Biden's Aggressive Response to Oil Prices Risks Backfiring


   
   LOUISVILLE, Ky. (DTN) -- This morning, the Biden administration announced 
the release of 50 million bbl of crude oil from the Strategic Petroleum Reserve 
in an effort to tamp down gasoline prices, which are hovering just below $3.40 
gallon nationally. In announcing the SPR release, the Department of Energy 
added that all options to combat high prices at the pump are on the table, 
including a ban on U.S. crude exports, an action Democrats in the House of 
Representatives have sought.

   While SPR releases are ultimately additional incremental commercial supply 
and therefore can -- all else equal -- marginally help ease the very near term 
global shortfall in production relative to demand, these releases cannot be the 
solution to longer term structural shortfalls in investment in oil production. 
That's what politicians should be worried about, particularly if their time 
horizon is looking out into the November 2022 midterms and 2024 elections.

   Furthermore, all else may not be equal. An SPR release could easily backfire 
given that the Energy Information Administration, International Energy Agency, 
and Organization of the Petroleum Exporting Countries are already forecasting 
that the oil market will move back into surplus in early 2022. This could give 
Saudi Arabia and OPEC+ reason enough to slow their planned 400,000 bpd 
production increases in the coming months and offset the increase in supply 
from the SPR release.

   Banning U.S. crude exports would be worse, an extreme measure that would 
also backfire by disincentivizing domestic crude production and thereby 
exacerbating the issue of high oil prices by guaranteeing the global market 
remains short supply in the years to come. While, in the very near-term banning 
exports could cause storage at Cushing to balloon and West Texas Intermediate 
prices to drop, this would inevitably lead to U.S. producers shutting in crude 
production and massive cuts in investment for future production. Everyone must 
remember the oil market is a global market and prices are set as such. Refined 
product prices are more reflective of the global market for both crude and 
products and gasoline prices would not plummet merely because the price of WTI 
would drop.

   Given that oil diplomacy with Saudi Arabia appears to be off the table, if 
the Biden administration wanted to truly ease oil supply fears longer term, 
they could begin to seriously work with Iran and Venezuela to bring their oil 
back to market while potentially scoring political points by rightly blaming 
the Trump administration's sanctions for taking over 2 million bpd of oil 
supply off the market from these sources. This would be the most powerful 
policy response from a longer term price and market balance perspective.

    

    

   Troy Vincent, troy.vincent@dtn.com, www.dtn.com.




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