Unprecedented US oil release to ‘make a difference’

US President Joe Biden’s decision to release one million barrels of oil reserves per day may tamp down soaring prices, but analysts and the energy sector say it’s a short-term fix.

US President Joe Biden says the oil release will ‘make a difference’. Picture: Nicholas Kamm/AFP

US President Joe Biden will tap up to 180 million barrels of government oil reserves to help tamp down near-record high fuel prices, an unprecedented government intervention into oil markets following Russia’s invasion of Ukraine.

In remarks from the White House on Thursday (US time), Mr Biden framed high energy prices as a wartime issue that requires a robust and wide-ranging response.

The oil release – about 1 million barrels a day for six months, starting in May – would be the biggest-ever drawdown from the country’s emergency stockpile of roughly 568 million barrels.

Mr Biden said he would also invoke the Defence Production Act – a Korean War-era national security mobilisation law – to boost domestic output of minerals used in batteries for electric vehicles and other clean-energy technology.

And he called on Congress to pass a new law that would push oil companies to drill faster when they have leases on federal lands, including by imposing fees on companies for unused leases.

“The action I’m calling for will make a difference over time,” Mr Biden said.

“But the truth is it takes companies months, not days to increase production … This is a wartime bridge to increase oil supply until production ramps up later this year.”

Mr Biden’s remarks drew criticism from the oil industry, which said that he unfairly blamed US energy companies for not pumping more oil in response to shortages stemming from the Russian invasion and the economic rebound from the Covid-19 pandemic.

“The best thing the White House can do right now is to remove barriers to investment in American energy production and infrastructure,” Mike Sommers, leader of the American Petroleum Institute, said in a statement.

“Unfortunately, today we heard more mixed signals about developing affordable, reliable and secure American natural gas and oil.”

Charging companies for unused leases would only add to rising costs that oil producers face due to inflation and supply-chain delays, said Tyler Glover, chief executive of Texas Pacific Land Corp., a big landowner in the Permian Basin in West Texas.

The Biden administration has also repeatedly asked the Organisation of the Petroleum Exporting Countries to speed up production increases, which the cartel has repeatedly rejected. OPEC decided again Thursday to stick with a production plan it has arranged with Moscow in which members will raise their collective oil output by a modest 432,000 barrels a day.

Mr Biden’s speech comes after months of attempts to ease rising energy prices, with little to show for it.

Polls show voters frustrated by rising prices at the pump and several congressional Democrats have been concerned about tough re-election campaigns and the prospects of losing control of the House and Senate after the midterm elections in November.

Prices for crude to be delivered this year fell on news of Mr Biden’s plan, but many futures contracts for deliveries in 2024 rose, reflecting broad expectations that the benefits of a reserve release may be short-lived.

The Brent crude price fell by 4.9 per cent to $US107.91 a barrel and the US Nymex crude price fell 7 per cent to $US100.28 a barrel.

Mr Biden said he didn’t know when or by how much his moves might trickle down into lower gasoline prices for consumers.

“There’s no firm answer,” he said, adding that the timeline and impact would also depend on the number of barrels US allies decided to release.

The decision to release oil from the U.S. Strategic Petroleum Reserve was made by the president after consulting with allies and partners, the White House said.

Administration officials said they expected other countries to also tap reserves, with possible announcements as soon as Friday.

An 180 million barrel release would be nearly four times as large as any other release from the government’s emergency stockpile according to analysts at ClearView Energy Partners LLC.

The US has already made two releases since November that totalled 62 million additional barrels than previously scheduled for release.

This newest release, if completed in full, would leave US government reserves with less than 400 million barrels, their lowest level since 1984, according to data from the US Energy Information Administration.

They had almost 700 million barrels – near their peak – as recently as 2017.

Those reserves were falling even before Mr Biden’s orders because at the peak of the shale drilling boom in the US, Washington lawmakers from both parties decided to start selling some of the reserves as a source of cash to balance budgets and modernise the reserve’s infrastructure.

It led several analysts to warn that it could weaken the strategic reserve, also called by its acronym SPR, if it is eventually needed.

The newest drawdown could leave the country with fewer options going forward if the Russia-Ukraine conflict gets worse or prices rise further.

At current import and export rates, a drawdown of this size would leave US reserves with not much more than the 90 days of supply required under its membership in the International Energy Agency, the Paris-based energy watchdog, according to calculations from RBC Capital Markets.

“The government has no further SPR bullets,” the bank’s analyst Michael Tran said in a note to clients.

And that might come with only little short-term gain for US consumers, several industry leaders and analysts said.

The amount of oil the Biden administration plans to release could reduce gasoline prices by 5 to 10 cents a gallon in the short-term, with little long-term impact, said Andy Lipow, president of Lipow Oil Associates in Houston.

“An SPR release is a one-time measure to bridge a supply disruption but does nothing to get more supplies out of the ground to replace Russian supplies,” Mr Lipow said.

Oil market participants are only now beginning to feel the true impact of reduced Russian supplies, which many western companies have shied away from purchasing.

“Russia is a problem that is too big for the SPR to solve,” said Bob McNally, who served as an energy adviser to President George W Bush and is now an analyst at Rapidan Energy Group.

“Gasoline prices are mainly influenced by crude oil prices. And crude oil prices are going to go higher as long as the Russia risk remains and intensifies.”

The government will also need to buy new crude eventually to replenish its reserves, which could itself cause prices to rise or become an expensive proposition if the war lingers on.

Some analysts have predicted worst-case scenarios of crude prices hitting near or beyond $US200 a barrel if conflict with Russia keeps its oil off the market.

“It is a loan of oil to the market rather than a new source of supply,” said Callum Macpherson, head of commodities at Investec, noting that the US would need to replenish its spent oil reserves at a later date, driving up prices for longer-dated oil contracts.

Pump prices across the US are still close to the average $US4.33-a-gallon record high they hit earlier in March, a pressure point for the president as he attempts to balance the needs of war in Ukraine with those of US consumers weary of inflation.

Mr Biden has been trying to help consumers, whom polls show are frustrated by rising prices at the pump.

Some Democrats in Congress face a difficult re-election and have pushed for legislation to suspend the federal gas tax.

Mr Biden’s economic advisers have privately discussed a gas-tax holiday, people familiar with the conversations said, but some have raised doubts that it would be an effective way to lower prices.

A gas tax holiday would also take money away from the highway trust fund, and may not be directly passed on to consumers by oil companies and retailers.

“You cannot write a law that requires them to pass it on, that’s just the way it is,” House Speaker Nancy Pelosi said.

She said the idea of some sort of rebate or direct payment to consumers was more appealing to her, but she said that Democratic leaders haven’t formulated details on it.

In the Senate, some Democrats have proposed legislation to stop collecting the federal gas tax of US18.4c a gallon through the end of the year, but it has met a cool reception from other party members as well as Republicans.

Opponents have called it a gimmick, with GOP lawmakers pushing for more domestic energy production as a way to push down prices.

The administration’s actions so far have focused on getting more crude on the market, but those efforts have often been frustrated by other market forces ultimately leaving gasoline prices around record highs for a month.

Producers around the world have been reluctant to increase despite pleas from Mr Biden and other Western leaders.

Analysts said it is clear Mr Biden is taking a novel, aggressive path to drive down prices even before there is an actual shortage in the market.

Rising demand has outpaced supply this year and the US has banned Russian oil, but that oil is largely still making its way to market.

Prices have been rising on fears of potential shortfalls to come, either from war-related disruptions or expanding economic sanctions against Russia.

It is “a break from prior policy of using stockpile releases to backfill a major supply disruption or refinery outages”, Helima Croft, head of global commodity strategy at RBC Capital Markets, said in a note to clients.

“The (reserve) release is being used as a tool to blunt the impact of these foreign policy decisions for US consumers.”

– The Wall Street Journal