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Biden’s ‘Shock And Awe’ Oil Gambit Faces Long Odds
Frustrated by a recalcitrant OPEC and wary of ongoing, energy-driven inflation ahead of the US midterms, the White House decided on aggressive action to curb oil prices.
Crude was under pressure Thursday ahead of an expected announcement from the Biden administration, which is poised to tap US reserves at a clip of one million barrels per day, a historic release that could amount to 180 million barrels over several months.
At the same time, the International Energy Agency is pressing for coord
If we’re penciling in a recession, demand destruction from an economic slowdown will be the balancing factor of the future. Looking at it from that perspective, the eventual SPR restock could be helpful to support oil during a slowdown and maintain our output.
It’s a gamble, particularly in the case of any unknown geopolitical risks or timing miscalculations, but not a bad one.
The SPR release is a product of two things, a failure to accept the reality of the market, and the mistaken idea that this has any chance of helping. The US uses around 20 mil b/day. The extra one million is 5% of that total. As added supply it will hardly move the needle. Besides, last I read most of our SPR is composed of oil we can’t actually refine so we sell the release to others and hope it will drive down prices here. So far these releases have mostly cost us a bunch of money with little or no domestic impact.
Can’t have high oil prices because it causes demand destruction and voters freak out (and it emboldens oil-rich tinpot dictators). Can’t have low oil prices because it stimulates demand and then there’s little financial incentive to hurry the transition to alternative energy.
The long-term solution is a massive redirection of fiscal authority towards renewables, which has the added benefit of being immune to the vagaries of the international oil market.
Clearly climate change is not a winning issue with a majority of voters, so why not co-opt the “energy independence” sloganeering of the right? Cheap “gas” means less dependence on KSA and their ilk, less energy-motivated foreign policy interventionism, more domestic infrastructure and jobs that can’t be exported.
The drama of the last 30 years is rooted in the lefts abandonment of the middle class and the rights consistent fascistic whispers in their ears that the problem is “foreigners.” Push jobs and cheap energy, instead. Dump the climate change rhetoric — frame it in economic terms. Most of the country doesn’t have the necessary level of executive functioning to conceptualize time beyond next week, let alone decades from now.
Excellent points.
Right now the current supply chain mess, the rise in inflation, labor shortages and COVID have conspire to dramatically curtail the ability to add new wind and solar power, quadrupling the cost in some areas. Production of turbines is way down, shipping is difficult, Trump’s duties on Chinese solar panels have raised cost and curtailed supply, and skilled builders and installers are in short supply. It will take some time to return to the steady growth of these alternatives.
BTW your last paragraph is, as the Aussies would say, “Too right , mate.
I remember reading once something along the lines that in the Panic of 1907 (or one of those early 20th century bank runs), J.P. Morgan directed that reserves be released. When someone questioned him about it, he allegedly said something like, “That’s what the reserves are for.”
It’s probably not an apt analogy, but in looking at Biden’s decision to release petroleum from the SPR, I’m thinking the same thing: that’s what they’re there for . . . moments like this.
Yes, but the SPR was “sold” as insurance for US consumers, not backup for foreign allies. Could be a problem here.
the release could be accomplished as a profitable swap that would have the effect of stabilizing future oil prices, which would be0 good for producers while ;owering front month prices. The goverment is in the uniquie position to do this and to make money in the process. difference in front month contract and one year out contract is $13.
Russia requires that gas needs to be paid for in rubles—A frontal attack on the hegemony of petrodollar. If that works out then China will want to demand that all Chinese goods that US imports be paid for in yuan…May we live in interesting times !!
I wonder if temporarily suspending Federal gasoline tax wouldn’t be a better move. Using SPR to boost supply will (if it works) reduce crude oil price, which potentially reduces incentive for increased production, and
down SPR reduces ability to respond in future. Suspending gas tax reduces retail price while preserving crude oil price signal. Both blunt demand destruction which is arguably counterproductive but for political considerations.
Google ‘ban on oil export’ and you can spend day’s reading the far left’s position on oil exports (killing the environment) and the oil company’s position that it would be bad, very very bad, to ban exports so don’t do it – or else. The oil industry propagandists cite the fact that US refineries are set up to process heavy oil, which is cheaper than light crude on the world market because it is more difficult to refine. Well, who made that decision? While asking us to drill our way to energy independence, the oil companies imported cheap heavy crude and exported expensive light fracked oil. End game: oil companies have optimized profits and we are nowhere near oil independence. Now they tell us we need to drill more so we can be energy independent. Horse Sheet! We can’t frack our way to energy independence if the oil industry exports all the fracked oil. We need a conditional export ban. When retail fuel prices reach a trigger point, all petroleum exports are banned until 90 days after retail fuel prices return to an acceptable level. Let the oil wizards figure out how to optimize that. Power of the free market and all that rubbish, you know….
Releasing SPR oil was a smart move. At least Biden and his folks are trying. A great follow up would be to sell even more currently and offer to buy back to refill the reserve in the future- many producers would be incentivized to drill if they had an attractive market to sell into 6 months to 2 years out. If US Department of Energy offered to buy oil in the forward market I bet there would be a lot of shale producers willing to drill- after all shale production is a short tailed production- you get most of your oil from a fracked well in the first 1-2 years. With a no risk counterparty in hand and guaranteed prices for marginal production, you would create the incentive to produce. And for the government it would be a profit trade as the market is currently backwardized (current spot prices higher than future prices). We could also offer to buy Mexican and Canadian output this way as well.
SPR could turn an instant profit on the spot to forward spread? That’d be tidy. Better than threatening penalties for unused drilling permits and windfall profits taxes.
H-Man, Biden begged for oil from the Saudis and Maduro, they said “no”. So yes it will help but he is using a thimble to fill a swimming pool. Biden should spend more time talking to Canada and providing incentives for drilling at home.