The US Department of Energy (DOE) will release 50 million bbl of crude oil from the US strategic petroleum reserve (SPR) in an effort to reduce high oil prices and address a lack of supply.
Oil prices are currently at the highest level for seven years. The US had asked OPEC and Russia to increase oil production, but the request was refused. The command to make the SPR oil available came from US president Joe Biden. Several other high energy consuming nations, including China, India, Japan, South Korea and the UK will also release oil from their SPRs. As world economies begin to recover from the COVID-19 pandemic, demand is outstripping supply for goods and energy supplies, and concerns have been expressed on the continued recovery.
Initially, 32 million bbl will be made available from the SPR’s four salt cavern storage sites. Big Hill and Bryan Mound in Texas will each release 10 million bbl, while in Louisiana, 7 million bbl will be release from West Hackberry and 5 million bbl from Bayou Choctaw. The oil will be released on an exchange basis, whereby companies receiving oil will have to return it at a given future date when oil prices are expected to be lower. The mechanism thereby acts as a bridge from high prices to lower prices. In this case, the oil must be returned in 2022, 2023 and 2024. Interested companies have until 10am CT on 6 December 2021 to submit bids. Contracts will by offered by 14 December 2021 and deliveries will take place from January-April 2022.
Additionally, 18 million bbl of oil will be put up for sale in December 2021.
Biden has stated that he will take additional action if necessary, and has also asked the Federal Trade Commission to investigate oil and gas markets to find out if ‘illegal conduct’ is the reason lower oil prices are not always passed down to domestic customers.
‘As we come out of an unprecedented global economic shutdown, oil supply has not kept up with demand, forcing working families and businesses to pay the price. This action underscores the president’s commitment to using the tools available to bring down costs for working families and to continue our economic recovery,’ says US secretary of energy Jennifer Granholm.
Early indications are that the combined efforts have not been effective. Immediately after the announcement, oil prices dropped slightly but quickly rebounded.
‘While OPEC maintains its narrative and continues to expect a fall in demand towards the end of the year, the US along with a group of other countries are attempting to ease the pressure by tapping into their strategic reserves. As stated in the past, this move was unlikely to have a long-term effect on prices since it would not be able to make a significant impact on total demand, and after a brief pullback which saw prices drop by around 4.5%, the move was reversed. Furthermore, we are seeing a faster than expected recovery in oil prices as Brent is trading above US$80 once again and WTI hovers in the US$78 range, this may worry markets once again as governments begin to run out of options to control the ongoing situation on the oil market,’ says Walid Koudmani, market analyst at financial brokerage XTB.
Meanwhile, OPEC+ officials have told various news outlets, such as Al Jazeera, that the decision to release the oil may affect OPEC’s decision next week as to whether to increase production. Many analysts are warning this could mark the beginning of a new power struggle in the global oil markets.