Why Biden’s bid to lower gas prices is more of a Band-Aid than a gamechanger

New York (CNN Business)For months, OPEC and its allies refused pleas from Washington and other world capitals to pump more oil.

Now, a US-led coalition of consuming nations is coming together to effectively say: Fine, if you won’t act, we will.The White House announced Tuesday that India, Japan, South Korea and the United Kingdom are all joining the United States in the first coordinated emergency oil release in a decade. Analysts have already dubbed the group the “anti-OPEC.”

    Biden announces release of oil reserves, but says gas prices will not drop overnightThe United States alone is releasing 50 million barrels of oil from the Strategic Petroleum Reserve. It’s the largest release on record and a dramatic way for the Biden administration to show it’s taking aggressive action in response to high prices at the pump.

      The good news is that the mere rumor of this historic intervention drove oil prices down from seven-year highs. And that should translate to some relief for Americans grappling with high gas prices.Read MoreBut the bad news is no one — not even the White House — is expecting a dramatic decline in prices at the pump.The “best case” is that prices slide by 15 to 20 cents a gallon, according to Bob McNally, president of Rapidan Energy Group.And don’t expect that to happen immediately.”It’s not going to come fast and furious,” said Robert Yawger, vice president of energy futures at Mizuho Securities.President Joe Biden acknowledged as much during his announcement on Tuesday.”While our combined actions will not solve the problem of high gas prices overnight, it will make a difference,” Biden said. “It will take time, but before long, you should see the price of gas drop where you fill up your tank.”Key details of the international intervention remain unclear, including the precise amounts that major countries are contributing. The White House initially announced that China would participate, but later Biden only said China “may do more as well.”The lack of details likely did not impress Wall Street. After initially retreating on the news, US oil prices finished the day 2.2% higher. Brent crude, the world benchmark, surged more than 3%.Unless China is stepping up with a truly massive release of barrels, this coordinated effort appears to be more of a band-aid than a game changer.

      The world consumes 100 million barrels a day

      The problem is the SPR won’t solve the underlying issue: Oil supply hasn’t kept up with surging demand as the US economy recovers from Covid. While releasing barrels from strategic reserves can help, there is a finite amount of oil in reserve. Countries can’t simply release oil every month.”Releasing oil from the SPR reserve will likely not have a long-term effect on lowering gasoline prices,” said Rob Thummel, portfolio manager at Tortoise, an energy investment firm.Supporters of using the SPR concede this point.”It’s not going to be a panacea. But we’ve got to do what we can,” Democratic Rep. Ro Khanna of California told CNN on Monday after sending Biden a letter urging him to tap the SPR.It’s also crucial to keep the size of the actions in context. Although the 50 million-barrel release by the United States is the biggest in US history, that’s roughly what the world consumes every 12 hours.

      Kicking the can

      Another factor is the way the Biden administration is releasing the barrels.About 18 million barrels will be an acceleration of a sale that Congress previously authorized.The rest, 32 million barrels, will be released through an exchange, or a swap. By definition, those barrels must be returned at a later date and that supply must come from somewhere. “The market knows the barrels have to be returned. To a certain degree, it’s self-defeating,” said Mizuho’s Yawger.Rystad Energy senior oil markets analyst Louise Dickson agrees.”The move by Biden and other leaders may just be pushing the supply issue down the timeline,” Dickson wrote in a note on Tuesday, “as emptying out storage will put even further strain on already low oil stockpiles and as these countries will eventually have to go on a buying spree to refill the strategic reserves.”Biden officials note, however, that the futures market is signaling prices will be lower next year. So they view the move as a “bridge from today’s high-price environment to a period of lower prices into the future.”

      The outlook for 2022

      Despite all of this, Biden officials felt compelled to act, in large part because high gas prices and inflation more broadly are creating anxiety for millions of Americans. And that anxiety is seriously weighing on Biden’s poll numbers.Biden is as “empathetic as anyone I’ve ever worked with,” one senior administration official told reporters during a press briefing. “Consumers are facing challenges at the pump right now. And we are trying to deal with that situation and deal with it in a smart, tailored and aggressive way.” Tom Kloza, head of the Oil Price Information Service, said the coordinated release is more than a band-aid and argued “we might have been knocking on the door of $90″ if not for the SPR release.However, Kloza is concerned that gas prices will rise sharply in early 2022, outpacing oil prices, due to the retirement of refineries in California, New Mexico and Louisiana.”They’re not coming back, and we’re going to miss them,” said Kloza. “We’re going to have a real apocalyptic spring, in my view. And it’s not because of Joe Biden.”

      ‘The nuclear option’

      There are two main wildcards going forward.First, the White House signaled Biden may not be done just yet. “The president stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic,” the White House said in its fact sheet.In theory, Biden could release even more barrels in the future. And some Democrats are calling for Biden to ban oil exports, although some experts warn that would be counterproductive because crude is a globally traded commodity. But the bigger question is how OPEC and its allies, known collectively as OPEC+, respond.

        The group, led by Russia and Saudi Arabia, is scheduled to meet next week, and the plan was to increase production by another 400,000 barrels per day. Yet it’s easy to see how these producers scrap those plans. OPEC+ could easily cite the emergency releases or the Covid lockdown in Austria as a reason why those barrels are no longer needed. “That would be the nuclear option,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

        Source: edition.cnn.com

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