The Economist explains
Why America is releasing emergency petroleum stockpiles
Joe Biden wants to send a message to OPEC+ countries and consumers irked by inflation
PRESIDENT JOE BIDEN, like many Western leaders, is battling inflation. One of the fastest rising prices is that of oil, thanks to an economy surging after the covid-19 pandemic and the reluctance of members of OPEC+, a club of oil-producing countries, to increase their output. Americans are paying close to 60% more to fill their tanks than at this point last year. On November 17th Mr Biden asked the Federal Trade Commission to investigate whether oil and gas companies had colluded in raising prices at the pump. Now he is turning his attention to oil-producing countries. On November 23rd Mr Biden said he would release crude from America’s Strategic Petroleum Reserve (SPR), a reservoir of more than 600m barrels stored underground in Texas and Louisiana. Britain, China, India, Japan and South Korea said they will move in step, releasing oil from their own reserves (though only a fraction of the amount pledged by America). Will Mr Biden’s plan reduce the cost of oil?
The majority of America’s release, 32m barrels, will be loaned to refineries over the coming months, meaning that eventually the stocks will need to be refilled. The remaining 18m barrels will be part of an accelerated sale previously agreed by Congress. America has sold its stockpiles just three times before: during the Gulf War in 1991; in response to Hurricane Katrina in 2005; and as part of a co-ordinated release in 2011 to counter disruptions in oil production in Libya, a result of the Arab Spring uprisings.
Nobody expects the measure to have a lasting effect on oil prices. The long-term causes of the price rise will not be eliminated by selling the stockpile. America’s release of 50m barrels amounts to little more than half of the world’s daily demand for crude oil. When 60m barrels were released in 2011, it caused crude prices to fall temporarily by $8 per barrel, and spun retailers into a price-slashing frenzy to pass savings on to customers at the pump. But two weeks later Brent crude oil futures, a benchmark for global oil prices, had rebounded, suggesting that any relief may be short-lived (see chart). Mr Biden’s intervention may also lead to uncertainty in the market by making buyers expect future tightness in the supply. This, in turn, can trigger price volatility.
Last, OPEC+ countries may fail to increase production as quickly as Mr Biden would like, offsetting America’s release. The knowledge that the countries releasing oil will eventually have to refill their stockpiles makes it unlikely that oil-producing countries will bow to Mr Biden’s will. OPEC countries are set to meet again on December 2nd, but no significant change in the group’s supply policy is expected.
As in 2011, Brent crude oil futures tumbled three percent after reports on November 18th that Mr Biden might release some of America’s stockpile. Mr Biden hopes a temporary relief in petrol prices will prove permanent and show voters that he is tough on inflation ahead of the 2022 mid-term elections. He also wants to show OPEC that America and other world powers are willing to push back against their control of the oil market.
More from The Economist explains:
What is the JCPOA, the deal meant to restrict Iran’s nuclear activity?
What will the covid-19 pandemic look like in 2022?
What is the “3.5% rule” beloved of climate protesters?