The Biden administration is ready to sell additional volumes of crude oil from the Strategic Petroleum Reserve after the 180 million barrel release plan ends, then it would begin to replenish the SPR once prices fall to 67-72 dollars per barrel. That’s the main finding of a fact sheet released by the White House this week as the administration continues to seek ways to rein in retail fuel prices just weeks before the midterm elections.
The SPR draws – and other projects – have raised concerns among some analysts, who have pointed out that the SPR’s purpose is not to control gasoline prices but to secure oil supplies. of the country in case of emergency.
Others have interrogates the very relevance of the SPR in today’s oil world, where the United States is the largest oil producer on the planet, but market reactions to this year’s SPR releases have suggested that maintaining a strategic reserve is always a pretty good idea.
The main concern of those monitoring SPR levels has been its replenishment. Due to the massive levies that the Biden administration implemented as a tool to maintain the price of gasoline, inventory at the SPR is now at the lowest in nearly 40 years, to some 405 million barrels.
“The administration intends to repurchase crude oil for the SPR when prices are at or below approximately $67-72 per barrel, adding to global demand when prices are around this range,” said the White House in a statement. fact sheet this week.
He added that “this buy-back approach will protect ratepayers and help create certainty about future demand for crude oil. This will encourage companies to invest in production now, helping to improve US energy security and lower energy prices that have been pushed up by Putin’s war in Ukraine.
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The above has led some media commentators to to suggest that Biden is indeed embrace the oil industry after spending most of his first two years in office fighting it. Indeed, the factsheet also noted that replenishing the SPR would involve contracts that lock in prices for the next two to three years.
If it looks like a floor price and it looks like a floor price, it must be a floor price, like Energy Intelligence demonstrated in a detailed analysis of the replenishment target price range.
The analysis underscores that the range cited by the administration is around the same price level that motivates US producers to hedge their future production. When oil exceeds $70 a barrel, the authors explain, they prefer to sell them on the spot market.
The range is also above the break-even point for most producers, the analysis also points out, suggesting this could be an incentive for drillers to steadily increase production.
It makes sense, on the face of it. What producers or any product would not be happy to learn that there will be a demand for their product in two or three years? Yet this is only at first glance.
Before Biden suggested a price floor for oil, he targeted the US oil industry with a fresh call for behavior change. He Told oil companies, they should stop buying back shares and invest in growing production and controlling fuel prices.
“My message to US energy companies is this: You should not use your profits to buy back stocks or for dividends. Not now. Not while a war is raging,” the US president said. “You should use these record profits to increase production and refining.”
America’s oil industry has demonstrated more than once that it doesn’t really like being told what to do, especially by someone who actually said the industry was the biggest obstacle to a better future. for America.
But he also demonstrated something else few could have seen coming: restraint. The pandemic appears to have shattered the grow-at-all-costs mentality of U.S. oil, and companies are now focused not only on returning cash to shareholders, but are also more pragmatic about growing production.
It should be noted that this new restriction is also related to the policies of the Biden administration. The focus is entirely on transitioning from fossil fuels to alternative energy sources. In other words, the Biden administration is betting on the death of oil. It really shouldn’t be surprising when oil producers are unwilling to help bring prices down in time for the medium term.
All this, however, does not really solve the problem of the shrinking strategic oil reserve. Because no one really expects oil prices to drop to $72 anytime soon. On the contrary, they are expected to increase further in a few months when the EU embargo on Russian oil comes into force.
And since the EU has announced its intention to stay the course with anti-Russian sanctions in the observable future, prices could remain high for an extended period, which would make the US administration’s job of resupplying quite difficult, even if US oil production is expected to come back to record levels in 2023.
By Irina Slav for Oilprice.com
