers. Notably, House Majority Leader Steny Hoyer has expressed similar reservations. “I think that the Strategic Petroleum Reserve is for a collapse in supply [during] times of emergency,” he told reporters earlier this month, after Chuck Schumer called for tapping the SPR in order to provide “immediate relief at the gas pump.”
Goldman suggested in recent notes that oil’s move lower on COVID headlines and SPR speculation was exaggerated by low liquidity. “We estimate that this move lower has far overshot the actual fundamental risks due to low trading volumes,” the bank said late last week.
“Most investors agree that the efficacy of an SPR release or ban of exports provides the opportunity for Biden to look presidential, but that the market impact is likely minimal with potentially negative externalities,” RBC’s Michael Tran and Helima Croft wrote. “A unilateral ban on crude exports would push WTI-Brent pricing considerably wider, spiking Brent prices for the rest of the world.”
There were indications on Monday that OPEC could respond to releases from consumer nations by adjusting their output plans, raising the specter of a diplomatic spat.
“The combined impact of planned lockdowns in Europe and the possible release of SPR barrels might bring forward the price correction that was expected to take place at the beginning of next year,” PVM went on to say, in the same Monday note cited above. “Given the structural deficit in the oil balance, further dips might just prove an irresistible buying opportunity for those who anticipate a supply crunch as the transition from fossil fuel to renewable unfolds.”
The White House on Tuesday reiterated threats to pursue alleged price gouging. “There is mounting evidence that declines in oil prices are not translating into lower prices at the pump,” the administration said, adding that Biden “stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic.”
Read more: ‘Turbulence All The Time’: A Never-Ending Energy Crisis?
