Biden Sacrifices National Security For Midterm Votes With SPR Drawdown

The Biden administration is again looking to the Strategic Petroleum Reserve (SPR) to tame rising oil prices. Unfortunately, tapping further into America’s emergency stockpile won’t work. In fact, drawing down the SPR will weaken America’s energy security and exacerbate an energy crisis already threatening the global economy.

It’s easy to see the political motivation behind President Joe Biden’s plan. Retail gasoline prices are on the rise again and threaten Democrats’ chances in the Nov. 8 midterm elections.

Clearly, things are not great with the economy. Domestic oil production growth from shale has stalled, and the OPEC-plus cartel certainly didn’t do the White House any favors with its recent decision to cut supply by 2 million barrels a day.

But Biden’s use of the SPR as a market management tool, rather than the emergency reserve it was designed as, is reckless in today’s supply-driven energy crisis.

Biden has been selling SPR oil at unprecedented rates since May to handle the aftermath of Russia’s invasion of Ukraine. The latest sale of 15 million barrels was in addition to the record 180-million-barrel sale authorized last spring. Despite this, the administration is already eyeing new sales starting in January.

The SPR under Biden has been drained to about 405 million barrels – the lowest volume since 1984. And the White House has made it clear that it is comfortable taking the SPR – which can hold up to 714 million barrels – much lower.

The administration thinks it has a plan to refill the SPR and spur more U.S. oil production by guaranteeing a “fixed contract” with a buyback price of around $70 a barrel for domestic oil companies.

“Refining and refilling the reserve at $70 a barrel is a good price for companies, and it’s a good price for taxpayers,” Biden said.

Biden’s comments demonstrate a total lack of understanding about how the oil markets and America’s oil industry work.

The buyback plan will have a limited impact on producers’ investment decisions, driven mainly by investor demands for cash returns.

Moreover, the oil futures market’s current structure is sending producers signals that locking into a fixed contract of $70 in the future is a bad idea – even with demand concerns about a coming recession.

Indeed, the “forward curve” for U.S. benchmark crude West Texas Intermediate (WTI) does not signal a drop to $70 until mid-2024. WTI now trades around $85 a barrel.

The oil market structure is in “backwardation,” a condition where prices further out in the future are lower than the price for immediate delivery. Backwardation indicates a very tight supply market, which dissuades producers from hedging for fear of leaving money on the table by locking into below-market rates.

Biden thinks he is setting a floor for U.S. producers as they consider new investments, but in reality, his plan adds risk to the global oil market.

Why?

Because it further antagonizes Saudi Arabia and the OPEC-plus group, which holds the spare production capacity required to manage supply and demand within the oil market.

Before this latest sale, OPEC-plus was already fed up with SPR releases and other market interventions by the United States and European Union, including a G7 “price cap” on Russian oil sales.

The cartel restored ample spare capacity of around 3 million barrels a day after it decided to make the big supply cut earlier this month. But having that spare capacity means nothing unless the Saudi-led group is willing to use it.

OPEC-plus will now factor further SPR releases into its supply management decisions. With U.S.-Saudi relations in the throes of a crisis, you can bet that the threshold for OPEC-plus to use that spare capacity has increased.

That’s troubling because the EU bans on Russian crude and refined product imports set to take effect in December and February, respectively, will result in Russian supply losses of up to 2 million barrels a day. That is a real supply disruption – the sort of emergency the SPR was designed to address.

But let’s not pretend Russia is the only supply risk on the horizon.

A closer look at the oil-producing countries in the OPEC-plus group shows considerable exposure to geopolitical risks: Libya, Iraq, Iran, and Nigeria, as well as the potential for issues to arise in Russia’s Caspian neighbor Kazakhstan.

Closer to home, the Atlantic hurricane season continues to pose a threat through November. Hurricane Ian may have missed the Gulf Coast oil production hub, but it served as a reminder of how much damage such a storm could inflict.

The SPR is the largest strategic stockpile in the world, so its shrinking volume impacts global oil prices. It’s no surprise that Biden’s latest announcement caused oil prices to rise, as traders see fewer emergency reserves as the market heads toward more Russian trouble with the approach of the EU import bans.

The White House is injecting a lot of risk for just a few votes in the midterm elections.

Biden would be better off making peace with America’s oil producers and easing his administration’s climate policies that seek to destroy the industry. Even former President Barack Obama boasted about the benefit of U.S. energy production, but Biden can’t seem to get there.

The Biden administration’s moves jeopardize our national security. The depletion of our emergency oil reserves can only last until the stockpiles are exhausted, while replenishing them will take years.

Who knows what new threats may menace energy markets then.