Ca Joe Biden pushes big oil to drill for more oil, lower gas prices and accelerate the switch to electric driving? That’s the ambitious goal of a plan the Biden administration is implementing as drivers continue to struggle with rising gas prices. It is unusual for the plan to receive support not only from the oil industry, but also from some economists and environmentalists.
As 2022 gas prices sparked inflation and oil companies celebrated record profits, Biden practically begged industry executives to take a fundamental step that could have lowered costs: pumping more oil to increase supply. His pleas fell on deaf ears.
While critics accuse the industry of acting out of greed, oil companies see a real risk in pumping more oil. Since 2008, oversupply of oil has repeatedly caused prices to collapse, leaving companies with dwindling profits.
“Exxon is not going to do national service by producing much more oil and risking massive oversupply because the executives know if they do it wrong, their shareholders will fire them,” said commodity analyst Alex Turnbull.
In late July, the Biden administration changed tack and moved ahead with a risky, albeit innovative, plan designed to protect consumers from high gas prices, reduce oil companies’ risk and push the nation toward electric vehicles. The proposal would work by using the Strategic Petroleum Reserve, the federal government’s oil reserve, in a way that sets a partial floor and ceiling for oil prices.
In short, when demand is weak and prices fall so low that pumping more oil becomes unprofitable, the government would buy at a price high enough to support industry profits and put barrels in reserve. When demand is strong and prices are rising, the government can intervene by flooding the market with reserve oil, which can help drive prices down.
If it works, the plan could be managed to keep gas prices high enough to keep consumers moving to electric vehicles, but not so high as to hurt the economy. While many will question the wisdom of a plan to reduce greenhouse gases by pumping more oil, the idea still has the support of a “coalition of strange bedfellows,” said Skanda Amarnath, executive director of Employ America, a progressive think tank that a similar plan.
“When you use these tools intelligently, it gives oil producers some security and confidence,” he said. “But it also needs to be thought about holistically… and it needs to manage the strategic reserve in a climate-conscious way.”
Set up a floor
A proposed change to the Department of Energy’s rules would allow the government to take steps to stabilize the oil market. As the rules are currently written, the DOE must pay the market price for oil on the day it receives the barrels.
Under the proposed rules, the government could use ‘fixed price forward’ contracts to buy oil for several years at a fixed price. Oil is expected to cost about $84 a barrel in May, so the government could contract at that time to buy it at $90 a barrel at that time. Even if the war in Ukraine ends and the market price drops to $50 a barrel as Russian oil floods the market, the government will still buy it for $90, eliminating much of the industry’s risk.
That would theoretically lead to more investment in drilling, and while it takes about a year for new shale oil to hit the market, only the prospect of stability could push prices down sooner. So is this proverbial olive branch of a once hostile government, Amarnath said.
“It sends the right signal to the market and reassures the oil industry that Washington, and especially Democratic Washington, will not undermine them any time soon,” he added.
The math also makes sense to the government, which has been selling oil for $100 or more in recent months and will buy it back at a lower rate.
But Biden’s plan marks a controversial shift in the reservation’s intended purpose.
The reservation consists of deep salt mine caves in Texas with space to store more than 700 million barrels of oil. Not everyone is convinced that using the reserve as a price control tool is a good idea. Depleting its stock could leave the nation vulnerable in the event of a major emergency, said Phil Flynn, an energy market analyst with the Price Futures Group.
Since April, the US has released about 1 million barrels per day from the reserve, which Treasury estimates have depressed gas prices by about 40 cents a gallon, and oil prices had fallen for more than 50 consecutive days through mid-August. But there are less than 440,000 million barrels left, the lowest level since 1985, and the DOE is eager to replenish its stock.
However, Flynn questioned whether the US could compete with Opec in a price war, saying the release of the Biden reserve “bringed a water gun to put out a wildfire”. Instead, he argued, the free market and the decline in demand are driving the recent drop in oil prices.
Socializing the risk of oil companies
And why should industry risk be socialized, especially when staggering profits have pushed costs up the entire economy, hurting many Americans?
This will ultimately benefit the public, Amarnath said. Oil companies operate in what he describes as “feast or famine cycles” – characterized by price spikes and collapses.
When demand dried up during the 2008 recession, oil prices fell from a record high of about $133 a barrel to about $39 within six months. Amid the Middle East turmoil and high demand, prices and profits soared in 2014. But the oversupply resulting from the US fracking revolution and increased OPEC production caused major damage that year. After a brief recovery, Covid dried up demand and in May 2020 oil prices collapsed to negative.
By this time, companies had stopped looking for new oil, leading to the current scenario where demand and prices are high, but the industry is not increasing production. Banks lending to oil companies have also lost money, Turnbull noted, so the government’s partial rock bottom makes it easier to borrow to cover the cost of new drilling.
While 2008 and 2021-2022 were “banner years” for oil companies, “there were a lot of crappy years in between,” Amarnath said.
“A number of major producers have effectively committed to not growing production, saying, ‘We’ve played this game too many times and our shareholders are too unhappy with us,’” he added.
By putting a partial floor on prices, the government’s plan provides near-term stability until 2024 and 2025, and will encourage new drilling, Amarnath said. While the government hasn’t said where it will try to steer prices, observers say the ideal zone is between $70 and $100 a barrel, which could keep gas in the $3 to $4 a gallon range.
Good for the climate?
On the face of it, pumping up more oil and supporting the industry runs counter to climate goals, but the plan’s proponents say that short-term environmental pain is now essential to meeting longer-term climate goals.
Building clean energy infrastructure is a lengthy process requiring fossil fuels, especially diesel for the supply chain in the meantime, and oil shortages would trigger an energy crisis that triggers inflation. Financing clean energy infrastructure becomes impossible when inflation drives up borrowing rates, Turnbull said.
“There’s a very stupid view to the left of acceleration, of ‘Let’s hasten a crisis,'” he added. “If you wish this on yourself, you’re just an asshole in Brooklyn.”
A provision included in the Inflation Reduction Act recently passed by Congress aims to reduce methane emissions from oil production. That could buy “time to work out longer-term solutions” and make a short-term increase in oil pumping more palatable, Halff added.
The Democrats’ political future also hinges on cutting gas prices immediately — if gas prices remain high, the party’s already bleak medium-term outlook will worsen, and Biden would likely lose in 2024. The clean energy transition would slow dramatically under a second Trump administration or another GOP chairman.
But pumping more oil to lower prices is a “recipe for disaster,” said Kassie Siegel, director of the Climate Law Institute at the Center for Biological Diversity. High oil prices, she argued, are the result of “profiting” as companies profit from the invasion of Ukraine.
While oil prices were lower in July 2008 than they were in June, gas prices and oil industry margins were respectively higher and wider in 2022, Siegel noted, calling on the Biden administration to rein in the industry. In the UK, the Conservative government has imposed a 25% windfall tax on oil company profits.
Siegel said Biden could also take steps that don’t increase production, with Congressional approval, such as reimposing a crude oil export ban in effect until 2015. The US ships a large amount of oil to Europe and parts of Europe. reserve sales have gone to other countries. Keeping it in the US would boost domestic supply and depress gas prices.
“We don’t have time for back and side steps anymore,” Siegel said. “We need to make great leaps forward so that every step backwards from the cliff leads to a climate catastrophe.”