Reserve tap won’t make a dent in oil prices

Chevron’s former CEO John Watson once declared that consumers need to get used to paying $100-abarrel oil, because that’s what’s required to meet world oil demand.

“For a company like mine and many others, $100 a barrel is becoming the new $20 in our business,” Watson told CERAWeek in 2014.

Eight years later, his prophecy has come true, and no amount of oil released from the Strategic Petroleum Reserve will make a difference. Geopolitics and economics are conspiring to keep prices high as long as oil remains our primary transportation fuel.

The price of Brent crude, the global benchmark, climbed from $63 a barrel last year to as high as $130 in March as the COVID-19 pandemic abated and the Russian invasion of Ukraine escalated. Russia is the third-largest producer behind the United States and President Vladimir Putin’s ally, Saudi Arabia.

With gasoline prices rising to record highs, President Joe Biden sought to ease the pain for Americans on Thursday by releasing 1 million barrels a day of crude from the U.S. strategic reserve for the next six months, adding 1 percent to the global supply. Brent crude dropped 3 percent to $103.

The meager drop, which will translate to a negligible reduction in pump prices, proves the federal government’s limited ability to affect prices in a global, competitive market.

Biden made the decision only after learning that the oil industry’s largest cartel, the Organization of the Petroleum Exporting Countries and its allies, including Russia, would ignore his pleas for more oil production. The group, which quickly took 10 million barrels off the market when the pandemic began, had only been

adding 400,000 a month since demand began rising again last year.

On Thursday, OPEC ratified a 432,000 barrel-aday supply increase for May. The slight increase mocks Biden’s request for a million barrels.

Despite Saudi Energy Minister Prince Abdulaziz bin Salman claiming they do not, geopolitics is clearly playing a role. Biden has snubbed the minister’s boss, Saudi Crown Prince Mohammad bin Salman, for his oppressive assault on civil rights and the murder of Washington Post columnist Jamal Khashoggi.

The crown prince is also angry over the Biden administration’s negotiations with Iran to reinstate a nuclear weapons deal that allowed Saudi’s long-time enemy to export oil again.

OPEC, meanwhile, has found a friend in Putin. By including Russia and its allies in setting oil production quotas, the cartel has found greater influence in global markets and injected billions into the economies of petro-dictatorships.

If OPEC had answered Biden’s call for more oil and natural gas, it would have alleviated Europe’s reliance on Russian energy and taken away Putin’s primary source of funding for the invasion of Ukraine. Saudi Arabia’s decision to stand with Russia against the United States could signal a significant realignment.

“They used to say when Saudi called 911, the phone rang in Washington, but increasingly, that could change to Moscow,” my friend Jim Krane, an expert on OPEC at Rice University’s Baker Institute, recently observed.

The American Petroleum Institute, a lobbying organization of U.S. oil companies, has been cranking out press releases proclaiming the industry could produce more oil if Biden and his administration would get out of the way. But a recent Dallas Federal Reserve survey proves regulations and leases are not the problems.

Fifty-nine percent of oil and gas executives told the bank that investor pressure to generate higher profits was the primary reason that more companies are not producing more oil in the United States. Only 6 percent said government regulations were holding them back.

More than 60 percent of executives said they need a sustained price of $80 to $119 a barrel for West Texas Intermediate crude, the U.S. benchmark, to begin drilling again. West Texas oil trades at about a $5 discount to Brent crude.

Biden can sell 180 million barrels of crude over the next six months, the largest release in U.S. history, but that alone will not solve the long-term challenges facing oil markets. American commuters, meanwhile, will save only a few pennies per gallon.

Opening the entire country to drilling without concerns for the environment or the climate would also fail to reduce gasoline prices. Eliminating gasoline taxes would also do little but drain the accounts used to build desperately needed roads and bridges.

Dictators who control most of the world’s oil want a pound of flesh before significantly boosting production. Oil companies need higher prices to pay the higher wages and input costs to get new wells pumping.

Biden wants Americans to think he is doing something about gasoline prices, but as is often the case, his announcement is all politics.

The problems driving prices are too complex for one action to fix.

“They used to say when Saudi called 911, the phone rang in Washington, but increasingly, that could change to Moscow.”

Jim Krane, an expert on OPEC at Rice University’s Baker Institute