Analysis: Why Biden’s bid to reduce gas prices is more of a Band-Aid than a game changer

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The United States alone is releasing 50 million barrels of oil from the Strategic Petroleum Reserve. It’s the biggest release on record and a dramatic way for the Biden administration to show that it’s taking aggressive action in response to higher prices at the pump.

The good news is that rumors of this historic intervention have driven oil prices below seven-year highs. And that should translate to some relief for Americans battling high gas prices.

But the bad news is that no one — not even the White House — is expecting a dramatic drop in prices at the pump.

According to Bob McNeely, president of Rapidon Energy Group, the “best-case scenario” is that prices are reduced to 15 to 20 cents per gallon.

And don’t expect it to happen right away.

“It’s not going to be fast and furious,” said Robert Yeager, vice president of energy futures at Mizuho Securities.

President Joe Biden acknowledged as much during his announcement on Tuesday.

“While our joint actions won’t solve the problem of high gas prices overnight, it will make a difference,” Biden said. “It will take time, but before long, you should see the price of gas where you fill your tank.”

Key details of international intervention are unclear, including the exact amounts to be contributed by major countries. The White House initially announced that China would participate, but Biden later said only that China “could do much more.”

The lack of details did not impress Wall Street. After initially retreating from the news, US oil prices ended the day higher by 2.2%. World benchmark Brent crude rose over 3%.

Unless China is actually stepping up with the release of barrels in a big way, this coordinated effort appears to be more a band-aid than a game changer.

The world consumes 100 million barrels a day

The problem is that SPR will not solve the underlying issue: oil supply has not kept up with rising demand as the US economy recovers from Covid. Issuing barrels from strategic reserves can help, given the limited amount of oil in the reserve. Countries can’t just release oil every month.

“Issuing oil from SPR reserves will not have a long-term impact on the reduction in gasoline prices,” said Rob Thummel, portfolio manager at energy investment firm Tortoise.

Supporters of the use of SPR acknowledge this.

“It won’t be a panacea, but we have to do what we can,” Democratic Representative Ro Khanna of California told CNN on Monday.

It is also important to put the shape of the verbs in context. Although the 50 million barrel release by the United States is the largest release in American history, roughly the world consumes it every 12 hours.

kill the can

Another reason is the way the Biden administration is releasing barrels.

About 18 million barrels would be an acceleration of a sale that Congress had previously authorized.

The rest, 32 million barrels, will be issued through an exchange or a swap. By definition, those barrels must be returned at a later date and that supply must come from somewhere.

“The market knows the barrel has to be returned. To some degree, it’s self-defeating,” said Mizuho’s Yoger.

Lewis Dixon, senior oil market analyst at Rystad Energy, agrees.

“The move by Biden and other leaders could push the supply issue down the timeline,” Dixon wrote in a note on Tuesday, adding that depleting the storage would put even more pressure on already low oil reserves and ultimately those countries’ holdings. Will happen. Going on a shopping spree to replenish strategic reserves.”

However, Biden executives note that the futures market is indicating that prices will be lower next year. So they see the move as a “bridge from today’s high price environment to a future low price period”.

Outlook for 2022

Despite all this, Biden’s executives felt compelled to act in large part because higher gas prices and inflation more broadly continue to raise concerns for millions of Americans. And that concern is seriously weighing on Biden’s poll numbers.

A senior administration official told reporters during a press briefing that Biden is as sensitive as anyone I have ever worked with. “Consumers are facing challenges right now at the pump. And we’re trying to tackle that situation in a smart, tailored and aggressive way.”

Tom Kloza, head of the Oil Price Information Service, said the coordinated release was more of a band-aid and argued that “we would be knocking on the $90 door” if not for the SPR release.

However, Kloza is concerned that gas prices will rise sharply in early 2022, leaving oil prices behind, due to the retirement of refineries in California, New Mexico and Louisiana.

“They’re not coming back, and we’re going to miss them,” Kloza said. “In our view, we’re going to have a real apocalyptic spring. And it’s not because of Joe Biden.”

‘Nuclear option’

There are two main wildcards ahead.

First, the White House indicated that Biden may not be done yet.

The White House said in its fact sheet, “The president stands ready to take additional action if needed, and to use his full authority working in coordination with the rest of the world to maintain adequate supplies.”

In theory, Biden could issue even more barrels in the future. And some Democrats are calling on Biden to ban oil exports, though Some experts warn This would be counterproductive as crude oil is a globally traded commodity.

But the bigger question is how OPEC and its allies, known collectively as OPEC+, will respond.

The group, led by Russia and Saudi Arabia, is due to meet next week, and the plan was to increase production to 400,000 barrels per day. Yet it’s easy to see how these manufacturers cancel those plans. OPEC+ could easily cite an emergency release or a COVID lockdown in Austria as the reason those barrels are no longer needed.

“It will be the nuclear option,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

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