Biden’s tacit endorsement of fossil fuels
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Strategic Reserve in response
Biden’s tacit endorsement of fossil fuels
Thank god for elections! With the 2022 midterms imminent, President Biden has decided to release more oil from the nation’s Strategic Petroleum Reserve to put downward pressure on gasoline prices. He's no dummy, Biden. He has clearly made the connection between gas prices—still fairly high, at around $3.85 per gallon—and the electoral prospects of the incumbent party, which happens to be his own.
But another Biden move may be more important. The Energy Dept. plans to purchase oil to replenish the reserve at prices ranging from $67 to $72 per barrel and sign contracts with producers locking in the price two or three years in advance.
Normally, the government purchases oil for the reserve at market prices, timing the purchases so that taxpayers get a good deal. If it sells oil from the reserve when market prices are at $100 per barrel, for instance, and replenishes when market prices are at $50, the program operates at a nominal profit.
Government contracts for future purchases would set a kind of price floor for oil, letting producers know they’d be able to sell some oil to one buyer at a known price, even if the market price is lower. The government might end up overpaying, relative to the market price, but it could still buy at a lower price than it sold the barrels it is replacing. The Biden administration has been selling oil since May, with market prices ranging from $78 to $120. So replacing those barrels at around $70 would still be a bargain for taxpayers.
Why guarantee a fixed price? Up till now, oil producers have readily cranked up supply as prices rose, with no government assist needed. Producers would cash in as long as prices remained high, but the added supply often sent prices lower, which was a kind of a built-in corrective. But that dynamic has changed. Punishing oil-industry losses in 2020 and the move to renewables have made drillers and their investors a lot more cautious about adding capacity, especially if it costs a lot of money. Nobody wants to finance new infrastructure if the payback period is long and demand might dry up before the returns are in.
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