Can Biden bring down global oil prices?

The U.S. will start supplying the domestic market with 1 million barrels of oil per day from its own strategic reserves within six months. This decision was personally announced by the President of the United States Joe Biden during his speech on the actions taken by the government in order to combat the rise in prices for energy resources.

It should be noted that the President began his speech with an attack on Russia. He suggested talking about the price his country is paying for Russia’s actions. For this reason, the US is applying the most severe economic sanctions ever on Russia, which is already hurting the Russian economy. The U.S. president went on to directly blame the Russian president for the soaring gasoline prices in his country.

With regard to the situation, Joe Biden said that the North American oil and gas companies should increase oil production by 1 million barrels per day for patriotic reasons. In addition, it would be unacceptable for U.S. companies to use the current deficit to enrich themselves. The interests of consumers, not their shareholders, are now more of a priority in this regard.

It will take several months to build up U.S. production to the announced level. Until then, 1 million barrels of oil per day will be supplied to the domestic market from the national strategic reserve. If we make a simple calculation, we can come to the conclusion that within the next six months about 180 million barrels of oil will flow on to the American market. The allies of the U.S. are also expected to intervene in their domestic markets in the next few months in a rather modest total volume of 30-50 million barrels.

When asked how much gasoline prices will fall in the U.S. as a result of the measures taken, the president explained that they have already begun to fall. They could drop 10-35 cents a gallon from current levels in the coming weeks.

Since the beginning of the year, gasoline prices in the United States have risen from $3 to $4 per gallon. Thus, according to his most optimistic estimate, gasoline in the U.S. could go down by as much as 10% in the coming weeks. In fact, we are not talking about lowering oil prices, but preventing their further rise.

We have to understand that gasoline prices are one of the most significant domestic political issues in the US. This is due not only to the high level of motorization in the country, but also to the large share of domestic automobile transportation, which is reflected in commodity prices.

According to the Energy Information Administration (EIA), U.S. crude oil production in March 2022 was about 11.6 million barrels per day. Meanwhile, the average monthly supply of Russian oil to the U.S. for 2021 was 0.67 million bpd. However, on March 8 of this year the USA imposed a ban on oil imports from Russia. Thus, the announced daily interventions in the amount of 1 mln barrels are intended to cover with some reserve the dropped out volumes of Russian supplies.

Joe Biden mentioned in his speech that the root cause of the medium-term increase in oil and gasoline prices in the U.S. was the coronavirus pandemic, which had sharply reduced the volume of oil production in the world. That is why it is impossible to find a quick substitute for Russian oil on the international market.

The U.S. has made a number of efforts to increase the supply of liquid hydrocarbons to the world market, not only from allies, but even from unfriendly states. However, the U.S. negotiate with Saudi Arabia and the United Arab Emirates.

Recall that the world’s key oil producers, including Saudi Arabia, Kuwait, Iraq, UAE and Russia, are part of the deal to limit the production level in the OPEC+ format. However, for quite some time now they have not been able to increase production at the same rate as their total quota, for purely technological reasons.

Increasing U.S. oil imports is impossible without overpaying for additional volumes by redirecting them from other markets. But expensive imported oil would not solve the problem of high domestic gasoline prices in the United States.

It should also be taken into account that heavy, high-sulfur crude oil was supplied to the United States from Russia for refineries specifically oriented toward it. It can be replaced by grades produced in Venezuela and Iran. The oil embargo on these countries was imposed long before a similar measure against Russia. However, removing sanctions from one state only to introduce them against another would look like a very dubious political step. One way or another, such a decision has not yet been made.

The U.S. strategic crude oil reserves are not unlimited. By the beginning of April 2022, they amounted to about 570 million barrels. Thus, the forthcoming semiannual interventions in a total volume of 180 million barrels will deplete them by almost a third. It is obvious that the subsequent replenishment of strategic reserves at high prices is not profitable for the country’s budget. However, in the current geopolitical realities, not having adequate strategic reserves is unacceptable from the point of view of national security.

The size of the announced intervention in the U.S. in the amount of 1 million barrels per day is less than 1% of the projected for this year global daily consumption of oil and liquid hydrocarbons. It is estimated at 100.6 million barrels. Thus, the forthcoming commodity interventions in the U.S. and some other countries are not so significant as to cause a serious sustained mid-term drop in global oil prices. This is only a temporary solution, largely designed for psychological effect.

As for Russia, even in the best of times oil supplies to the USA did not exceed 10% of domestic oil exports. This volume will find its place in other markets. For example, the physical export of Russian oil to India in March 2022 increased fourfold compared to the annual average – up to 0.36 million barrels per day.

At about the same time, it was reported that international commodities trader Trafigura was offering Russian Urals crude at a record discount of $34.8 to Dated Brent. In the context of the current energy crisis, sales of Russian oil, even at a one-third discount from the exchange price, remain quite profitable.