President Biden’s move to release oil from a national stockpile may provide some short-term relief to drivers paying an average of $3.50 per gallon to fuel up. Gasoline prices have risen 50% during the last year, crimping the recovery from the pandemic downturn—and infuriating drivers. Dropping more oil into the market will put downward pressure on gas prices.
But there are risks the move could backfire. Over the summer, Biden asked oil-exporting nations in the Middle East and elsewhere to pump more oil. They declined. The nations belonging to the oil cartel OPEC+ generally favor oil prices at $70 per barrel or higher, a level that optimizes revenue for them. More production would lower prices, which are currently around $80. Major oil producers such as Russia and Iran have no interest in doing Biden a favor, and even allies such as Saudi Arabia and Iraq want to maximize oil profits after a lean stretch in which prices fell to as low as $20 per barrel.
The OPEC+ nations have been planning an incremental supply increase of 400,000 barrels per day, but that would boost global supplies by less than one-half of 1%—far less than Biden wanted. Biden plans to release 50 million barrels from the U.S. reserve during the next several months. The Biden administration is also coordinating with the UK, China, India, Japan and Korea, which will release millions of additional barrels from their own reserves. None of those nations belong to OPEC+.
The arrangement is a confrontation of sorts between oil-consuming nations, and oil producers. If OPEC+ continues to pump at expected levels, then the additional supply would lower oil prices, as Biden hopes. But OPEC+ could also cut its own supply, to keep prices up, or push them even higher. “This raises the specter of a disruptive standoff that pits major producers led by OPEC+ against big consumers, led by the U.S.,” the Eurasia Group explained in a Nov. 22 analysis. “Countervailing moves by each side are likely to lead to increased volatility, producing seesawing oil prices and added uncertainty.”
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Biden obviously cares about domestic politics. An unforeseen bout of inflation—led by rising energy costs—has damaged Biden’s reputation and torpedoed his approval ratings. Big oil-producing countries, however, care about price stability, and they’re worried about longer-term trends that could dent demand for oil, and prices. Ongoing Covid outbreaks around the world could kneecap the global recovery and the rebound in commodity prices. Stimulus programs in the United States and other countries are winding down, another possible drag on demand. And many nations are pushing green-energy policies that portend the long-term decline of fossil fuels.
OPEC+ nations are meeting in early December, a gathering where they were expected to ratify the plan to gradually boost supply by 400,000 barrels per day. But that event could now produce a different result, as the cartel deliberates how to respond to Biden’s move. No change in plans would be a dovish response, indicating accepting of slightly lower prices, for a while, at least. But the cartel could surprise markets with, say, a cut in output, which would undermine Biden’s move by pushing prices up.
There are other oddities to Biden’s decision to release oil from the US stockpile. The world’s biggest oil producer isn’t Russia or Saudi Arabia, but the United States. Yet Biden hasn’t “asked” American drillers to produce more, likely because it would look like a blatant conflict with his aggressive green-energy plan. The United States, as a free-enterprise democracy, also doesn’t exert government control over the energy sector. Congress could pass additional tax breaks or other incentives for fossil-fuel production, but it’s currently considering the opposite as part of the Biden Build Back Better legislation.
Oil prices remain difficult for any politician to control. In 2011, President Obama released 30 million barrels of oil from the U.S. reserve to counteract supply shortages related to disruptions in Libya. Prices dipped briefly, but were higher than before six months later. OPEC, for its part, has a history of fractious relations among member nations and lack of discipline sustaining production quotas, as some nations desperate for cash often produce more than assigned.
The proverbial cure for higher oil prices is higher oil prices—because the appeal of larger profits is an incentive to produce more, which in turn boosts supply and brings prices down. But a new wrinkle is the global push for green energy, which is crimping the investment needed to develop new rigs or reopen shuttered wells. That puts Biden in the awkward position of demanding more oil now even as he crusades for its eventual obsolescence. Whatever keeps American drivers happy.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.