The Biden administration Oct. 18 announced the last of a series of crude oil sales from the Strategic Petroleum Reserve (SPR) and a revised approach to purchasing oil to add to the reserve.
The notice of sale for up to 15 million bbl of crude requires bids by Oct. 25 for deliveries at any time during December. It will complete the drawdown of 180 million bbl announced by the administration in the spring (OGJ Online, Mar. 31, 2022).
The White House said President Biden is also calling on the Energy Department “to be ready to move forward with additional significant SPR sales this winter if needed due to Russian or other actions disrupting global markets.”
At the same time, the Energy Department completed a rule that allows it to replenish the crude oil reserve with fixed-price forward contracts when prices are at or below about $67-72/bbl.
“Relative to conventional purchase contracts that expose producers to volatile crude prices, the fixed-price contracts can give producers the assurance to make investments today, knowing that the price they receive when they sell to the SPR will be locked in place, providing them with some protection against downward movements in the market,” the Energy Department said in its announcement.
The White House added that fixed prices could protect taxpayers, who fund the purchases, against upward movements in the market.
Skeptical responses
The strategic petroleum reserve “is meant to protect consumers against emergency supply disruptions, not politicians during an election year,” said Jeff Eshelman, president of the Independent Petroleum Association of America, in a statement released Oct. 19.
“Releasing more oil from the SPR is a short-term fix for prices at best,” Eshelman said. The sale “reduces our capacity to protect ourselves in case of a true emergency in the future,” he said.
“Joe Biden is draining our emergency oil supply to a 40-year low,” Sen. John Barrasso (R-Wyo.) said Oct. 19. “His dismal approval rating is not a justifiable reason to continue to raid our nation’s oil reserves.”
The sale of 15 million bbl for delivery in December, averaged over that month, would amount to half a million b/d. By contrast, OPEC and its allies announced Oct. 5 they would cut their production by 2 million b/d starting in November.
The Energy Information Administration estimates global production and consumption of petroleum at about 100 million b/d. It is an open question whether a release of half a million b/d can have a discernible impact on prices set in a global market of 100 million b/d, and at a time when OPEC is throttling back a larger amount.
Unhappiness over profits
As part of the White House announcement of the SPR sale, President Biden called on oil companies to pass through lower energy costs to consumers right away.
“The profit that energy refining companies are now capturing on every gallon of gasoline is about double what it typically is at this time of year, and the retailer price margin over the refinery price is more than 40 percent above the typical level,” the White House said.
The phrasing seemed to indicate the White House was talking about a combined gross margin of retailers and wholesalers, though it was not entirely clear.
“These outsized industry profit margins—adding more than $0.60 to the average price of a gallon of gas—have kept pump prices higher than they should be,” the White House said.
This did not sit well with Chet Thompson, president of the American Fuel & Petrochemical Manufacturers, a refiners’ group.
“The president and his team know that fuel prices are set by the global market and reflect supply and demand more than anything else,” Thompson said. “They are wrong to misdirect the American people on this point and to pretend their policies have no role in compounding today’s challenge.”
The reference to “their policies” echoed an argument made often by the oil industry that the Biden administration cannot expect all of the investments it wants in production and refining while advancing policies that often restrict production and discourage long-term investments in refining.