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Q&A – Oil Releases Have No Impact on Today’s Gas Price & Why They Don’t Work
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Today’s Entry: @brianmuddradio Why would releasing barrels of oil from our reserves increase gas prices?
Bottom Line: Today’s note is on back of my commentary last Thursday as the news broke that President Biden authorized a million barrels of oil a day to be released from the strategic oil reserve. To sum up what I said, releasing oil from the strategic reserve for the purpose of attempting to reign in gas prices is a flawed plan that historically hasn’t worked and yes, has the potential to lead to even higher prices down the line. I’ll explain why that’s the case but first, let’s look at what President Biden’s authorization does.
- Release 1 million barrels of oil per day from the US Stategic Reserve for up to 180 days starting May 1st
Now, here’s the first and silliest thing that doesn’t require any understanding of the energy markets to piece together. This doesn’t even begin until May 1st. Thus, all immediate reporting that gas prices were lower because Biden did this is not only demonstrably false reporting, its devoid of any reality whatsoever and yet it was pervasive. It’s nothing new for news reporters to not know things but say stuff but this is an especially egregious case of absurdity. The reality is the peak price for oil in the current cycle was reached March 8th, reaching a peak of $138 per barrel that day and then generally trending lower in recent weeks. Oil was trading at $102.45 at the time of Biden’s announcement. What we’re paying for at the pump today is a product of what was happening weeks ago.
As I’ve covered recently, on average just over half (53%) of the price of gas at the pump is derived from the cost of oil itself. The balance comes in the form of refining costs, transportation costs, taxes and retail margin. And because of that process, the absolute soonest possible for a barrel of oil to have gone from delivery to being refined in a gas pump is two weeks, at the long end of the curve it can take up to four. That takes us to the soonest it’s possible to have any direct impact at the pump by virtue of what the Biden administration is releasing.
- May 15th
With a May 1st date for the first barrels of oil to be released from the Strategic Reserve, it’s not possible to have to have direct impact at the pump until May 15th at the soonest. Take note, news reporters. And how much in the energy markets can change between now and then? That takes me to the next point. Where this has the potential to fail.
The reason we didn’t see wild swings in the price of oil and thus gas during the Trump years was due to an ever-growing condition of producing more petroleum than we needed. You’re probably familiar with the term “net energy exporter”. The US became energy independent for the first-time post-World War II under the Trump administration. That took the edge off of geopolitical events. But the thing is obviously not all energy is created equal. Nat gas doesn’t help you at the gas pump. President Biden recently stated the US is still a net energy exporter – through the first half of 2021 – which is the most recent data from the EPA as of now, however that was due to Nat gas. The United States became a net importer of 2.9 million barrels of oil per day in the first half of last year as Biden administration policy to reign in petroleum production and distribution took hold. That’s a number that almost certainly has risen significantly higher with economic growth/demand in the most recent nine months. Still, even at those levels what Biden is doing starting in May would only offset a third of what’s being imported daily. And because we’re once again reliant on foreign sources of oil, we’re at the mercy of entities like OPEC. At anytime, OPEC, or other oil producing nations could decide to ease production to offset what the US is releasing. That means the impact on oil prices in the global marketplace by the US release isn’t within our control and is only possible, from a supply and demand perspective, if all other oil producing countries continue to increase production by the rate of global economic growth/demand. And as for what history says about these types of releases...
I could give you a detailed historical perspective of how this policy has failed previously, however you need look no further than the most recent one which will illustrate the point with an example that’s fresh in your brain. On November 24th President Biden announced the release of 50 million barrels of oil from the Reserve to attempt to achieve lower prices. The price of US crude was $72 at the time he released the oil on December 16th. The 50 million barrels represents the equivalent of 50 days' worth of releases under the policy which starts next month. 50 days from the release in December was February 3rd. The price of oil on February 3rd was $90. A 25% price increase in 50 days with 50 million barrels of oil being released from the Reserve by the Biden administration. I’ll spare you any additional macro-economic discussion by leaving it there. That example speaks for itself.
The bottom line is Biden is doubling down on bad policy that’s already failed under his administration. As long the US is importing millions of barrels of oil per day from often hostile foreign actors, we’ll remain at the mercy of their actions – at least as much as our own. What’s more is that with every barrel of oil released, it weakens US national security in the effect of an actual emergency. That’s a reason we have the reserve in the first place. It’s most certainly not there to attempt to bring down gas prices for a short window of time preceding elections. Which btw, I’ll point his out because your news media won’t. Biden’s plan starts May 1st right. It lasts for up to 180 days, or six months, correct? Six months takes you to November, correct? Yes, this plan is sadly and obviously that political.