TRADER JOE BIDEN
May 26, 2024 § 2 Comments
President Joe Biden is in the oil trading game. To date he has bought low and sold high, an enviable record. He has used the Strategic Petroleum Reserve (SPR) as a tool for stabilizing oil price continually, and not just in a supply crisis. His nuanced policy on minimizing Russian oil sale profits has not caused a supply-disruption-led oil price rise. In the last two years, transport fuel price has been stable in the US, and domestic oil production has been high. Some folks think he is perpetuating fossil fuel in achieving the latter. Not so. Shale oil wells are notoriously short lived. Other folks think he is taking an inspired gamble with our energy security. He is not. Abundant, accessible, shale oil is our security. And conventional oil traders must be haters. Riding volatility waves is their skill.
When President Biden authorized withdrawal of 180 million barrels (MM bbls) from the SPR in 2022, there were howls of anguish from many sides. The SPR was a reserve, for emergencies, not the sitting president’s piggy bank, he was placing the country at risk and so on. At the time I wrote a blog supporting the drawdown, which entailed 1 MM bbl per day withdrawal for 180 days. My support was premised on the argument that the SPR was no longer necessary at the design level of 714 MM bbls. At the time it was conceived in 1973 (and executed in 1975), we were importing 6.2 MM bbl per day. In 2022 we were a net exporter by a small margin. But the story is better than that. We import heavily discounted heavy oil and export full price light crude. Again, buying low, selling high.
The chart shows the SPR levels over the years. Note the plummet in 2022. In February 2024 it was at 361 MM bbls. This is ample in part because much of domestic production is shale oil, and new wells can be brought on stream within a few weeks. Shale oil is, in effect, our strategic reserve. One argument against that assertion is that many of the operators are small independent producers, who are averse to taking risk with future pricing, and may need inducements.
Biden’s Gambit
Enter President Biden into the quandary. He needs gasoline prices to remain affordable. But he also needs the shale oil drillers to keep at it for the nation to continue to enjoy North American self-sufficiency in oil (domestic production plus a friendly and inter-dependent partner Canada). Gas is a horse of a different color. The US has gone from an importer of liquefied natural gas (LNG) to the largest exporter in the world in just 15 years. American LNG is key to reduced European reliance on Russian gas. How this is reconciled against renewable energy thrusts, is a topic unto itself for another time.
He ordered the SPR release described above. The average price of the oil in the reserve was around USD 28 per bbl. He sold it at an average price of USD 95. All SPR oil is not the same quality, and depending on which tranches were sold, the selling price could have been less for any given lot. On average not a shabby profit. Then in July last year, when the price was USD 67, he refilled the SPR some (see the small blip upward on the chart). In so doing he fulfilled a commitment he made to drillers back in 2022 that he would buy back if the price dropped to the USD 67 – 72 range. Such purchases would, of course, have some impact on raising prices. The mere intent, taken together with the fact that the SPR had sufficient capacity to add 350 MM bbls, would give the market a measure of stability, a goal shared by OPEC, albeit at levels believed to be in the mid-80s.
The purchase in July 2023 was for about 35% of the amount he sold in 2022. The reported profit was USD 582 MM. According to Treasury, the 2022 sale caused a drop in gasoline price of USD 0.40 per gallon. In an election year. And the mid-term election went more blue than expected. Political motivations aside, the tactical use of the SPR to stabilize gasoline prices and at the same time keep domestic industry vibrant, is a valid weapon in any President’s arsenal. As noted earlier, an SPR at a third of the originally intended levels is now adequate as a strategic reserve. Any fill above that level could be discretionary.
Biden’s gambit went a step further. Prices were declining in October 2023. Biden unveiled a standing offer to buy oil for the SPR at a price of USD 79 for up to 3 MM bbls a month, no matter the market price at the time. For the producer this was a hedge against lower prices. While in world consumption terms this was the proverbial drop in the bucket (uhh, barrel), the inducement worked. Investment is reported to have tripled in the period following the offer.
Russian Oil
The Russian invasion of Ukraine prompted actions intended to reduce Russian income while not causing a rise in the world oil price. A combination of sanctions and price caps has certainly achieved the second goal. Russia was forced to sell oil through secondary channels and India became a large buyer, initially at heavily discounted prices. India then refined the oil and sold into all markets, including US and allies. Blind eyes got turned. At first. Now there are additional sanctions. As I noted before, US policy was nuanced. But world prices remained stable and US production thrived.
Trader Joe Biden has shown how deft buying and selling oil can utilize the SPR to achieve national objectives while making a profit*. And in so doing, not relinquish the strategic objective of it as a reserve against extraordinary supply shocks. Future presidents will take note.
* You’ve got to know when to hold ‘em, know when to fold ‘em, in The Gambler, by Kenny Rogers (1978), written by Don Schlitz.
Vikram Rao
May 26, 2024
Research Triangle Energy Consortium 
Vik,
As usual you craft a compelling tale. Wish I could agree with you as usual, but not this time. In my view the use of the SPR for political arbitrage was never the intent of its proponents. And, as you stated, spooling up production from unconventional formations (or reserves as you label them) cannot be accomplished as quickly as many may think. Given the poor state of the industry’s technical talent base (or reserves as I like to call them) recovery may be possible. However, the “invisible hand” of the market remains stymied by the fat thumb of government interference (permitting, bans on land use, etc.) along with its professed goal of killing the fossil fuel business. We need rational decision makers in Washington to ensure our energy future, not amateur commodity traders.
Rob
Great discussion, Rob, thanks. The motivation may well be political, but the results are positive for the public and the industry. Till now, anyway. Stable prices for consumers and producers (as you remember, producers prefer stability over just how high) and thriving domestic industry. But that is why we write blogs. For differing opinions in response!