In the run-up to the 2022 US elections the Biden administration is doing whatever it can to lower the price consumers pay for gasoline. Having been snubbed by Saudi Arabia regarding potential crude production increases on the part of the Organization of Petroleum Exporting Countries and allies (OPEC+), and with US producers continuing to practice capital discipline even while production returns to near-record levels, the administration last month launched a three-pronged initiative to try to soften prices anyway.
First, Pres. Biden authorized another 15 million bbl release from the Strategic Petroleum Reserve (SPR), completing planned 2022 releases. Next, he attempted to get operators interested in boosting production by saying the US government would purchase oil to refill the SPR once prices fell to $70/bbl.
Finally, he exhorted oil companies to share their “windfall profits” with consumers. “You should be using these record-breaking profits to increase production and refining,” Biden said. “Bring down the price you charge at the pump to reflect what you pay for the product.” Battle plan laid out, Biden asserted that “we can strengthen our energy security now, and we can build a clean energy economy for the future at the same time. This is totally within our capacity.”
This final point is true. And the belief that efforts to pursue an energy transition must come at the price of failing to keep everyone warm in the meantime is a false dichotomy. But let’s take things in order.
The second-half December SPR-release is a political ploy. It is the only tool directly available to the President and he needs to appear to be doing something. But the weight it will have in softening prices is limited.
Industry reaction to Pres. Biden’s buyback proposal was moot at best. And the notion that refiners should sell the gasoline they produce at a price less than whatever the market will bear is as preposterous as protectionist suggestions that oil companies not sell their wares overseas.
At the end of the month, Biden suggested that a windfall-profit tax on US-based oil companies would be a good idea. Industry reaction was stronger. Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association, described it as “yet another effort in a growing list of misguided domestic energy policies.”
The big picture
Spot West Texas Intermediate (WTI) crude prices reached an all-time low of -$36.98/bbl on Apr. 20, 2020, in the midst of COVID-related demand destruction. They had already risen to $92.14/bbl before Russia’s invasion of Ukraine and peaked at $121.94/bbl on June 8, 2022. As of Oct. 24, 2022—with the war still raging and OPEC+ having announced 2-million b/d production cuts—prices had fallen to a level lower than before the war began, reaching $86.12/bbl.
Demand for crude oil remains weak with recovery hampered by the economic slowdown, particularly in China where the outlook is muddied further by recurrent COVID restrictions. The strong US dollar has also helped soften prices.
Spot prices for US Gulf Coast unleaded gasoline have followed a similar path, quintupling between April 2020 and February 2022 and reaching $4.252/gal on June 8. Gasoline prices have also softened since then but remain at $2.701/gal, relatively flat where they were when the Ukraine War started. Crude prices, by comparison, are 7.4% lower.
Against this backdrop, in 2022 global capital investment in renewables will outstrip capital investment in upstream oil and gas for the first time, according to Rystad Energy research: $494 billion to $446 billion. Oil majors are among those moving capital towards renewables. Shell PLC has targeted 50% of its capital expenditures to be low- or no-carbon by 2025. Equinor ASA has a similar target by 2030.
Pres. Biden needs to get out of the way and let the market do whatever the market is going to do.