How Joe Biden's oil bet went sideways
US energy secretary Jennifer Granholm talks oil prices in January 2023.
In 2022, the US government helped fight inflation with a smart oil trade: Selling from the Strategic Petroleum Reserve (SPR) when prices were high eased pressure on US consumers and generated big profits for the Treasury.
The flip-side of that trade is refilling the SPR when oil is cheap, but now the Biden administration may be missing its chance.
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Energy markets were surprised over the weekend by production cuts announced by major oil-producing nations. The decision by OPEC+, which has prices for crude oil rising to around $80 a barrel in the US, led forecasters to beef up their forecasts for future oil prices. More than a million barrels per day of missing oil exports won’t help global efforts to tame inflation, but it will improve the returns for major exporters.
The Biden administration had created new authorities that would allow the Department of Energy to purchase oil for the SPR at spot prices and using futures contracts. The White House said last year that it would buy oil to refill the SPR when the price of a barrel in West Texas, a key industry benchmark, sits between $67 and $72. That happened for much of the month of March, but no purchases were made.
One problem was failure of a pilot oil purchase program in January, likely due to technical challenges around market structure, the specific type of oil required, and how it would be delivered to the salt caverns where the US stores its oil reserves.
An energy shock that Biden’s team must deal with
OPEC’s decision now puts US energy policymakers in a tough spot. There are clear benefits: Moderating the supply of oil and stabilizing its price will help ease volatility that has led to recent supply crunches. Many oil producers lost money during years of low prices and didn’t invest in new production when prices spiked. Putting a floor under oil prices can prevent the ugly economic and political consequences that come with sudden energy shock, particularly if a widely predicted recession occurs this year.
From a climate point of view, a stable economy will navigate decarbonization more effectively, and higher fossil fuel prices will help make renewable energy and petroleum substitutes more competitive.
But if oil prices stabilize and increase, the US could lose its opportunity to refill its reserves cheaply, leaving the government with limited flexibility in the case of a future crunch or recession. (The average price of oil during the SPR’s sales in 2022 was $96 a barrel; that’s about where Goldman Sachs analysts now predict crude oil will land by the end of this year.) Failing to follow through on purchase commitments also hurts US credibility in the market and, according to the Financial Times, might have influenced OPEC+’s decision to cut production.
US energy secretary Jennifer Granholm has predicted the country won’t replace the 180 million barrels it released from the SPR until 2024 or 2025. That, say advocates of more active energy supply management, like Skanda Amarnath and Arnab Datta of Employ America, is a mistake that could be fixed with the use of futures purchases.
“Logistics are not an excuse—the new acquisition regulation was changed specifically to allow fixed-price purchases for later delivery. Among commodities, crude oil arguably has the deepest and most liquid futures curve, and thus makes the prospect of longer term fixed-price forward contracts procedurally straightforward for crude oil market actors,” Amarnath and Datta wrote today. “The DOE should be piloting a variety of methods for refilling the SPR through fixed-price forward contract so that they are operationally ready to give credible service to the White House’s commitment.”
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