President Biden faces few options to lower oil prices without OPEC

President Biden has limited options to counter OPEC-plus, ignoring calls from the White House to produce more oil and moderate price increases. Some strategies, like freeing oil from strategic reserves, could even backfire and push prices up further.

The administration says all options are on the table to keep domestic gasoline prices on the rise as benchmark crude pushes back $ 80 a barrel. But US criticism of OPEC only underscores the White House’s inability to influence oil prices in the short term.

White House Biden pressured Saudi Arabia-led OPEC to turn on the taps. But the group on Thursday maintained its plan to add 400,000 barrels per day in December as it sees uncertain winter demand and inventories increase in the first half of 2022.

In response, Deputy White House spokeswoman Karine Jean-Pierre said “this is not the end,” adding that Biden officials will continue to “have these conversations” with producing countries.

The OPEC-plus is the center of attention because it has some 5 million barrels per day of immediately available reserve capacity. However, he decided to keep the market tight to maintain control and avoid eroding his strength during the pandemic recovery.

Strategic oil reserve

The United States plans to release crude from its Strategic Petroleum Reserve (SPR), which holds 621 million barrels in caverns on the US Gulf Coast. But this goes against the established rules that these stocks should only be used in the event of a supply disruption.

American producers, who are reaping the benefits of rising oil prices, are reluctant to intervene in the market that would lower oil prices.

Sales of SPR without any disruption in supply would only further tighten the supply, and the market would see such a move as “desperation” and a signal to further increase prices.

Producers have more leverage and a much greater impact on the market than releasing oil from limited stocks.

Even President Biden acknowledged in October that the release of oil on its own would not significantly impact the price consumers pay at the pump – the White House’s main concern.

Nonetheless, a release of SPR oil would likely only have a temporary bearish effect on rapid prices and is not a lasting solution to an imbalance between supply and demand.

For the market to turn bearish, a coordinated government intervention policy is needed, which seems unlikely as there is no legitimate supply disruption to justify it. The price of gasoline at $ 3.50 a gallon is not an emergency – it’s a political issue for Biden.

The president could also take a more positive approach to the domestic oil industry instead of attacking it with policies such as terminating the Keystone XL pipeline, halting sales of federal leases, and generally restoring climate activists rather than improving energy security.

Its decision at COP26 for the United States to join with other countries in ending public funding for international oil and gas projects by the end of 2022 is the latest example of its assault on oil supply. and gas. This sends a bearish signal to investors in the US oil industry and makes them less inclined to invest in new supply projects.

US SPR Oil in Loans

The Department of Energy (DOE) can also conduct limited “trades” in which it delivers oil to refiners which is then replaced.

The agency did so as late as September, following the disruption caused by the hurricanes. The action threshold on an exchange is also lower, which makes it a bit easier to achieve.

The DOE also has mandatory releases of strategic stocks to consider.

Congress has approved sales that would reduce inventories by 300 million barrels over the next decade. Since mid-September, SPR sales have averaged 1.1 million barrels per week for a total of 9 million barrels. Since the start of 2021, the United States has sold 26 million barrels of the caverns, according to data from the Energy Information Administration (EIA).

The DOE has authority over the timing of these releases, which means it could proceed with the sales when it feels the market is more likely to be tight – but those sales are already valued in oil, so that doesn’t. would not lower the price.

Relief for refiners

Biden is focusing on prices at the pump, which have been above the politically sensitive level of $ 3 a gallon since May.

Independent U.S. refiners are once again pushing for a long-sought change to the Renewable Fuels Standard (RFS) program, which requires specific volumes of biofuels blended with the country’s gasoline.

The price of compliance credits – known as RIN – for this program has skyrocketed over the past year. Adjusting the required volumes or providing some sort of temporary relief from program compliance could have a direct impact on gasoline prices.

However, it could be politically complicated for the Biden administration due to the perception that it would undermine the renewable biofuels market, which is a key part of the president’s platform to tackle climate change.

The political complexity of the program – lawmakers in agricultural states and oil states are keenly interested in it – means that decision-making has been pushed back as the White House tries to deal with its top priorities – the recently passed infrastructure and reconciliation spending legislation.

Limit exports of crude and petroleum products

Another option the United States would have to limit imports or exports of crude and refined products – six years after the Obama administration lifted crude exports.

Energy Secretary Jennifer Granholm has acknowledged that the United States can limit exports, but there is intense skepticism as to whether such action would lower crude prices which are the main driver of oil prices. gasoline, because it would create disruption in the world market.

Restricting the flow of oil would impact domestic producers or refiners and further damage the reputation of an administration that must balance calls for a low-carbon future with complaints of high gasoline prices at home. short term.

Such a move would be a political minefield, with intense backlash in power-producing states, where producers and coastal refineries want export operations to maximize profitability. After all, America should be about free markets.

As recently as August, the United States was a net exporter of oil – a sign that domestic demand may be more than met by domestic production of oil, natural gas liquids and biofuels. So exports are not the problem.

Hope for a warm winter

Like the United States, India and Japan have also asked OPEC-plus to inject more oil into the market in order to control the prices of refined products.

But Saudi Arabia – the de facto leader of OPEC – says consumers are appealing to the wrong party. The world has no shortage of crude oil, Saudi Oil Minister Prince Abdulaziz bin Salman said. There is a lack of petroleum products.

Prince Abdulaziz called the rise in prices as a result of “alarmism” during a cold winter and natural gas prices which are stimulating demand for refined products.

This winter, the recent surge in oil prices above $ 80 was mainly due to traders betting on a substantial change in fuel by some power producers and industrial players. The concern is that players with the ability to change fuel will use cheaper petroleum products instead of more expensive gas, which will increase the demand for oil by up to 1 million barrels per day this winter.

So the arrow continues to point higher for oil. How high ? Bank of America

recently predicted benchmark Brent prices to hit $ 120 per barrel by June 2022, a 45% increase from current levels.

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Steve R. Hansen