Washington Wednesday: Lowering oil prices

MARY REICHARD, HOST: It’s October 26th, 2022. You’re listening to WORLD Radio and we’re glad to have you along today. Good morning, I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. It’s time for Washington Wednesday.

Today, raiding the strategic petroleum reserve.

President Biden last week announced the release of another 15 million barrels from the nation’s strategic reserve. Biden said the move was aimed at helping American families by keeping gas prices down.

BIDEN: When the price of gas goes up, other expenses get cut. That’s why I have been doing everything in my power to reduce gas prices.

But Republicans said the announcement, just weeks before midterm elections, had a different purpose. Congressman Michael McCaul:

MCCAUL: It’s not the political petroleum reserve. He’s playing politics with this national security asset that we have that’s really developed for a time of war.

So now the reserve is is at its lowest level since 1984. But the president argues it’s still more than half full. And that’s more than enough to get the nation through a crisis.

Joining us now is James Coleman. He’s an expert on energy policy. He’s testified before Congress and has written for the Harvard Environmental Law Review.

REICHARD: James, good morning!

JAMES COLEMAN, GUEST: Good morning.

REICHARD: Let’s clear this up first: is the petroleum reserve only designed for times of war or a dire emergency … or is it entirely in the discretion of the president?

COLEMAN: Well it’s mostly designed for those significant disruptions that you identified. But it has been used at times for other purposes. Congress has at times mandated sales and, of course, the President has a lot of discretion about what can be designated an emergency. And so you see President Biden pushing much further than other presidents have done with this unprecedented release of a third of the capacity of the Strategic Petroleum Reserve.

REICHARD: Is the president correct in saying the reserves we still have on hand are plenty to take us through an emergency?

COLEMAN: Well, we’ll see. It really depends on what kind of emergency we're talking about and I hope we don't have to find out. But it may be that there are further disruptions to oil markets coming in the near future in December. Europe is talking about imposing some kind of tanker ban or maybe price cap on Russia and that's creating a lot of uncertainty for the markets. Remember that this initial release from the Strategic Petroleum Reserve was, in theory, designed to address the problem that Russian oil exports to the world were potentially going to drop catastrophically as a result of the war in Ukraine. But, in fact, they haven't really dropped very much at all.

But the question is, when Europe imposes this tanker ban, price cap, whatever will be in early December, that could cause a bigger disruption. And, of course, there's all sorts of other disruptions that could happen in terms of war in the Middle East. We certainly have growing tensions between Saudi Arabia and Iran. There's a lot of different things that could happen. And, you know, our hope is always not to find out how the Strategic Petroleum Reserve would suffice in these scenarios. But I think it's important to understand that because it's at lower levels than it's been in 40 years, we are less prepared for a strategic disruption than we've been in decades.

REICHARD: President Biden also said that once the price of oil hits $70 a barrel, the government will buy the oil needed to replenish the strategic reserve. He said that will encourage oil companies to ramp up production. What’s your reaction to that?

COLEMAN: Well, I think it is starting to gesture toward a better idea. Unfortunately, as far as it’s gone so far, I don’t think it’s going to do much to encourage producers, because producers were not, you know, they can already hedge their future production if they want to and that's a pretty low price. Now, on the other hand, if that was a promise to purchase for $70 even if prices went lower, that kind of put option might really put something of a floor under oil prices, at least, to the extent of the capacity and the Strategic Petroleum Reserve. And as we know, it's now a third empty, basically. So I think that could potentially help but just saying at a press conference that you plan to buy when things get down to $70, that's not much of a new incentive for oil producers to ramp up production.

REICHARD: Gas prices are well below what they were several months ago, although a bit higher now than this time last month. The White House says that’s because of the president’s earlier releases from the strategic reserve. James, what do you think? Did the earlier releases affect gas prices?

COLEMAN: Yeah, they certainly have lowered the price for crude. The reality of crude oil is that usually it's a global market. And so everything that happens around the globe affects it. And so there have been really three big things that have been lowering oil prices a little bit. One is that Russian oil production hasn't collapsed as many expected. Two is that Chinese oil demand has actually gone way down compared to what we were expecting, because of all the COVID lockdowns in China that we've had for the past year. And then three is that we've had these releases from the Strategic Petroleum Reserve. And the cumulative effect of those three things is that we actually have lower oil prices today than we had the day that Russia invaded Ukraine. And so I do think it's fair to say that releasing from the Petroleum Reserve does lower oil prices. The challenge is that, of course, that leaves us less prepared to deal with future disruptions.

REICHARD: Recently, OPEC+ countries decided to cut back on their oil output, despite Biden’s request that they ramp up supply. Will that affect our energy and gas prices here?

COLEMAN: Yes, it will. Just as all those other developments around the world impact global oil prices. Certainly OPEC’s decision will impact global oil prices. I do think that there's sometimes maybe slightly too much focus on this. I say for a couple of reasons. One is although the headline cut to oil production that OPEC announced was 2 million barrels per day, a lot of their producers were struggling to meet their quota. So, in reality, it's probably a cut of less than 1 million barrels per day. So it's not as big as it appears in the headlines.

The second thing to say about that is, ultimately, in the United States, we don't have a lot of control over production of the Petroleum Exporting Countries in OPEC. But we do have a lot of control over our own production. And so I think sometimes there's a little bit too much focus on something that, really, we don't just get to turn OPEC’s supplies on and off. Whereas we have a lot of control over decisions like how much federal land do we lease for oil and gas development.

REICHARD: We know that Europe is facing a winter with high energy prices, mainly due to their dependence on Russian energy. Will Americans see their energy bills go up significantly this winter? I mean, we don’t buy as much from Russia.

COLEMAN: Yeah, that’s right. So, in oil markets, we’re already seeing, of course, that price at the pump differential and that's partly related to just not enough oil production coming out of the pandemic. Demand recovered faster than our supplies of oil. It's also in part because we had a bunch of refineries shut down in the last 18 months. And so that means that sometimes there's shortages of some of those refined products, particularly diesel. We're seeing very high diesel prices, and that has an impact on prices of food and everything else. So I think we're already seeing that in the oil, you know, those liquid fuel markets. In terms of electricity bills, that's more tied to the price of natural gas. And those natural gas markets are not as global. And that's because, typically, it's hard to transport natural gas from someplace where prices are low to where prices are high and so you can get very different prices developing between places without transport to smooth it out. Now, with that said, the U.S. has recently become the world's number one exporter of liquified natural gas, which can carry refrigerated gas overseas, and that is connecting markets a little bit. And so we're seeing slightly higher prices for natural gas. I mean, in fact, they're significantly higher. I say slightly because they're nothing compared to the price spikes that we're seeing in Europe or in Asia or in other places. And so that's already making its way into utility bills. And it just sort of depends on what the lag is between the higher prices that utilities are paying for natural gas and how long it takes that to work its way into the consumer bills. But I do think that means we're going to be paying higher electricity prices going forward.

REICHARD: Final question, James. Suppose you are advising the White House on how to make energy as affordable as possible and still move toward its clean energy goals. What might you say?

COLEMAN: I think the biggest challenge and potential opportunity that they have right now is speeding up permitting of energy projects. And kind of an all-of-the-above program for speeding up those projects would in effect have a disproportionate impact in terms of speeding up clean energy projects. Because if you improve a bunch of pipelines and power lines, new solar projects and wind projects, the reality is that a lot of the infrastructure for our traditional energy system based on oil and coal is already there. And so they don't need new infrastructure as much as those new projects for power transmission, for solar, for wind, for natural gas to backup those intermittent sources of energy and to replace coal power overseas. So I think by speeding up permitting, they could help expand the supply of all kinds of American energy, lowering prices, while also encouraging a transition to cleaner sources of energy.

REICHARD: We’ve been talking to James Coleman. He is a Senior Fellow at the American Enterprise Institute. James, thanks so much!

COLEMAN: Thank you.

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