As Biden weighs response to OPEC, he has a few options
For President Joe Biden, the easy part was threatening a response. Now comes the tougher challenge of delivering one.
When last week Biden pressed OPEC+ to bring oil prices down with a large output hike, he warned of consequences if the cartel rejected his appeal: “What we’re considering doing on that, I’m reluctant to say before I have to do it.”
Now, Biden has to match words with action or risk looking impotent in his struggle with oil cartel. On Thursday, Saudi Arabia and its OPEC+ allies not only refused to boost output by more than the 400,000 barrels a day they had already planned, but also declined to make even a token gesture to placate Washington. It was nothing but a flat-out no.
“The ball is back in Biden’s court,” said Amrita Sen, chief oil analyst at consultant Energy Aspects in London.
Within minutes of the OPEC+ announcement, the White House accused the oil alliance of putting the “global recovery for countries around the world” in jeopardy. “We will consider the full range of tools at our disposal to bolster resilience and public confidence,” a spokesperson said.
Biden certainly has tools a his disposal. Perhaps the strongest is the country’s strategic petroleum reserve, a huge crude stockpile of more than 600 million barrels kept underground in Louisiana and Texas for major emergencies. The SPR has enough crude to replace all the oil the U.S. imports from OPEC+ for more than a year.
There are more radical options. He could ban American oil exports, keeping more crude at home, or encourage American lawmakers to pass legislation that would allow the U.S. federal government to sue OPEC for acting as a cartel.
But all of those measures bring big political, diplomatic and market risks, according to traders, consultants and diplomats.
Biden is in a “tough spot,” said Bob McNally, president of consultant Rapidan Energy and a former White House official. “He’s both raised expectations of doing something while simultaneously, and correctly, noting nothing he does can really lower gasoline prices near term.”
The oil market is now abuzz with talk of a SPR release.
But many in the oil market question whether the current situation justifies a stockpile release. Beyond ad hoc responses to localized oil disruptions, the U.S. has only tapped its oil reserve a handful of times, notably in response to hurricanes in 2005 and armed conflict: the Gulf War in 1991 and in 2011 during the Libyan civil war.
The closest use of the SPR to today’s situation nearly came in 2000, during the tight presidential election between Al Gore and George W. Bush. With oil prices rising, President Clinton ordered a 30 million barrels release in what one of his senior energy officials said was needed “to make sure American families keep warm this winter.”
The release was technically a swap, with companies having to return the oil within a year. Oil prices initially fell in response to the release, but within weeks they set new highs.
To tap the reserve, Biden will need to invoke special powers to deal with supply disruptions. Outside an emergency, an SPR release is limited to 30 million barrels. The impact of such a small amount is likely to be “modest and temporary,” according to Damien Courvalin, oil analyst at Goldman Sachs. He estimates that even an emergency-scale 60 million barrels release would knock down oil prices by less than 5 percent.