Loren Steffy, UH Energy Scholar
This week on Oil Market Theater, a new release from the Strategic Petroleum Reserve.
Gasoline prices have climbed steadily for most of the year and are now about 32 percent above pre-pandemic levels. Energy costs are one of the biggest drivers of inflation, which is at its highest in three decades.
What’s Joe Biden to do? No president wants to be held hostage by the oil markets, especially not when their approval ratings are tumbling and the mid-term elections loom.
The Biden administration wants to push its green agenda, but reality keeps getting in the way. It needs crude markets to cooperate in the short-term so that it can focus on cleaner energy sources in hopes of reducing carbon emissions and combatting climate change.
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So Biden once again took a page from the past, calling for the release of 50 million barrels from the Strategic Petroleum Reserve, an underground crude stockpile created in response to the oil embargoes and gas lines of the 1970s.
Unlike the 1970s, though, today’s higher prices stem from global supply and demand issues, not a directed action. OPEC, concerned that mounting COVID-19 infections in Europe will once again weaken global demand, is sticking to its production quotas. U.S. producers, who are in a far better position than the White House to ease the supply crunch, are sitting on the sidelines, eager to convince investors that they believe in financial discipline more than growth.
Against this backdrop, the SPR release is a blip in the global market. It does nothing to address the longer-term issues that are creating today’s price environment.
“The U.S. volume being discussed—50 million barrels—is a drop in the bucket, amounting to only about half of what the world uses in a single day,” Chet Thompson, president and CEO of the refinery trade group American Fuel and Petrochemical Manufacturers, said in a statement. “A one-time, symbolic release of oil from the Strategic Petroleum Reserve isn’t going to have a meaningful impact on the current energy landscape.”
In addition to the production issues, pump prices are affected by the same problems causing shortages and higher prices for other goods — supply chain disruptions and higher transportation costs. And thanks to a legislative leftover from the era of oil scarcity, the U.S. requires blending ethanol into gasoline. Prices for ethanol, which is made from corn, has surged like most commodities, up 49 percent since the start of the year.
Biden convinced China, India, Japan and South Korea to join him in tapping their reserves, implying the coordinated release would make a bigger impact on the global market.
“Before long you should see the price of gas drop where you fill up your tank,” Biden said in announcing the SPR release.
Don’t count on it. Pump prices are tied to crude prices, and crude prices rose 2.3 percent after Biden announced his plan.
Given the president’s predilection for recycling energy policy form the Obama era, he should have known that would happen. After Obama announced an SPR release in 2012, a Bloomberg News analysis found that in four releases during the prior eight years, gasoline prices rose after each of them.
But getting the oil from the SPR to the pump is more complicated than it used to be. For one thing, U.S. refining capacity hasn’t recovered from the pandemic. Five refineries closed permanently as COVID stifled gasoline demand last year. As a result, our domestic refining capacity has fallen to 18.1 million barrels a day, the lowest since 2015.
Not to mention that getting that crude from one of the SPR storage areas to the gas pump is, under the best scenarios, a months-long process. Any effects at the pump will be long after the current driving season ends.
The SPR release could, indeed, have an impact, just not the kind that Biden wants. It could add to the uncertainty that has roiled the markets for much of the year. Oil companies have cut some 60,000 jobs since the pandemic. Sustained higher prices could bring them back, but if the administration’s actions add to market volatility those laid off workers are likely to remain on the sidelines.
As typically happens when a president runs to open the taps on the SPR, no one who understands the market is impressed. In fact, the smart money is betting on the opposite outcome — that crude prices will keep rising. Many producers have scaled back their hedging programs, leaving themselves fully exposed to this year’s market rally — and adding to their risk if prices fall. Pioneer Natural Resources said it won’t add hedges anytime soon, and Continental Resources is largely unhedged. In other words, those with the most at risk are confident prices will go up, unfettered by any action from Washington.
It’s increasingly clear that the SPR is misnamed. There’s nothing strategic about it. It’s a political tool, the Political Petroleum Reserve, or PPR, if you will, that’s used less a defense against crisis than as a tool to further the illusion that the president has some influence on oil markets. It’s a convenience in times when political desperation trumps free market principles.
In the decades since the reserve was created, the nature of crude markets has changed. More countries now produce oil, including our own. Thanks to hydraulic fracturing, the U.S. has gone from being the biggest importer of crude to being one of the world’s biggest producers. This supply diversity means the market can respond more quickly to disruptions. In addition, the futures market is more effective now, and reacts more rapidly to global issues that can affect supply.
All of which works against the effectiveness of what the administration is doing. In the hours after Biden’s announcements, hedge funds dumped futures contracts, which caused prices to dip. Then, OPEC responded by saying it might tighten its production quotas in response, which caused prices to rise.
While global supplies remain tight, the only crisis is political. The administration needs to create the illusion that the president is doing something to combat higher pump prices. Cue the curtain on the Oil Market Theater.
Loren Steffy is a writer-at-large for Texas Monthly, an executive producer for Rational Middle Media and a managing director for 30 Point Strategies, where he heads the 30 Point Press publishing imprint. He is the author of five nonfiction books: “Deconstructed: An Insider’s View of Illegal Immigration and the Building Trades” (with Stan Marek), “The Last Trial of T. Boone Pickens” (with Chrysta Castañeda), “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet, The Man Who Thought Like a Ship,” and “Drowning in Oil: BP and the Reckless Pursuit of of Profit.” His first novel, “The Big Empty,” was published in May 2021.
Steffy is the former business columnist for the Houston Chronicle and previously was the Dallas (and Houston) bureau chief and a senior writer for Bloomberg News. His award-winning writing has been published in newspapers and other publications worldwide. He has a bachelor’s degree in journalism from Texas A&M University.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.