Saudi Crown Prince Mohammed bin Salman (R) greets U.S. President Joe Biden with a fist bump after his arrival in Jeddah, Saudi Arabia, on July 15, 2022. (Bandar Aljaloud/Saudi Royal Palace via AP)
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, surprised global energy markets on Oct. 5 by agreeing to slash crude production by 2 million barrels per day. In response to fears of waning demand amid worries of a global recession, the cartel thought it necessary to reduce production and help establish a floor for oil prices.
OPEC’s decision helped lift energy prices, as the West Texas Intermediate and Brent crude futures topped $87 and $93 a barrel, respectively. The measure might also contribute to more pain at the pump, with the U.S. average for a gallon of gasoline exceeding $3.86.
In response to OPEC trimming output, the White House announced that it would release 10 million barrels of oil from the nation’s Strategic Petroleum Reserve (SPR) in November. This action signaled that President Joe Biden’s six-month plan to release 1 million barrels of oil per day would be extended beyond Oct. 31.
“The President will continue to direct SPR releases as appropriate to protect American consumers and promote energy security, and he is directing the Secretary of Energy to explore any additional responsible actions to continue increasing domestic production in the immediate term,” national security adviser Jake Sullivan and National Economic Council Director Brian Deese said in a statement.
“The President is also calling on U.S. energy companies to keep bringing pump prices down by closing the historically large gap between wholesale and retail gas prices—so that American consumers are paying less at the pump.”
Representatives of OPEC member countries attend a press conference after the 45th Joint Ministerial Monitoring Committee and the 33rd OPEC and non-OPEC Ministerial Meeting in Vienna, Austria, on Oct. 5, 2022. (Vladimir Simicek/AFP via Getty Images)
According to Warren Patterson, the head of commodities strategy at ING, the challenge is that “OPEC+ can cut output for longer than the U.S. can tap into its SPR.”
The U.S. emergency oil reserve, which was established in 1975 to mitigate supply disruptions, has declined about 34 percent since January 2021, falling to a near-four-decade low of 416 million barrels.
So, how did the United States get to this point?
Biden to OPEC: Drill, Baby, Drill
In August 2021, the Biden administration requested that OPEC and its allies expand production to rein in higher gasoline prices, which had already surpassed a national average of $3 per gallon.
Sullivan denounced the group, including Saudi Arabia, for lackluster oil output levels following the coronavirus pandemic.
“At a critical moment in the global recovery, this is simply not enough,” he said in a statement.
Biden would later tell reporters that the United States presented its position to OPEC that “the production cuts made during the pandemic should be reversed” so that consumers can enjoy lower prices during the global economic recovery.
During the COVID-19 public health crisis, OPEC had imposed a record production cut of 10 million barrels per day, accounting for about 10 percent of international demand. The entity had steadily increased output levels in the following months, but not enough to keep up with demand or to narrow the deficit.
For a couple more months, the administration repeatedly lamented OPEC’s actions.
“Our view is that the global recovery should not be imperiled by a mismatch between supply and demand. OPEC+ seems unwilling to use the capacity and power it has now at this critical moment of global recovery for countries around the world,” the White House’s National Security Council said in a statement after OPEC maintained its plan to boost production by 400,000 barrels a day.
The United States and other nations attempted to curb the surge in crude prices. China’s National Food and Strategic Reserves Administration, for example, in September 2021, announced it would initiate its first public auction of state crude oil reserves to a small number of domestic refiners to “better stabilize domestic market supply and demand, and effectively guarantee the country’s energy security.”
In an announcement on Nov. 23, Biden officially tapped into the SPR as part of a multilateral campaign to curtail the increase in fuel prices. The measure included the United States releasing 50 million barrels over several months.
“The president stands ready to take additional action, if needed, and is prepared to use his full authority, working in coordination with the rest of the world, to maintain adequate supply as we exit the pandemic,” the White House stated.
President Joe Biden announces the release of 1 million barrels of oil per day for the next six months from the U.S. Strategic Petroleum Reserve, as part of administration efforts to lower gasoline prices, during remarks in the Eisenhower Executive Office Building’s South Court Auditorium at the White House in Washington, on Mar. 31, 2022. (Kevin Lamarque/Reuters)
In February, Biden told reporters that the United States and its partners would inject more from their emergency stocks to fight the surge in energy prices. One month later, the president unveiled his largest-ever release from the SPR over six months: 180 million barrels.
At the time, energy analysts dismissed the strategy, arguing that the United States consumes approximately 18 million barrels each day, while the entire worldwide economy uses an estimated 90 million barrels per day. Moreover, Biden blamed other parties for the spike in oil prices, including gasoline stations, oil companies, the Republicans, and “Putin’s price hike.”
One month after Russia’s invasion of Ukraine, Brent prices soared to $130 a barrel on London’s ICE Futures exchange. But this was the peak, as the international benchmark and its U.S. counterpart erased their post-invasion gains and slumped to their lowest levels since January. Gasoline prices also topped $5 a gallon in June before plummeting more than 25 percent.
In July, Biden visited Saudi Crown Prince Mohammed bin Salman Al Saud to encourage greater output. Instead, Riyadh raised production by just 100,000 barrels per day while also scolding Biden’s green energy agenda.
“We also stress the importance of continuing to inject and encourage investments in fossil energy and its clean technologies over the next two decades to meet the growing global demand, with the importance of assuring investors that the policies adopted do not pose a threat to their investments to avoid their reluctance to invest and to ensure that no shortage of energy supply would affect the international economy,” the crown prince said in an address.
Phil Flynn, a market strategist and writer of The Energy Report, isn’t surprised that Saudi Arabia is defying pressure from the administration.
“One might say that Biden retreated and then lost the shale revolution. He turned his back on U.S. oil and gas producers, canceled the Keystone Pipeline, put on drilling moratoriums and discouraged investment in all fossil fuels,” Flynn wrote. “He then looked to other countries to make up for our supply deficit. Biden thought he could use his clumsy foreign policy and make Saudi Arabia a pariah state, at the same time expect them to jump whenever he asked them to raise oil production.”
Now that crude and gas prices are on the rise again, the United States may be back to where it started, and this could have political and economic consequences.
Are There Consequences?
Last month, the Consumer Price Index (CPI) highlighted that the energy index had fallen for two consecutive months: negative 4.6 percent in July and negative 5 percent in August. According to the Bureau of Labor Statistics, gasoline plunged 7.6 percent and 10.1 percent month over month in July and August, respectively. Fuel oil declined by roughly the same amount on a monthly basis.
This past summer, Deese claimed that energy accounted for much of the inflation. Despite the significant drop in oil and gas prices, the August annual inflation print came in at a hotter-than-expected 8.3 percent.
The consensus among economists is that inflation is entrenched in the U.S. economy and sticky. Should energy revive its upward trend, could this add to inflationary pressures in the coming CPI prints? If so, it might create a domino effect because it may force the Federal Reserve to maintain or accelerate its hawkish stance on monetary policy, potentially leading to extended losses in the stock market.
A new Monmouth University poll found that the economy is the top issue for U.S. voters ahead of the midterm elections in November. Moreover, the same survey gave Republicans an edge over Democrats on this issue. This comes after a recent Gallup poll discovered that 38 percent of voters identified the economy as their main issue, with 51 percent trusting Republicans more than Democrats on the subject.
If energy prices begin climbing again, especially during winter, the political fallout could be damaging for Biden and the Democrats. But some market analysts aren’t penciling in meteoric gains comparable to what occurred in the first half of 2022.
Rob Thummel, senior portfolio manager at TortoiseEcofin, doesn’t think OPEC’s move will accelerate price growth in the short run, but crude could remain elevated longer term.
“I don’t expect the OPEC+ decision to dramatically increase oil prices which often result in higher gasoline prices in the short term. U.S. gasoline inventory levels are at the lowest levels since 2014, but should begin increasing through January of 2023, which will help moderate gasoline price increases,” he said in an Oct. 5 note. “Longer term, I still expect oil prices to be around $80 per barrel, which means the national average gasoline price is $3.50–$3.75 per gallon. OPEC+ now has more spare capacity to meet future oil demand growth requirements once China returns to growth mode. In addition, the world needs more oil from secure supply sources, so the United States and Canada need to increase oil production to meet future global oil demand growth.”
At the same time, OPEC’s action will benefit Russia more than anyone else, Patterson says.
“A big winner from these supply cuts will be Russia. They do not need to cut output, given they are already producing below their targeted levels, yet they will benefit from the higher prices we are likely to see as a result of the cuts,” he added in his note.
Saudi Aramco CEO Amin Nasser recently told the Energy Intelligence Forum that investors have been misreading the oil market, concentrating on “short-term economics rather than supply fundamentals,” according to an article by Energy Intelligence Group. In other words, the world is focusing too much on a global recession instead of global supply deficits, lackluster infrastructure, and refinery troubles.
While the White House might continue to tap into emergency stocks, the United States and its allies may be ignoring the root problems of the energy situation, which could lead to higher prices in the future.
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