As gasoline prices and inflationary pressures have climbed in recent weeks, calls have been growing in Congress for the Biden administration to tap into the nation’s Strategic Petroleum Reserve.
Over the weekend, Chuck Schumer, the Senate majority leader, also spoke out. “We need immediate relief at the gas pump, and the place to look is the Strategic Petroleum Reserve,” Mr. Schumer, a New York Democrat, said at a news conference.
Jennifer Granholm, Energy Secretary has stated that such a press release is one measure the administration is considering in order to calm energy markets.
People who support such a release claim that a sale of the reserve at oil prices above $80 per barrel would not only increase supplies but also reduce pump prices. This would generate billions of dollars for the federal government.
What is the Strategic Petroleum Reserve (SPR)?
The Strategic Petroleum Reserve, which holds approximately 620,000,000 barrels of various grades crude oil in underground caverns at four locations in Texas or Louisiana, is the largest global emergency supply. It is capable of satisfying the nation’s consumption needs for about a month in the unlikely event that all imports and domestic production were halted.
It was established after the 1973-74 oil embargo imposed by the Organization of the Petroleum Exporting Countries by Arab members. It has been used only in a few emergencies, including the buildup of the Persian Gulf war in 1991, and the aftermath of Hurricane Katrina, 2005, when most of the Gulf of Mexico oil infrastructure was destroyed. It is often used to exchange or lend oil to refineries during storms or barge accidents.
What’s the argument for releasing oil from the ground?
With the world’s economy and shipping lanes contorted by the pandemic, the United States faces inflation pressures not experienced in decades. The United States is now a major oil producer and does not have to keep its reserve as full as it did in days when it was more dependent on foreign oil.
“High gasoline prices have placed an undue burden on families and small businesses trying to make ends meet,” according to a letter sent by 11 Democratic senators to President Biden last week, “and have proven especially burdensome as our constituents continue to recover from the economic fallout of the Covid-19 pandemic.”
A release would reset the supply-demand equation and ease oil market tightness. Even a temporary drop in domestic oil, gasoline, and diesel prices could help ease inflationary pressures on food and other goods being transported around the country.
The average price for a gallon (or more) of regular gasoline in the United States has increased to $3.42 from $2.13 a Year ago.
The tight supply situation is a result of OPEC members keeping a lid on production to maintain prices. American producers have been cautious due to investors demanding that they reduce debt and raise dividends, rather than increasing production to oversupply markets and reduce prices.
What is the objection to a release?
Reserves should be made only for genuine emergencies. The reserve was established to address emergencies caused by wars and severe weather, not the increase in prices at pump. Prices naturally rise when supplies are low. Companies respond by producing more to resolve the issue eventually.
Is a release effective?
Experts believe that a price drop would be modest, at most for a brief time.
The amount of oil released depends on how much was released and whether coordination is made with allies like Japan or Germany that could also release reserves. A 30 million barrel release would have a limited impact on the world’s oil consumption, which averages around 100 million barrels per day.
Learn the Supply Chain Crisis
“A release of S.P.R. volumes, which are mostly held in crude oil and not oil products like gasoline, would offer a reprieve to gasoline prices, but the impact would likely be mild and short-lived,” said Louise Dickson, senior oil markets analyst at Rystad Energy, a consultancy.
Oil prices have been falling in recent days due to the fact that traders take the threat of oil being withdrawn from the strategic reserve seriously. Over the last week, the average price for a gallon regular gasoline has fallen by one penny.
“The market is again focusing on the U.S., and how the Biden administration will act now that political pressure is ramping up,” Ms. Dickson said.
But that isn’t the only reason. The dollar’s recent strengthening has lowered the oil price because it takes fewer dollars to buy a barrel of oil. American shale oil producers are increasing the number of their rigs in use, which should increase supply in the coming months. Also, a new coronavirus wave has hit parts of Europe, threatening to slow down the continent’s economic recovery.
Could a release reduce home heating prices
Maybe in some areas. Most homes heat their homes with natural gas or electricity. However, about five million homes still use heating oil. Most of these are located in the Northeast. A modest release from the strategic reserves could help, but any impact would have had to wait until late winter for the oil refiners to process it and ship it.
Source: NY Times
