The Biden administration announced on Tuesday it would act alongside five other major economies and release tens of millions of barrels of oil from national stockpiles in a bid to lower prices, as global oil cartel OPEC+ resists significantly boosting production in response to President Joe Biden’s urging.
The Department of Energy will oversee the release of up to 50 million barrels of crude oil from the Strategic Petroleum Reserve’s four storage sites along the Gulf Coast, which will be made available to private firms for refining or otherwise adding to their own crude reserves.
Here’s how it will work:
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How will the Department of Energy distribute the oil?
The department will make up to 32 million barrels of crude available to refiners and other companies through its exchange capability, which is functionally a loan repaid with in-kind interest in the form of oil. Exchange oil will be returned to the reserve over the next three years.
Up to another 18 million barrels will be sold on an accelerated timeline under authorization from Congress, which in the Bipartisan Budget Act of 2018 ordered the department to sell 30 million barrels between Fiscal Years 2022 and 2025.
When will the sales take place?
Firms interested in receiving crude oil through the exchange must submit bids by mid-morning Dec. 6. The department will award contracts no later than Dec. 14, and the crude oil will be delivered between January and April 2022, although early deliveries will be accepted in late December.
A separate Notice of Sale for the 18 million barrels will be announced no sooner than Dec. 17, laying out the terms and deadlines for bidders.
Who will buy it?
Any company — including trading houses, refiners, and other authorized bidders that can take delivery of the oil — is permitted to buy it.
For the most recent 20-million barrel sale in August, which fulfilled a congressional mandate and scheduled apart from Biden’s announcement, the department awarded contracts to major firms such as Chevron USA, Phillips 66, ExxonMobil, and Valero. However, bidders do not have to be U.S.-based companies.
UNIPEC America, a subsidiary of Chinese oil firm UNIPEC, was among the eight companies to receive a contract in the August sale.
Will this lower prices?
A number of analysts have assessed that opening reserves in this way will likely drop prices slightly but have a relatively small or “short-lived” effect, as Stephen Nalley of the Energy Information Administration told the Senate Energy and Natural Resources Committee recently.
“Typically, other dynamics in the market would overtake decrease in price,” Nalley said.
Some, like Kevin Book, managing director of ClearView Energy Partners, have pointed to the increase in the Brent and West Texas Intermediate crude benchmarks Tuesday as a signal the market had already “priced in” the release of stockpiled oil after weeks of speculation and reports that Biden would seek a coordinated effort. Both benchmarks did fall, though, on Wednesday.
“A lot of this depends on what other players — what OPEC+ is going to do,” Book said. “The power to be able to unleash a stockpile is pretty significant if it works, but you’ve only got so much ammunition, and the folks who control the flows have a lot more.”
OPEC+ is reportedly weighing whether to pause the 400,000-barrel-per-day production increase it resolved to undertake each month through next year following Tuesday’s announcement to keep the market tight.
Does it matter who buys the oil?
For global prices, not really, according to Book. If refiners on the Gulf Coast take deliveries, there will be some localized price fluctuations. But those fluctuations will not be reflected in gasoline prices, which correspond more directly with the Brent and WTI benchmarks, he said.
Is it unusual to sell stockpiled oil to lower prices?
It isn’t entirely unprecedented. The Clinton administration authorized the exchange of up to 30 million barrels from the SPR in September of 2000 to affect prices and supplement heating oil inventories in the northeast.
Beyond congressionally scheduled sales, however, tapping the SPR has largely been left to scenarios involving significant global market disruption. For example, the Obama administration authorized a sale of more than 30 million barrels of crude back in 2011 due to global supply interruptions resulting from OPEC member Libya’s civil war.
It also released SPR crude in 2005 following Hurricane Katrina, which shut in production capacity in the Gulf of Mexico.
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Overall, the Biden administration is communicating it is being proactive on the issue of gasoline prices. Still, officials are also looking to manage expectations that they are not in a position to send prices falling.
“We’re not saying that we’re going to be supplying all oil for the country. We’re just kind of trying to do what we can temporarily,” said Energy Secretary Jennifer Granholm during the White House press briefing on Tuesday. “We are not saying that there is going to be some dramatic difference.”
