A recent spike in gasoline prices has left President Biden scrambling to find options to address it.
One of the topics that is getting a lot of attention is the possibility of the Biden administration releasing crude oil from the country’s emergency oil stockpile, known as the Strategic Oil Reserve.
Much will depend on oil prices, which have skyrocketed over the past year, returning to pre-pandemic levels and then to some. But after hitting over $ 86 a barrel in October, they’ve since fallen below $ 80.
There are many factors affecting prices, including the fact that the White House is now talking about mining stocks.
Here is an explanation of the country’s oil reserves and whether tapping them would be really efficient.
What is the Strategic Petroleum Reserve, or SPR?
It is a stockpile of crude oil that the United States maintains in an emergency. If supplies are interrupted, such as by a hurricane or war, the United States can draw on reserves and avoid catastrophic shortages.
The SPR was created after the oil crisis of the 1970s. The oil is stored in underground salt caves in Texas and Louisiana. The caves currently contain over 600 million barrels of oil. It’s a little less than a month of oil at current American consumption levels.
In addition to being tapped in an emergency, reserve oil can also be loaned to oil companies (who pay it back with interest) or sold to raise money for the federal government.
Congress has already ordered the release of tens of millions of barrels over the next few years for non-urgent reasons.
Why is Biden considering running the SPR now?
The emergency oil reserve is not hypothetically intended to be exploited to manage prices; it is supposed to manage major supply disruptions, which the market does not currently experience. But this is one of the some tools the president must lower oil prices.
In October, US crude prices hit seven-year highs. This was a very rapid increase from the start of the pandemic, when prices even briefly turned negative, meaning oil traders were actually paying others to take barrels from them.
And rising energy prices, including natural gas and coal as well as oil, are a major contributor to high inflation.
OPEC has refused to increase production to deal with the high prices, despite calls from the White House. The Saudi Arabia-led oil cartel has stuck to its policy of gradually increasing production as the global economy continues to recover from the pandemic.
US oil producers, under pressure from their own investors, have also not increased production as much as they usually do when prices are this high.
This has left Biden’s White House under intense pressure to do something about the high prices. After all, history has shown that soaring gas and food prices can take a heavy political toll.
What impact would an SPR version really have?
The mere possibility of an exit from SPR has already helped bring prices down. One would expect an actual announcement to lower prices further … but only temporarily.
This is because a single publication does not really change the underlying dynamics of supply and demand that determine oil prices.
“The impact would likely be slight and short-lived, based on historical examples of sales,” said Louise Dickson, senior oil markets analyst at Rystad Energy, in a note this week.
The magnitude of the effect on the markets would also depend on the magnitude of the rejection.
What if several countries drew on their reserves?
Coordinating a version with other countries could give more oomph to an SPR version. The White House has called on other major oil consumers, who have their own oil reserves, to release oil from their stocks in one coordinated action.
China is reportedly considering a release of its own SPR, although it is not clear whether this is a response to Biden’s call. Some other countries have indicated that they believe their reserves should be kept for potential supply shocks, and not used to vary prices.
“Other countries don’t necessarily look at strategic reserves the same way the United States does,” said Kevin Book, managing director of Clearview Energy Partners. “We are the only country in the world to liquidate its security blanket.… We burn it for money.”
But even a coordinated release might have only a temporary impact. In June 2011, the announcement of an SPR press release coordinated by the International Energy Agency to respond to a crisis in Libya caused prices to fall by 6%. But two weeks later the prices were back to where they had been.
What is the outlook for oil prices?
Recent projections from the Energy Information Agency, the International Energy Agency and OPEC all predict that the supply of oil will increase by early next year and that the world will end up with a surplus of oil. It would lower the prices.
But some analysts are more skeptical and predict that prices will remain high until 2022.
Copyright 2021 NPR. To learn more, visit https://www.npr.org.
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