Biden’s Oil Madness
The U.S. strategic petroleum reserve is down to forty-six days of consumption, a forty-year low. This is not surprising, given that the Biden administration has used some three hundred million barrels from the reserve to flood the market to keep crude oil prices low, a political imperative with his re-election in sight.
The obsessive pursuit of “energy independence” by U.S. policymakers has gone down the drain, in what seems a total contradiction with the aim of not having to rely—in normal times but, more importantly, in times of strategic peril—on foreign oil usually produced by ugly regimes with which Washington is at odds. Since the shale oil revolution is now clearly ending, the U.S. will be forced to import oil to build back its reserve—an ironic twist of fate, to say the least. Could the U.S. import oil from Russia in the not-too-distant future, just as Europeans have continued to import energy, particularly liquified natural gas, from Putin’s regime despite the wartime rhetoric and sanctions?
The objective of using the strategic reserve to control the price of oil faces more than one limit, of course. Aside from the fact that oil reserves are by definition finite, there are other forces at work acting against the Biden administration’s intentions. One of them is the control countries such as Russia, Saudi Arabia, and the smaller OPEC members have over their own supply. About 1.3 million barrels have been withdrawn from the market by these countries, and they have announced that the cuts in production will be maintained. The impact of this decision on oil prices is one of the reasons why Goldman Sachs has predicted that a barrel of Brent oil will likely surpass $107 next year. The prediction seems, in fact, conservative: WTI oil already surpassed the $90 mark this week.
Other factors at work are less immediate and less political, but ultimately more decisive, such as supply and demand. The monumental political pressure brought to bear on the big producers of traditional energy in the past decade and a half, as governments have tried to accelerate the transition to renewable energy, has meant that upstream capital investment for oil and gas has fallen precipitously. At the same time, demand for crude has not only kept up but actually risen. The countries that bet heavily on solar and wind power (such as Germany, which, according to Goehring & Rozencwajg, has already spent over $1 trillion) have discovered that they are a long way from fully transitioning to renewables, that the cost has been devastating and that they will need to obtain more energy from traditional sources again very soon. This means that we can expect demand to continue to rise—not just based on the needs of emerging countries but also developed countries.
Between mid-2022 and the first half of the current year, the price of oil was held in check. The Biden administration’s use of the strategic reserve, coupled with the international economic slowdown and the fear of a deepening recession, played their part. Ultimately, given the demand and supply dynamic and the harsh realities of the transition to alternative energy sources, the political manipulation of the price of oil is a mirage.
What is not a mirage is the fact that the U.S. finds itself with the lowest amount of strategic reserves in several decades for no reason at all.