Politics trumps economics with Biden’s SPR release

US president Joe Biden is clear-eyed that the drawdown of strategic oil reserves he negotiated will not quickly end his woes over inflation, but the chance to push back on Opec+ and do something on fuel prices that are near seven-year highs proved too tempting to resist.

As part of the drawdown, the US will sell 18mn bl of sour crude from its Strategic Petroleum Reserve (SPR) and loan out up to 32mn bl. India plans to sell 5mn bl of crude, while the UK will allow voluntary releases of up to 1.5mn bl of oil. Japan will bring forward planned sales of its emergency stocks, while South Korea and China plan to join but have not offered specifics. "While our combined actions will not solve the problem of high gas prices overnight, they will make a difference," Biden says. The global drawdown could total 71.5mn bl and increase supply by 1.2mn b/d if it occurs over a two-month period, consultancy Rystad Energy says.

Biden conceded a month ago that an SPR drawdown might lower pump prices by only 18¢/USG, while the Energy Information Administration (EIA) estimates an effect of 5-10¢/USG. But the idea's political appeal is too great to resist, after Biden's entreaties for Opec+ to boost production did nothing but give Republicans fodder with which to attack his policies, and as families struggle with inflation heading into the holidays.

It could not have been lost on the White House that retail gasoline prices were already likely to drop by 30¢/USG by January from this month, according to the EIA's latest Short-Term Energy Outlook. A price decline could ease concerns from West Virginia Democratic senator Joe Manchin, who sees controlling inflation as a prerequisite to backing Biden's massive budget bill and its $555bn for clean energy and climate change.

The US was already required by law to sell 18mn bl from the SPR over the next four years. Holding the sale now, when prices are high, could raise sales revenue and cut pump prices. Washington's offer to loan 32mn bl from the SPR for 3-33 months requires winning bidders to return 2.3-9.1pc more oil than borrowed. The idea marks a new twist on former president Donald Trump's decision in 2020 to loan out 23mn bl of storage in the SPR when Covid-19 limits were in full force and commercial storage was scarce.

Neither the sale nor loan interfere with Biden's ability to draw down an additional 60mn bl from the SPR, which he could do if he "determines" that there is an emergency fuel shortage that is likely to have a major adverse economic effect. For now, Biden is wielding the threat of investigations to prod fuel distributors to pass recent savings in wholesale prices on to consumers. "If the gap between wholesale and retail [gasoline] prices were in line with past averages, Americans would be paying at least 25¢/USG less right now," Biden says.

Tax holiday season

The more than $1/USG rise in US retail gasoline prices since this year has put intense pressure on politicians facing elections in November 2022 to offer relief to constituents. High gasoline prices were a "financial hardship" for nearly three-quarters of registered voters that television network Fox News polled earlier this month week. Florida governor Ron DeSantis - who is up for re-election next year and a contender to run for president in 2024 - intends to ask the state's legislature to "basically zero out" fuel taxes of 26.5¢/USG on a temporary basis. The $1bn gasoline tax holiday will save the average driver $200, his office says. State-imposed taxes and fees average 30.6¢/USG for gasoline. If other states also suspend fuel taxes, it could ease inflation but starve funding for highways, undermining a recently enacted $1 trillion infrastructure bill.

By Chris Knight