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Johannes Eisele/AFP via Getty ImagesThe U.S. may release oil from the country’s strategic petroleum reserve or even ban oil exports to hold down energy prices, U.S. energy secretary Jennifer Granholm said at a conference on Wednesday. The statements showed that soaring energy costs are starting to worry the Biden administration—but those actions may not do much, or even be counterproductive, some analysts said.
Europe and Asia are facing real economic destruction from rising energy prices, with electricity costs forcing power producers out of business in the United Kingdom and causing power rationing in China. The U.S. isn’t in quite such dire straits, but prices are certainly rising. Gasoline at the pump has been hovering around its highest levels since 2014. On average, it’s at $3.22 a gallon today, according to Patrick Dehaan, head of petroleum analysis at GasBuddy.
Rising gasoline, electricity, and heating prices could become a liability for President Biden. But the administration has been sending mixed signals about its intentions, particularly as the president attempts to wean the U.S. off of fossil fuels.
This summer, National Security Advisor Jake Sullivan urged OPEC to start boosting production to “support the recovery.” At the same time, Biden has been limiting the areas where domestic oil and gas producers can drill, banning new leases on federal land. That ban was blocked by a judge, but oil companies were still uncertain of the new rules after the judge’s ruling.
In general, U.S. producers have cut back production in order to focus on stabilizing their balance sheets. With OPEC also holding back production, there’s a supply-demand imbalance that’s forcing prices higher. Neither the Energy Department nor the White House responded to inquiries about the administration’s energy policy. (A report on Thursday indicated that the Energy Department has since downplayed chances of an export ban or reserve release.)
Some analysts say the idea of releasing strategic reserves would lead to only a temporary dip in prices. There are “inherent limitations to using the SPR in the current scenario to ease rising gasoline prices,” wrote RBC Capital Markets analyst Helima Croft. For one thing, U.S. refiners are already running at high capacities, so they wouldn’t be able to quickly process new releases of oil.
“Additional barrels coming onto the market would not translate into materially greater amounts of refined product, doing little to curb rising fuel prices,” Croft wrote. She thinks that the U.S. is trying to force OPEC’s hand and make them pump more, itself a difficult proposition.
Goldman Sachs analysts agree that the reserve release would provide only “modest and transient” relief and would reduce their year-end Brent crude price target to $87 from $90.
And an oil export ban might actually cause the opposite of the intended effect.
An export ban would “likely create large price distortions, with U.S. export restrictions depressing WTI crude oil prices relative to Brent in order to balance the domestic market,” wrote Goldman analyst Damien Courvalin. “This would also have knock-on effects on the product markets. Ironically, it would be particularly bullish for gasoline and refined products more generally due to the fact the U.S. will still be a net importer of gasoline, with the product needing to price off of a much tighter Brent market to incentivize a continuation of such flows.”
Beyond the limited or even counterintuitive price impact, Biden’s strategy risks turning off allies and undermining climate goals, Croft argued.
“Again, we reiterate that the Biden administration is walking a very challenging tightrope as it tries to balance its desire to accelerate the energy transition and at the same time shield consumers from the pain of higher prices at the pump, especially ahead of the COP26 climate conference,” she wrote.
Write to Avi Salzman at avi.salzman@barrons.com
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Gas Prices Are Rising. Wall Street Questions Biden Energy Strategy. - Barron's
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