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It's time for Joe Biden to buy some oil
The case for refilling the Strategic Petroleum Reserve
Democrats have a lot of anxiety about the 2024 election, but there’s one major factor that I think ought to be generating a lot more concern among congressional leaders, White House staff, major donors, generalist pundits, and others who care about the looming matchup with Donald Trump: global oil prices.
What will Joe Biden’s response be if the governments of Russia, Saudi Arabia, and the United Arab Emirates spend the summer of 2024 curtailing oil production in order to spike gasoline prices and help restore Trump to power? Is he going to say people should be glad gasoline is getting more expensive because that puts the world closer to meeting its Paris Agreement goals on climate change? In theory, the question of how much voters care about climate change is controversial, but on a practical level, everyone knows that won’t wash. Will he say everyone should just grit their teeth and bear it, that this is a price worth paying for Biden’s pro-democracy foreign policy? I guess that might convince some newspaper editorial boards.
During the summer of 2022, by contrast, Biden unleashed an efficacious response — massive, unprecedented releases of oil from America’s Strategic Petroleum Reserve that helped stabilize global supply and moderate the price of oil and gasoline.
Republicans at the time argued that this was dirty pool; that it was unfair of Biden to advantage himself politically by helping moderate living costs and bolstering real incomes. I think it feels like dirty pool when you get unexpectedly outfoxed. The spike in oil prices wasn’t really Biden’s fault, but Republicans were counting on it being Biden’s problem. Biden seized the reins of his own destiny, though, and played an important part in saving the midterms. The GOP said this wasn’t the intended use of the SPR and that it was supposed to be for wartime emergencies. The White House countered correctly that the invasion of Ukraine was a wartime emergency. The GOP also said that by bringing the SPR to such a low level, Biden left the country without adequate reserves for future emergencies. Here the White House reply was clear and convincing: they could simply refill the SPR when oil got cheaper, formalizing this policy in an October 2022 memo that said they would start buying back oil when it fell into the $67-72 per barrel range, thus preventing prices from falling further (giving insurance value to American producers) and restocking the SPR to hedge against future price spikes.
That was a good plan! But then when oil dipped into the refill range in March, the Energy Department didn’t start repurchases. Instead, OPEC+ cut production and the price went up anyway. Then last week, it fell into the range again. Still, no new purchases. The price has since rebounded yet again.
It’s good that a price crash has been avoided so far, but it’s time to stop playing games. The Energy Department keeps offering various reasons why the timing isn’t quite right to start repurchasing, but the Biden administration has very limited credibility with the oil industry and can’t afford to squander it. Both supporting domestic production and refilling the SPR are critical to Biden’s reelection goals and to his foreign policy goals, and therefore ultimately critical to Biden’s climate goals. It’s time to bring as much clarity as possible to the repurchase commitment and as much creativity as possible to fulfilling it regardless of the technical hurdles. The problems DOE has pointed to aren't fake, but they’re not insurmountable either. It’s time to get serious about buying low on oil.
The global struggle for oil dominance
I mentioned this in a recent mailbag, but I think the Obama-era boom in American oil and gas production is one of the most overlooked events of our time. It’s just awkward, given both parties’ messaging, for anyone to admit that this happened.
But cheap natural gas strongly complemented the growth of renewable electricity, and the two worked in tandem to bring down America’s carbon dioxide emissions. Domestic energy production has also played a big role in driving the unexpected re-divergence of the American and European economies. And in 2015, Congress repealed — with very little debate — the statutory ban on exporting American crude oil, putting our producers in direct competition with OPEC+ for global markets and eventually transforming us (first under Trump but continuing under Biden) into a net exporter of petroleum products and the world’s largest oil producer.
This has left global markets in a somewhat unsteady equilibrium.
The United States produces more oil than Saudi Arabia, but Saudi producers have a significantly lower breakeven price. In other words, there is a price of oil such that Saudi production continues to be profitable but American production is not. That’s why during the pandemic American oil production crashed, and why investors in American oil lost their shirts. It also helps explain why production did not rebound as quickly as demand. Wall Street, much more than the Biden administration, pushed an agenda of “keep it in the ground” and asked companies to plow their profits into share buybacks, dividends, and debt reduction rather than expanding production. But we do have a competitive market, and American production has nearly returned to the 2019 peak level.
Average monthly production under Biden is higher than we’ve seen under any prior administration.
A key geopolitical question in this era is, essentially, “who sets the global price of oil?”
For a long time, American policy toward the Middle East suffered from a kind of studied hypocrisy about the significance of this commodity. Nobody would say that ensuring access to oil was a key driver of our policy thinking. But one could hardly deny that Middle Eastern oil coming under the auspices of Soviet-aligned states would have important geopolitical consequences. By the same token, preventing Iraq from obtaining regional hegemony was considered important because the region at issue was full of oil.
America’s emergence as a major producer has changed the game — we are less dependent on the goodwill of the Gulf monarchies than we used to be, but they are less interested in cultivating a positive relationship with us. They like Donald Trump, personally, because in exchange for large cash bribes paid directly to his family, he’s been willing to completely subordinate American interests to Gulf interests when it comes to Iran policy. But historically, the entire purpose of the U.S.-Saudi alliance was that the Saudis were supposed to help the West in the event of a crisis with Russia, and they’ve done the opposite.
The broader risk to the United States is that the Saudis might replay a version of their 2014 price war in which they crashed the price of oil and put a bunch of frackers out of business. Fear of such a price war restrains investment in domestic oil production in the United States. But the Saudis can also opportunistically spike the price of oil to maintain their own revenue, for the sake of their budding relationship with Russia, or to bring their preferred presidential candidate into office. That power to either spike or crash oil prices is the privilege of having such a low breakeven price. And the goal of American SPR policy should be to seize the power to be the global price setter.
The benefits of stable oil prices
Last September, I proposed committing to buy oil for the SPR any time the price dropped below $80/barrel. The goal was twofold:
Provide American investors insurance against the risk of a Saudi price war, so they feel comfortable investing when prices are high.
Restock the SPR so any time prices are very high, we can sell again and bring them back down to earth.
The idea is to create prices that are low enough to avoid economic pain but high enough to ensure that even when domestic oil production is profitable, the electric vehicle market share keeps rising. In October, the Biden administration came out in favor of a version of this strategy, but they set the target price lower at around $70/barrel. That’s less industry-friendly than my proposal and also less climate hawkish,1 but somewhat more hostile to Russian interests. I would put this firmly in the "reasonable people can differ" basket.
Either way, it’s a great deal for the American people.
Many aspects of inflation have complicated relationships to wages. Price increases eat away at people’s earnings in a way they don’t like. But higher wages also sometimes simply pass through to higher prices. And fighting inflation by tossing tons of people out of work has massive costs. Basic commodities — of which food and energy are the most important — are the big exception. If you can stop gasoline prices from rising, then it’s much easier to get inflation-adjusted wage increases without needing more unemployment. A basic commitment to buying low and selling high is revenue-positive and could be used over time to expand America’s ability to store oil. This kind of commodity price stabilization is a classic role for state power (think of Joseph and Egyptian grain storage in the Bible), and the United States is uniquely positioned to do it since we’re both a huge producer of oil and a huge consumer.
I was really happy to see the Biden administration articulate this policy, and I think that Biden’s oil politics have been generally under-appreciated. The issue this spring, though, is that we have to actually implement the policy. What’s happening instead is that oil dips briefly into the range and then pops back above it due to OPEC+ actions. In some ways that’s convenient — we’ve been getting the price stabilization without needing to spend the money. But it leaves the power in Saudi hands in a way that’s dangerous and undermines the insurance value of the commitment. The administration needs to take ironclad steps to shore up its credibility instead of accepting excuses.
What needs to be done
When Covid hit, the SPR had spare capacity and the Trump administration proposed filling it up during the price crash. Congressional Democrats blocked this, with Chuck Schumer emailing colleagues to congratulate himself for having “eliminated [a] $3 billion bailout for big oil.”
This was dumb. Flash forward two years and Biden was using SPR releases to stabilize the world economy and save Schumer’s bacon in the midterms — Democrats shot themselves in the foot to spite the oil industry. And I think mainstream liberals don’t understand (or have conveniently forgotten) how over their skis Democrats got during this period. Sarah Bloom Raskin, a former Deputy Treasury Secretary in the Obama administration,2 wrote an op-ed for the New York Times arguing that fossil fuel companies should be denied access to Covid business lending programs, essentially forcing the entire industry into bankruptcy. If the Fed had done what she wanted, the production recovery of 2021 and 2022 would have been much slower. This would have had the intended effect in terms of reducing greenhouse gas emissions, but through the mechanism of higher gasoline, electricity, and home heating prices. That would have blown back politically on Democrats.
But rather than counting themselves lucky that this proposal was rejected, the Biden administration put Raskin up for a Federal Reserve Board seat, only to have her shot down by Joe Manchin.
I bring this history up because even though Democrats have moved on from this spring 2020 episode, actual participants in the industry have not. These are mostly conservative Republicans who are not inclined to give Biden the benefit of the doubt; any signs of fuzziness invoke the memory of this short-lived effort to leverage a global pandemic into liquidating their entire industry. And this spring, the Energy Department has been extremely fuzzy on the SPR issue.
The official reason that Secretary Jennifer Granholm has given for not doing purchases is that the DOE is currently undertaking congressionally mandated releases of oil from physical storage. And it is true that the SPR, logistically speaking, cannot load and unload oil simultaneously. That said, as Skanda Amarnath and Arnab Datta write, the world of modern finance (and existing DOE regulations) provides tools to get around this:
The DOE has trotted out the line that it cannot be buying crude oil while it is also selling crude oil (for Congressionally mandated reasons), but this is just flatly incorrect. The DOE specifically changed a regulation last year to make purchasing more nimble and flexible. With the new authority, the DOE can contractually repurchase (buy) crude oil now for delivery at a later date. That’s exactly what the DOE should be doing if crude oil prices stay durably in their current price range. DOE can buy crude oil now for physical delivery in late 2024, when Congressionally mandated sales are not an issue, and in a manner that aligns with any SPR maintenance constraints.
Energy market participants routinely engage in longer dated futures and forward contracts to physically sell and acquire crude oil. At just over 10% of the traded volumes of the most immediately available (and liquid) futures contract, the December 2024 futures contract for West Texas Intermediate crude oil is still routinely traded and should offer a sufficiently liquid point for the DOE to find a competitive offer. While DOE is not a market participant and is somewhat constrained, it has the flexibility to replicate market transactions. If the DOE is incapable of this–-even after a full six months since the President initiated his commitment—questions must be asked about DOE’s incompetence, or why it is wholly uninterested in carrying out a major presidential policy initiative.
My reporting indicates that there is no Energy Department conspiracy to backslide on Biden’s SPR commitments. There is, instead, the most boring and common source of public sector dysfunction: inertia and risk aversion from rank-and-file career employees intersecting with inattention from the top political officials in the White House. The people who actually do the work, on a day-to-day level, don’t just do new and potentially controversial things on their own accord. The Secretary asks them “so, are we gonna refill the SPR?” and they say “no, we’re doing scheduled releases,” and then she goes on TV and says “we can’t do new purchases while we’re doing the releases.”
With clear, consistent pressure from the top, things happen. Without it, they don’t.
I hope that someone in the White House reads this newsletter, because what’s really needed here is for non-specialists to get on the phone and insist that the Energy Department do the work to make sure they are living up to the commitments the president already made.
Activists insist on framing the fossil fuel industry as the key enemy in climate discussions, and ignore the extent to which high oil prices both reduce consumption and increase oil industry profits.
And the wife of Rep. Jamie Raskin.