Two years ago the Biden administration initiated the largest sale of oil from American emergency national reserves in history, to calm the ‘twitchy’ nerves of observers, according to the Economist. Such a gamble paid off handsomely- Biden is now ‘refilling America’s tanks’ and ensured domestic fuel prices remained ‘relatively stable and American production high’
Biden in 2022 sold 180 million barrels of crude at a high of US$95, buying back when the West Texas Intermediate indicator dipped to US$67, replacing 20% of what he sold and pocketing a substantial profit of 582m USD. Truly, he has ‘timed the market to perfection’.
He has been successful in his actions- having ‘knocked about $0.40 from the price of a gallon of petrol’, relieving consumer woes and improving his stance at the midterm elections. However, such price falls could hurt producers and discourage investment in new production- in the case of scarce supplies, producers are encouraged to invest in increased capacity, but Biden’s flooding of the oil market ‘masks this important signal’. Versus acting only as a ‘buyer of last resort’, Biden has acted far more actively in his approach, which has been termed as ‘activist’ due to his promise to buy back some of the stock if the price of crude dipped to US$67, at a significant premium over the historical use of the Strategic Petroleum Reserve(SPR) serving as Biden’s supply.
Biden has effectively ‘rewrote rules’ in order for the government to offer producers fixed-price forward contracts, the equivalent of futures trading, Producers forfeit future profits if the price of crude rises above the agreed price, but they also have a guaranteed payout equivalent to the contract price. Biden’s decision to offer contracts entering firms into a strike price of US$79, at up to 3 million barrels a month. Undoubtedly, while seeming as a mere ‘drop in the barrel’ of the global market, which clears around 100 million barrels a day, the offer to sell at such a price has encouraged domestic producers to bolster means of productions and supply without worrying of lowering prices.
This is especially poignant due to the reaction of the oil market in times of volatility, where producers typically ‘underinvest and leave profits on the table’ in periods of insecurity, skirting ‘painful losses’. Biden’s intervention ‘tripled’ planned investment despite falling prices, a significant catalyst for development.
Oil traders are undoubtedly unhappy by Biden’s actions, especially those relying on volatility to merely ‘turn a buck’. The SPR has made oil incredibly cheap to store in its vast ‘caverns’. Finally, Biden is undoubtedly in no hurry- he is able to wait until ‘prices fall to his store’.
Naturally, there also seems to be an element of luck prompting such spectacular success on Biden’s part, with Russia still exporting its oil despite having a slew of sanctions enforced on it, along with ‘sluggish’ global demand for crude. OPEC’s stifling of production have helped maintaining higher prices, which relieves Biden’s price floor from being tested by preventing prices from plunging. Undeniably, such past success, though, does not serve as a guarantee for future returns.
Author: Kendrick Low
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