When President Joe Biden ordered the release of 50 million barrels of oil in the U.S. strategic reserve to help reduce energy costs, he was aiming for the growing burden of millions of Americans embarking on the Thanksgiving journey.
The move announced Tuesday, which has been “unusual” in cooperation with a few other nations, is one of the few things the presidential administration can do to try to reduce the pressure – and political threat – of inflation. The prospects for providing meaningful freedom in the near future, however, are slim. However, any help in reducing fuel prices, even modestly, can be accepted by most Americans.
Here is the look involved:
What exactly is a petroleum reserve?
America’s Strategic Petroleum Reserve holds about 605 million barrels of oil in underground salt caves in Texas and Louisiana. It was created following a ban on Arab oil in the 1970s to store oil that could be extracted in an emergency. But the evolution of the global oil industry has changed dramatically in recent years: The US is now exporting more oil than it is importing.
There is a limit to how much money can be released at a time. In the past, the government provided about 1 million barrels a day. At that rate, the promised flow of contaminated barrels of 50 million can take up to two months.
Why is Biden tapping storage?
The idea is that by putting more oil on the market, prices will go down. That has not yet happened. But depending on what happens around the world, there is still room for improvement.
Oil prices rose slightly after the announcement. Traders had been waiting for the news, and it was likely that the details were shocking, said Claudio Galimberti, senior vice president of oil markets at Rystad Energy.
“The immediate price response is not the final decision on the effectiveness of this effort,” said Jim Burkhard, vice president of IHS Markit. “It will definitely be in the coming months.”
Whether a movement works depends on a number of factors.
What about OPEC?
The OPEC oil company and its partners will meet for a week to decide whether to increase or increase production, a strategy the group often uses to raise prices. Earlier this month, Biden hoped that OPEC countries, led by Saudi Arabia, would agree to significantly increase production. But they just grow a little bit.
If OPEC decides next week that it wants higher prices, its members may remove oil from the market. “Just tonight, they can fix it,” Burkhard said. “So that’s a sign of the big question, how they reacted to this.”
The Biden coalition – which includes India, China, Japan, South Korea and the UK to hold its oil reserves – has never existed, Galimberti said. In all, the group could add 70 to 80 million barrels of oil to the market, he estimates.
“It is a kind of importer of oil imports,” he added. “But can they really take over, or can they represent a rival in OPEC-plus? The answer is no.” This is because a group of foreign buyers use their own fuel depots, which are limited. On the other hand, OPEC and its partners have oil resources that can last for decades. “So there is no comparison between the two,” said Galimberti.
Will gasoline be cheaper?
What many consumers want to know is what will happen to the fuel prices at the tap. Many items go into the price of gasoline. Refineries buy crude oil in advance, so they still operate on more expensive oil, and the provinces have different tax rates that affect the price. However, if OPEC does not respond to the reduction in production, oil inflation could lead to a reduction in fuel prices by 10 cents to 15 cents per liter, said Kevin Book, managing director of Clearview Energy Partners. Even if the downturn does not happen, Biden can still file a lawsuit.
“Actually, what we are talking about is consumers who are very sensitive to prices in the economy,” Book said. “They may not be seen in terms of GDP numbers or economic downturns, but they may be seen in the counting of votes as minor voters, who may or may not respond in the next election cycle, and I think if we go down that is really the case.”
Why is oil important?
The future of oil and gas in the US is a political source and a source of tension, especially as corporations and government agencies deal with climate change and the transition to clean energy sources.
On the other hand, the American oil and gas industry has been praised by political leaders for creating independence. Whereas once the US relied heavily on exports, other nations now rely on the US for oil. It is also a service provider: The oil and gas industry employs more than 10 million people in the US and provides about 8% of the country’s gross domestic product, according to the American Petroleum Institute. Any impact caused by Biden’s oil extraction into strategic reserves “could be temporary unless paired with policy measures that promote American energy production,” the API statement said.
Oil companies benefit from higher prices. But consumers do not like it when those high prices go down the tap.
“The broader drama is this new shift in the oil market: the conflict between carbon offsets and the real concern of having lower fuel prices,” Burkhard said. “And there is a conflict between the two armies. And that is why we will continue to see the distinction between demand and supply. ”