A customer prepares to pump gas into his car at a Shell station on November 17 in San Rafael, California. Gasoline prices have skyrocketed this year leaving the Biden administration looking for ways to deal with the problem. One thing that’s been in the spotlight lately is tapping into the country’s emergency oil reserves.
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A customer prepares to pump gas into his car at a Shell station on November 17 in San Rafael, California. Gasoline prices have skyrocketed this year leaving the Biden administration looking for ways to deal with the problem. One thing that’s been in the spotlight lately is tapping into the country’s emergency oil reserves.
Justin Sullivan / Getty Images
The recent increase in gas prices has caused President Biden to struggle to find solutions to this problem.
One thing that is receiving a lot of attention is the possibility that the Biden administration will release crude oil from the country’s emergency oil reserve, aka the Strategic Petroleum Reserve.
Much will depend on oil prices, which skyrocketed last year, recovering to pre-pandemic levels and then some. But after rising to over $86 in October, they fell below $80.
A lot of factors are influencing prices – including the fact that the White House is now talking about tapping the stockpile.
Here’s an explanation of the country’s oil reserves – and whether exploiting them really works.
What is the Strategic Petroleum Reserve, or SPR?
That’s the crude oil stockpile that the US maintains in case of an emergency. If supplies are disrupted, such as by hurricane or war, the United States can tap into reserves and avoid severe shortages.
SPR was established after the oil crisis of the 1970s. Oil is stored in underground salt caves in Texas and Louisiana. The caves currently hold more than 600 million barrels of oil. That’s a little less than a month’s worth of oil in US current consumption levels.
In addition to being extracted during emergencies, the oil in the reserve can also be loaned to oil companies (interest payments), or sold off to raise funds for the federal government.
Congress has ordered the release of tens of millions of barrels over the next few years for non-emergency reasons.
President Biden speaks during a news conference at the United Nations Climate Change Conference COP26 in Glasgow on November 2, although the Biden administration is pushing to transition the country to greener energy sources. , but in the short term, the White House is calling on OPEC to produce more oil to help reduce high gas prices.
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Brendan Smialowski / AFP via Getty Images
President Biden speaks during a news conference at the United Nations Climate Change Conference COP26 in Glasgow on November 2, although the Biden administration is pushing to transition the country to greener energy sources. , but in the short term, the White House is calling on OPEC to produce more oil to help reduce high gas prices.
Brendan Smialowski / AFP via Getty Images
Why is Biden considering SPR mining now?
Hypothetically, the emergency oil reserve is not intended to be exploited as a way to manage prices – it is supposed to manage major supply disruptions, which the market is not currently experiencing. But it’s one of those some tools The president has to push the price of oil down.
In October, the price of US crude oil rose to a 7-year high. That’s a very rapid increase from earlier in the pandemic, when prices even briefly turned negative, meaning oil traders are actually paying others to take the barrel. .
And rising energy prices, including natural gas and coal as well as oil, are the main cause of high inflation.
OPEC has refused to increase production to address high prices, despite calls from the White House. The Saudi-led oil group has stuck with a policy of gradually increasing output as the global economy continues to recover from the pandemic.
US oil producers – under pressure from their investors – are also not increasing output as much as they usually do when prices are this high.
That has put the Biden White House under great pressure to do something about the high prices. After all, history has shown that soaring food and gas prices can be politically damaging.
What impact will an SPR release actually have?
Just the ability to launch out of the SPR helped push the price down. An actual announcement would be expected to push prices down even more… but only temporarily.
That’s because a one-time release doesn’t actually change the underlying supply and demand dynamics that drive oil prices.
“The impact is likely to be mild and short-lived, given historical examples of past sales,” said Louise Dickson, senior oil market analyst at Rystad Energy.
The size of the effect on the market will also depend on how large the release is.
What if more countries tap their reserves?
Coordinating releases with other countries can give SPR a stronger punch. The White House has asked other major oil consumers, who have oil reserves of their own, to release oil from their stockpiles by a single coordinated action.
President Biden meets with Chinese President Xi Jinping during a virtual summit from the Roosevelt Room of the White House in Washington, DC on November 15, the White House has asked other countries to tap into their emergency oil reserves. them in a coordinated manner. China is said to be considering such a release, although it is unclear if it will react to the US
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President Biden meets with Chinese President Xi Jinping during a virtual summit from the Roosevelt Room of the White House in Washington, DC on November 15, the White House has asked other countries to tap into their emergency oil reserves. them in a coordinated manner. China is said to be considering such a release, although it is unclear if it will react to the US
Mandel Ngan / AFP via Getty Images
China is said to be considering issuing its own SPR, though it’s unclear if that’s a response to a call from Biden. Several other countries said they believe their reserves should be saved for potential supply shocks, not used to adjust prices.
“Other countries don’t necessarily look at strategic reserves in the same way that the US does,” said Kevin Book, chief executive officer of Clearview Energy Partners. “We’re the only country in the world that’s liquidating our security blanket… We’re burning it for the money.”
But even a coordinated release could have only a temporary impact. In June 2011, the announcement of an SPR release coordinated through the International Energy Agency in response to a crisis in Libya pushed prices down 6%. But two weeks later, the price was right back where they were.
What is the oil price outlook?
Recent forecasts from the Energy Information Administration, the International Energy Agency and OPEC all predict that oil supply will increase early next year and the world will end up with an oil glut. That will push the price down.
But some analysts are more skeptical and predict that prices will remain high into 2022.
