With Biden now in a panicked scramble to give the public the impression that he is doing something, anything to lower gas prices, whether it is sending angry letters to the FTC to scapegoat oil and gas giants for his admin's catastrophic "green" policies, or casually and politely asking Xi Jinping - one of the world's biggest oil importers - to "come on, man" and release some oil from the Chinese strategic petroleum reserve, some are starting to expect that a 1970s price controls is next on the Biden agenda now that the midterm elections are less than a year away.
But before we get there, some are asking - is there any chance for a coordinated global SPR release? After all, one could argue that with gas prices soaring in both the US and China, the two superpowers' interest are - for once - aligned. The answer, at least according to JPMorgan, is "highly unlikely."
In a note from JPM's Natasha Kaneva, she writes that since October, when US Energy Secretary Jennifer Granholm first mentioned that the Biden administration was considering a release from the government strategic stockpile of crude oil, "a chorus of Democratic senators including Senate Majority Leader Schumer has called for the White House to leverage the Strategic Petroleum Reserve to attempt to lower fuel prices for Americans. With rising inflation and retail gasoline prices at seven-year highs, the Biden administration is under intense pressure to do something" even if other Democrats, like the top Democrat in the House, Steny Hoyer saying he is against an SPR release.
And while neither JPM nor Goldman- believe an SPR release will be effective in curbing prices at the pump (in fact, Goldman predicted that an SPR release would only lead to more pain down the line), the White House does have a few options at its disposal to immediately deliver volumes of crude oil to the still-undersupplied market and is likely to act on at least one of them.
Though the Biden Administration has the legal authority to draw down the US strategic petroleum reserve (SPR) as it wishes, the Energy Policy and Conservation Act gives the president and the DOE the power to draw down SPR stocks as necessary during what the president deems an emergency and to sell up to 30 mb in what the president deems “likely to become” an emergency, a unilateral emergency sale from the SPR without coordination with the IEA is unprecedented. As shown in the next chart, presidentially-directed emergency releases have occurred only three times over the last 30 years and all happened before the US shale revolution significantly reduced US dependence on imported crude.
It's worth noting that all three releases were executed in accordance with IEA's Coordinated Emergency Response Mechanism (CERM), which allows for differentiated national responses to an oil crisis, in that it does not oblige all 29 IEA member countries to release their emergency reserves (or in equal proportions). The CERM activation must be approved by unanimity of the Governing Board, the main decision-making body of the IEA, composed of energy ministers from each member country. Once release action is recommended, the board suggests the volume of oil equivalent to be made available to the market by each IEA member, where individual contributions are based on the country’s share of total IEA oil consumption.
The punchline: while the IEA has shown willingness to work with member countries and producers to try to stabilize oil prices, without a specific supply disruption to point to OPEC+ production cuts may qualify, but it may be hard to justify given that the producer group is already raising its supply. As such, JPM notes that "there does not appear to be an explicit need for a collective response." In fact, the desire for a response among the IEA member countries appears to be limited to the US and purely for political reasons, just so Joe Biden can approach the mid-terms with the price of oil lower.
And though the US holds a greater voting share than the other members because of its outsized demand allocation, JPM thinks that the IEA Governing Board is well short of consensus and a collective action and a resulting coordinated emergency sale is unlikely.
So if a SPR release is unlikely, what is? One option is a large SPR Volume Exchange.
According to Kaneva, while there is no precedent for a unilateral emergency sale from the SPR, there is a long history of volume exchanges and one example of a volume exchange of a similar magnitude to that of the largest emergency SPR sale. The 2000 Heating Oil Exchange, used by the Clinton Administration to support the establishment of a home heating oil reserve in the Northeast US, was for more than 30 mbd, similar in magnitude to the largest emergency sale. Delivering SPR volumes via an exchange agreement gives the Biden administration and the DOE wide latitude in how it can attempt to address the current undersupply in the global crude oil market without the risk of damaging its relationships within the IEA.
In a volume exchange agreement, the DOE loans SPR barrels to oil market participants for a specified period of time after which the recipients return the volumes to the SPR. There does not appear to be any statutory limit on the volume the DOE can exchange and the deadline for volumes to be returned can be extended at the discretion of the DOE. This means that the DOE could deliver 30 mb—or, theoretically, as much as it wants—to the market today and wait until crude oil balances normalize to require the return of those barrels, no matter how long it takes.
A less possible, if still likely option, is an accelerated mandated SPR sale schedule
The DOE may be able to move a sale of 18 mb mandated to occur over the next three years to sell those barrels immediately. In the 2015 Bipartisan Budget Act, congress mandated that the DOE sell 8 mb from SPR in FY2022 and 10 mb in FY2023. The 2018 Bipartisan Budget Act also mandates sales, but is a little more flexible on timing, requiring 30 mb of SPR sales between FY2022 and FY2025. That means that, theoretically, the DOE could sell up to 38 mb from the SPR in FY2022. Some of those sales have already started, with the DOE selling 20 mb in August 2021. 11.6 mb of that volume has already been delivered to winning bidders in November with the remaining 8 mb to be delivered by the end of the year. With the mechanism for this sale already in place, with broad discretion from the legislation on timing, and without the risk of alienating IEA allies, accelerating this 18 mb of mandated sales may be the easiest of the options the White House has.
Of course, as we noted earlier, a form of this appears to already be taking place: as the next chart shows, the US SPR has seen drawdowns for 10 straight weeks, during which more than 15 million barrels of crude have been withdrawn. And, at 606 million barrels, the US SPR is at its lowest since 2003, and it seems more declines are on the horizon. Incidentally, the latest SPR withdrawal of 3.25 million barrels from the SPR is the biggest in more than a decade.
As an aside, some are asking how much SPR volume is available to sell, if the Biden admin actually goes that way?
The answer is that aside from coordination with other IEA members on an emergency sale, the US has the ability to sell as much volume as it wants from the SPR and still remain compliant with the IEA reserves requirement. The DOE had around 606 million barrels of oil in strategic reserves last week, equal to about 39 days of US crude oil demand and nearly 200 days of US net imports of crude oil. According to the Agreement on an International Energy Programme (I.E.P.), the founding document of the IEA, IEA member countries each are required to hold emergency oil stocks equivalent to at least 90 days of net oil imports. Member countries may consider industry stocks in addition to government reserve stocks to meet their 90-day storage target.
With all that in mind, what does the JPM strategist think will happen? Well, With global oil markets moving into surplus as early as 1Q22 and with limited impact on global crude prices, much less prices at the pump, JPM does not believe that "any additional drawdown from SPR is necessary." Key officials at the DOE seem to agree, preferring a wait-and-see approach, and, on Tuesday, before the US Senate Energy Committee, the EIA acting administrator Stephen Nalley, testified that the impact of an SPR release would be short-lived and that the price impact of a 15-48 mb release over a short period would only bring down crude oil prices down by about $2/bbl (or the equivalent to as much as 10 cents per gallon of gasoline), in line with our previous analysis.
Furthermore, with midterm elections still a year away, President Biden likely has time to wait. However, with inflation rising and under pressure from Senate Democrats, JPM thinks the White House will ask the DOE to execute an exchange agreement, accelerate mandated sales, or a combination of both. More from JPM:
We expect about 30 mb to be delivered from the SPR over the course of a month and to be completed before the end of the 2021. Though the SPR is designed to draw down inventories at a rate of 4.4 mbd, assuming sufficient pipeline capacity, SPR drawdowns have never exceeded a pace of more than 0.9 mbd in any given week of previous major sales and exchanges. Even then, 30 mb in a month is faster than the largest emergency drawdown, the 2011 Libya sale, which was completed over the course of two months.