Tapping US SPR will make oil supply situation worse
Events, not price, should dictate the use of strategic petroleum reserves
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The White House, as expected, on Tuesday announced a plan to curb sky-high energy prices, which includes tapping the U.S. Strategic Petroleum Reserve [SPR] by releasing 50 million barrels of oil in concert with China, Japan, India, UK, and South Korea.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| USO | UNITED STATES OIL FUND - USD ACC | 71.61 | -0.11 | -0.15% |
Now, Biden and his team need a lesson in economics. If you try to use the SPR as a weapon it will backfire because it will only serve to artificially lower prices, thereby increasing demand making supplies tighter in the long run.
Number two, it will discourage production in the new oil fields and thereby creating an even larger shortage down the road. It will also give OPEC more power because the left amount of oil in the global strategic petroleum reserve will be less.
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Since its inception, the International Energy Administration (IEA) has intervened in oil markets three times by releasing oil stocks. The first time was in 1991 during the Gulf War; next in 2005, a month after Hurricane Katrina affected U.S. production by releasing 2 million barrels per day; and lastly in 2011, to offset a continued disruption to oil supplies as a result of the Libyan civil war.
Each time the IEA had a real reason to intervene in the market and it wasn't price action.
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So in the long run, unless the Biden administration plans reversing course and allowing U.S. producers to produce more oil, what we're going to find is that this plan is going to make us more dependent on OPEC in the future.
The problem in the market isn't short supply because the cartel isn't producing enough oil — there is a problem in the market because U.S. oil production has been thwarted by the Biden administration, restricting U.S. oil producers from producing enough oil at a time when oil demand is rising. They have discouraged investment in fossil fuels.
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The irony of these potential fixes comes as Biden pushes strict regulations on methane emissions from oil and gas production. This sends mixed messages not only to U.S. energy producers but to the world.
Conflicting energy policy is not going to help advance his agenda on green energy nor will it help bring energy prices down at home.
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Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.