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NEW YORK (AP) – When President Joe Biden ordered the release of 50 million barrels of oil from America’s strategic reserve to reduce energy bills, he targeted a growing burden for millions of Americans making Thanksgiving trips.
The move announced on Tuesday, taken in rare coordination with several other nations, is one of the few things a presidential government can do to ease the pressure – and political threat – of rising inflation. However, the likelihood of providing meaningful relief in the near future is likely to be slim. Still, many Americans would welcome any help, even in a modest way, in lowering fuel prices.
Here’s a look at what it’s all about:
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WHAT IS THE OIL RESERVE ONLY?
America’s Strategic Petroleum Reserve holds approximately 605 million barrels of oil in underground salt caverns in Texas and Louisiana. It was created after the Arab oil embargo of the 1970s to store oil that could be tapped in an emergency. But the dynamism of the global oil industry has changed dramatically in the past few years: the US now exports more oil than it imports.
There is a limit to how much can be released at one time. In the past, the government has released about 1 million barrels a day. At this rate, the promised inflow of 50 million barrels of crude oil could take about two months.
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WHY HAS BIDEN CONNECTED THE RESERVE?
The idea is that as more oil is put into the market, prices go down. It 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 awaited the news and may have been overwhelmed by the details, said Claudio Galimberti, senior vice president of oil markets at Rystad Energy.
“The immediate price reaction is not the ultimate judgment on the effectiveness of these efforts,” said Jim Burkhard, vice president of IHS Markit. “It really will be in the months ahead.”
Whether the move is effective depends on several factors.
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WHAT ABOUT OPEC?
The OPEC oil cartel and its allies will meet in about a week to decide whether to increase or hold back production, a strategy the corporation often uses to raise prices. Earlier this month, Biden had hoped the OPEC nations, led by Saudi Arabia, would agree to a significant increase in production. But they only made modest increases.
If OPEC decides to ask for higher prices next week, its members could take oil off the market. “Only overnight, they could just make up for it,” said Burkhard. “So that’s a big question mark on how they react to that.”
The coalition formed by Biden, which is bringing together India, China, Japan, South Korea and Britain to develop their strategic oil reserves, is unprecedented, Galimberti said. Overall, the company could bring 70 to 80 million barrels of oil on the market, he estimates.
“It’s kind of a coalition of oil importers,” he added. “But can they really oust OPEC-plus or can they really be a rival? The answer is absolutely not. ”Because the group of importers uses their limited strategic oil reserves. On the other hand, OPEC and its allies have oil reserves that can last for decades. “So there is no comparison between the two,” said Galimberti.
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GAS PETROL GETTING CHEAP?
What many consumers want to know is what happens to gasoline prices at the pump. Many factors play a role in the price of gasoline. Refiners buy crude oil up front, so they are still working with more expensive oil, and states have different tax rates that affect the price. However, if OPEC doesn’t respond by curbing production, the influx of oil could lead to a 10 to 15 cents per gallon drop in gasoline prices, said Kevin Book, managing director at Clearview Energy Partners. Even if the price drop doesn’t happen, Biden can act in the event that he tried.
“We’re really talking about the most budget-conscious consumers in the business world,” said Book. “They may not show up in GDP numbers or recessions, but they show up in the vote count as marginal voters who may or may not answer in the next election cycle, and I think when we get down to business this is really what this is about.”
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WHY IS OIL IMPORTANT?
The future of oil and gas in the US is a political hotspot and source of tension, especially as corporations and government agencies grapple with climate change and the transition to cleaner energy sources.
On the one hand, the US oil and gas industry has been praised by some political leaders for creating energy independence. While the US once relied heavily on imports, other nations now rely on the US for oil supplies. It’s also a job supplier: the oil and gas industry employs more than 10 million people in the United States and accounts for about 8% of the country’s gross domestic product, according to the American Petroleum Institute. Any impacts resulting from Biden’s release of oil from the strategic reserves “are likely to be short-lived unless paired with policies that encourage the production of American energy resources,” the API said in one Explanation.
Companies that supply oil benefit from higher prices. But consumers don’t like it when those higher prices trickle down to the pump.
“The broader drama is this new variable in the oil market: it’s the tension between the pursuit of decarbonization and the practical concern about low gasoline prices,” said Burkhard. “And there is a conflict between these two forces. And that’s why we will continue to see distortions between supply and demand. ”
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Follow Cathy Bussewitz on Twitter: @cbussewitz
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