The Biden Administration last week announced plans that it hopes will ease the pain at the pump for Americans, but oil market experts say the plan isn’t likely to have as much of an impact as the Administration hopes.
The plan announced March 31 would release up to 1 million barrels of crude oil per day from the U.S.’ Strategic Petroleum Reserve (SPR) over the next six months, and also called on Congress to institute fees on oil companies for wells from leases that haven’t been used in years.
Frans Koster, a market reporter with Energy Intelligence, said the Administration “is attempting to resolve what amounts to a structural problem with several one-off solutions,” adding that with how the U.S. economy is structured, particularly the oil market, the plan is about the extent of what any president could do.
“It’s not like the president, no matter the party affiliation, can just flip a switch to produce more oil or institute price controls,” Koster said. “The tools the Administration has at its disposal are inherently acute and reactive. They cannot just by their nature ultimately address what is a supply shortfall in the market at the moment.”
The impact of SPR releases, Koster noted, tend to be short-lived, especially once the oil makes it downstream to the consumer after being refined into diesel, gasoline or other fuels.
“This may have a little, tiny effect at the pump, but it won’t be huge,” Koster added. “It’s not the kind of relief that consumers want, or the kind of political capital the Administration wants,” especially going into midterms later this year.
Chris Lee, vice president of marketing for ProMiles, agreed with Koster, stating simply, “Too little, too late” for SPR releases to have an impact on retail fuel prices.
One big issue with the SPR releases, Koster noted, is that it’s all crude oil that still has to be bought by oil companies and refined into fuel before it filters down to retail stations. “It still needs to go through the refining process, and the refining costs are passed down to consumers,” he said.
While the latest SPR release announcement by Biden will end up being the largest release by this Administration so far, it is the third release in the last six months. In November, Biden ordered a release of 13.4 million barrels to help rising fuel prices at the time.
Then, at the beginning of Russia’s invasion of Ukraine when fuel prices spiked to record highs, Biden ordered the release of 30 million more barrels. By the end of the next six months, this release could account for as many as 180 million barrels.
Koster said the last two releases saw a “very brief and immediate reaction in the news,” followed by oil futures contract prices briefly falling but quickly coming back up. “We didn’t see much impact in prices at the pump,” which Koster said was a function of a number of factors, including that the releases are of crude and not the actual product sold at the pump.
Another factor keeping diesel prices elevated in the U.S., Koster said, is that a lot of diesel produced in the U.S. is exported — between 1-1.3 million barrels per day. Overseas buyers have also been buying a lot of the crude released from the SPR, particularly since the supply from Russia has been cut off, Koster said. There’s no guarantee that SPR releases stay in the U.S.
Finally, Koster noted that the prices at the pump generally aren’t set by the oil companies, who tend to receive a lot of the blame for high prices. Oil companies, he said, only own about 5% of the retail stations across the country. Even stations branded as Exxon, BP, etc., while they may sell that brand of fuel, often aren’t owned by the oil companies themselves. Retail station owners have their own costs to recoup, especially after oil prices spike like what was seen at the beginning of the Russia-Ukraine war.
When it comes to the fees the Administration hopes to institute on unused oil well leases, Koster said that’s “a more structural approach to a supply deficit, but it takes time. It’s not possible to just all of a sudden bring up crude oil production by an amount that would offset the disruption to Russian supplies. It takes time to bring that kind of capacity online.”
He added that the Russian crude the world oil market has lost tended to be higher in diesel yield than the type of oil the U.S. produces, which has put additional strain on the global diesel supply.