Since Russia’s invasion of Ukraine, President Biden has overseen the largest sale of oil from the Strategic Petroleum Reserve in history, to drive down prices at gas stations.
Having released 160 million barrels of crude oil since March, more than a quarter of the reserves, the Department of Energy has reduced the reserve to its lowest level in four decades. Some oil experts say continuing withdrawals could test the nation’s energy security.
But even though oil prices have fallen sharply from their peak, the administration isn’t ready to start filling the reservoir. Instead, instead of ending the releases in October as planned, it decided to extend them, at a slower pace, for at least another month.
“It’s a risky policy,” said Kevin Book, managing director of ClearView Energy Partners, a consulting firm in Washington. “This policy can only last until the reserves run out, and replenishing the reserves would take years.”
Tapping into the reserve this year was aimed at offsetting supply shortages resulting from Western sanctions on Russia, a major oil and gas exporter. Some experts predicted that oil prices would rise well above $150 a barrel. But while prices soared in the immediate aftermath of the invasion in February, the US benchmark West Texas Intermediate fell to around $82 a barrel.
Gasoline prices fell from a national average of just over $5 a regular gallon in June to $3.68 last week, according to the AAA car club; since then they have risen about 10 cents. Energy experts have estimated that the reserve releases have knocked 40 cents off the price of gasoline.
“The SPR reduction was probably the single largest factor in lowering crude oil prices and thus gasoline prices over the last three months,” said Sarah A. Emerson, president of ESAI Energy, a firm consultant and director of Chesapeake Energy, an oil and gas producer.
The Biden Presidency
Now that the midterm elections are approaching, this is the position of President Biden.
The rest of the drop in oil and gasoline prices can be explained by the global economic slowdown, the Covid-19 lockdowns in China, and Russia’s success in diverting oil exports from Europe to China and India. The International Energy Agency originally said Russia’s daily oil production could fall by as much as three million barrels, but Russian exports fell by only about 400,000 barrels a day, out of a global market of 100 million barrels.
Industry executives say that while the reserve sales helped lower prices, they are a short-term remedy and did nothing to encourage the production of new supplies.
“I’m not sure it will have a long-term impact,” said Sean Strawbridge, executive director of the Corpus Christi Port Authority, which manages the largest port for US oil exports. “What I do know is that if the federal government’s intention is to replenish reserves to their projected inventory, that will take a significant amount of time.”
Filling up the reserve could even push up prices as it will increase demand and encourage drilling at a time of growing concern about climate change.
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But for now, lower gasoline prices have helped ease inflation, improving Democrats’ prospects in the midterm election campaign. The reserve still has approximately 420 million barrels in its underground caverns. With the maximum capacity to release 4.4 million barrels per day, it would take 95 days to deplete the entire inventory during a crisis.
The nation’s energy profile has changed radically since 1975, when Congress established the reserve in the event of a supply interruption due to a natural catastrophe or a war or embargo in the Middle East. Gasoline lines from the 1973-74 Arab oil embargo were fresh in the minds of legislators and voters.
Since then, US oil production has grown tremendously, transforming the country from a vulnerable fuel importer to a major energy exporter. Vehicles are more efficient now and the transport of the future is leaning towards batteries and eventually hydrogen.
The reserve has been used on several occasions to stabilize supplies, including during the Iraq-Kuwait crisis in 1990-91, Hurricane Katrina in 2005, and the Middle East disruptions of the Arab Spring in 2011.
Several previous presidents released oil from the reserve during campaign seasons, but they always said their purpose was to bolster supplies, not explicitly to drive down prices.
“Previously, the mantra was ‘We’re not here to manage markets, we’re here to manage physical scarcity,’” said Mark Finley, an energy economist at Rice University.
The current administration, by contrast, has promoted the launches explicitly as a relief to consumers.
“The bottom line is that if we want lower gas prices, we need to have more oil supply now,” Biden said when announcing the release policy in March.
A new test for global oil markets will come when Europe is scheduled to ban most imports of Russian oil on December 5 and Russian refined products on February 5. It remains in question how strict the sanctions will be, especially if a cold winter threatens. Power shortage in Europe.
A European Union embargo could take 2.4 million barrels a day of Russian oil off the market. If Western countries put a price ceiling on their oil, as some officials have threatened, the Russians could retaliate by cutting off oil exports.
Many economists say the 20 percent drop in oil prices in the last two months could be reversed soon. JP Morgan recently forecast that the global benchmark for Brent oil, now hovering around $88 a barrel, will rise above $100 in the fourth quarter.
Announcing that 10 million barrels of oil per day would be sold from the reserve in November, administration officials said they would then be guided by supply and demand for oil in world markets. There appear to be no immediate plans to replenish the reserve.
Andrew Lipow, president of Lipow Oil Associates, a consulting firm in Houston, said the releases were only a stopgap measure as they did nothing to increase energy production. “I’m concerned that when sales from the Strategic Petroleum Reserve stop, how is the market going to make up for that supply?” he said.
But he added that continuing to draw reserves produced its own set of risks. “Will there be enough inventory in the Strategic Petroleum Reserve to cover a future supply disruption?” she asked.