The US Strategic Petroleum Reserve holds about 605 million barrels of oil in underground salt caves in Texas and Louisiana.
When President Joe Biden orders the release of 50 million barrels of oil from America’s strategic reserves To help reduce energy costs, he was taking aim at the increasing burden for the millions of Americans embarking on the Thanksgiving journey.
The move announced Tuesday, done in a rare coordination with several other countries, is one of the few things the presidential administration can try to ease the pressure – and political threat – of rising inflation. However, the chances of getting meaningful relief in the near future are slim. Still, any help to reduce fuel prices, even modestly, would be welcomed by many Americans.
What is Petroleum Reserve?
The US Strategic Petroleum Reserve holds about 605 million barrels of oil in underground salt caves in Texas and Louisiana. It was built after the Arab oil embargo of the 1970s to store oil that could be tapped in case of an emergency. But the dynamics of the global oil industry have changed dramatically in recent years: the US now exports more oil than it imports.
There is a limit to the amount that can be issued at a time. In the past, the government has issued about one million barrels per day. At that rate, an estimated inflow of 50 million barrels of crude oil could last about two months.
Why did Joe Biden tap the reserve?
The idea is that putting more oil in the market will drive prices down. That hasn’t happened yet. But depending on what happens in the rest of the world, there’s still a chance it could work.
Oil prices rose slightly after the announcement. Traders were anticipating the news, and may be overwhelmed by the details, said Claudio Galimberti, senior vice president of oil markets at Rystad Energy.
“Immediate price feedback is not the final judgment on the effectiveness of this effort,” said Jim Burkhard, vice president of IHS Markit. “It will really happen in the coming months.”
Whether this step is effective or not depends on several factors.
What about OPEC?
The OPEC oil cartel and its allies will meet in about a week to decide whether to increase or withdraw production, a strategy the group often employs to boost prices. Earlier this month, Mr Biden expected OPEC nations, led by Saudi Arabia, to agree to significantly boost production. But they only increased marginally.
If OPEC decides next week that it wants higher prices, its members can pull oil from the market. “Just overnight, they could just make up for it,” said Mr. Burkhard. “So it’s a big question mark how they respond to this.”
Mr Biden’s alliance – bringing together India, China, Japan, South Korea and the UK to tap their strategic oil reserves – is unprecedented, Gallimberti said. He estimates that in total, the conglomerate could add 70 million to 80 million barrels of oil to the market.
Read also | India to release 5 million barrels of crude oil from strategic reserves
“It’s a coalition of oil importers,” he said. “But can they really be a replacement, or can they really represent a rival to OPEC-Plus? The answer is absolutely no.” This is because the group of importers are using their strategic petroleum reserves, which are limited. On the other hand, OPEC and its allies have oil reserves that could last for decades. “So there’s no comparison between the two,” said Mr. Gallimberti.
Will petrol be cheaper?
Many consumers want to know what will happen to the price of petrol at the pump. Many factors go into the price of gasoline. Refineries buy crude in advance, so they are still dealing with more expensive oil, and states have different tax rates that affect the price. Still, if OPEC doesn’t respond by reducing production, the influx of oil could drop the price of gasoline by 10 cents to 15 cents a gallon, said Kevin Book, managing director of Clearview Energy Partners. Even if prices don’t drop, Mr Biden could make the case he tried.
“Indeed, what we’re talking about are the most price-sensitive consumers in the economy,” Mr Book said. “They may not show up in GDP numbers or recessions, but they show up in vote counts as marginal voters who may or may not respond in the next election cycle, and I think if we get down That’s what it really is.”
Why does oil matter?
The future of oil and gas in America is a political flashpoint and a source of tension, especially as companies and government agencies grapple with climate change and the transition to clean sources of energy.
On the one hand, the US oil and gas industry has been praised by some political leaders for creating energy independence. Where America was once heavily dependent on imports, other countries now depend on the US for oil. It’s also a job supplier: According to the American Petroleum Institute, the oil and gas industry employs more than 10 million people in the U.S. and contributes about 8% of the nation’s GDP. In a statement, API said any impact resulting from the release of oil from Mr Biden’s strategic reserves “is likely to be short-lived, unless it is combined with policy measures that encourage the production of US energy resources.” “
Oil supply companies benefit from higher prices. But consumers don’t like it when those high prices reach the pump.
Read also | Coordinated reserve release eases some supply fears as oil prices fall
“The broader drama is this new variable in the oil market: it’s tensions between aspirations to decarbonize and practical concern for low gasoline prices,” said Mr. Burkhard. “And there’s a conflict between those two forces. And so we’re going to continue to see dislocations between demand and supply.”
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