Good Timing, And Too Small To Hurt Anything

President Biden speaking Nov. 23, 2021 on economics and inflation.

AFP via Getty Images

President Biden’s release of 50 million barrels from the Strategic Petroleum Reserve is timed perfectly. Both to take advantage of seasonally softening oil demand, as well as to provide some much needed “C.Y.A.” ahead of the holiday season — during which everyone’s uncle will be complaining that gasoline (average $3.40/gal nationwide) didn’t cost this much when Trump was president (and hasn’t since 2014). 

A senior administration official admitted on a call with reporters this morning that the SPR move is “not an emergency release.” Indeed, there are no domestic gasoline shortages, and oil prices have already fallen 10% in the past week (to $75/bbl this morning), as demand segues into what economist Ed Yardeni refers to as “typical seasonal decline.” The window to ship goods to the U.S. in time for Christmas closed in mid-October. The number of cargo ships waiting off Los Angeles is down to 71 from a peak of 86, while the global container index fell 20% last week. As the logistics pressure lift so will heightened demand for bunker fuel and diesel. Meanwhile, the International Energy Agency says that oil production will soon ramp up, as drillers have already been moving in response to higher prices. Add to that the economically suffocating effect of new Covid-19 lockdowns in Europe, and oil demand is set to soften just in time for Biden to take credit for price declines.

And if prices rise? The administration can just keep blaming Big Oil and say at least they tried something. 

The best thing about Biden’s move is that it doesn’t really hurt anybody. Because it will be virtually undetectable. Doled out “over the next several months,” these 50 million barrels — 18 million of which will be the acceleration of previously authorized sales — will disappear into the global oil market like spit into the Mississippi. According to analyst Michael Haigh at Societe Generale, “the resulting effect on our model is hard to even notice,” reducing prices by “at best” $1/bbl.

For context, the world consumes 95 million barrels of petroleum per day. That’s nearly 35 billion barrels per year. America’s commercially held oil inventories are 433 million barrels, the tightest since before the pandemic (down from a pandemic peak of 540 million). The SPR, meanwhile, contains 606 million barrels.

Put another way, Biden’s SPR release would cover about half the nation’s wintertime demand for heating oil

More supply helps, on the margin. Much of the world is in the midst of an energy crisis, with Europe and Asia panicking over access to sufficient supplies of coal and natural gas for power plants amid record power prices. La Nina weather patterns threaten a frigid winter; meanwhile Russia’s Gazprom has been sluggish in sending gas to Europe, which faces the very real prospect of people freezing to death because they can’t afford to stay warm. 

Though Biden’s move doesn’t really hurt anyone, there are plenty of folks who will find it annoying. First off, OPEC. Biden begged OPEC twice in recent months to add more oil to the market — which they have already been doing, bringing back 400,000 barrels per day, per month, that the group had previously cut in the face of Covid demand destruction. OPEC turned down his requests.

Why acquiesce to a guy who has shown nothing but contempt to the industry? On Biden’s first day in office he scotched the Keystone XL pipeline. He has blocked oil lease sales on federal land and pushed for tighter regulations. Last week he ordered the Federal Trade Commission to investigate Big Oil as to “whether illegal conduct is costing families at the pump.” Since Biden came to office, U.S. oil producers have kept their horns in. Domestic oil production, at 11 million bbl per day, is down from a pre-pandemic peak of 12.8 million. 

America’s frackers are rightly miffed that Biden would rather beg more barrels from the Saudis than encourage more activity from Texas frackers. To them, $75 oil seems reasonable. If that’s not the right price, then who’s to say what is? Biden? Doesn’t he want us to trade in gas-guzzlers for EVs?

Oil and gas production is subject to inflationary forces like everything else. The tsunami of dollars released by the Federal Reserve pushes up the price of steel and sand and labor that go into producing every barrel of oil. Why bother firing up the rigs and fracking crews to drill more wells if the president is just going to try to undercut you once prices reach a healthy, profitable level?

The administration admits oil supplies are adequate and there is no supply emergency. So this move then is effectively Biden’s declaration of no-confidence in the world’s biggest and deepest commodity market. It’s “I’m a car guy” Biden shaking his fist at the sky and declaring to whoever will listen that he knows better than the market what the price of gasoline should be.