Biden explains rising gasoline prices and announces measures 1:20
New York (CNN Business) -
For months, the Organization of the Petroleum Exporting Countries (OPEC) and its allies rejected pleas from Washington and other world capitals to pump more oil.
Now, a coalition of consumer countries led by the United States is coming together to effectively say: Well, if they don't act, we do.
The White House announced Tuesday that India, Japan, South Korea and the United Kingdom will join the United States in the first coordinated emergency oil release in a decade.
Analysts have already called the group the "anti-OPEC."
The United States alone is releasing 50 million barrels of oil from the Strategic Petroleum Reserve.
It is the largest deployment on record and a dramatic way for the Biden administration to show that it is taking aggressive action in response to high prices at the pump.
The good news is that the mere rumor of this historic intervention brought oil prices down from seven-year highs.
And that should translate into relief for Americans struggling with high gas prices.
But the bad news is that no one, not even the White House, expects a dramatic drop in pump prices.
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Biden announces the release of barrels from the Strategic Petroleum Reserve, but warns that prices will not drop immediately
The "best case" is that prices drop 15 to 20 cents a gallon, according to Bob McNally, president of Rapidan Energy Group.
And don't expect that to happen right away.
"It's not going to happen in a fast and furious way," said Robert Yawger, vice president of energy futures at Mizuho Securities.
President Joe Biden acknowledged him during his announcement Tuesday.
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"While our combined actions will not solve the problem of high gasoline prices overnight, they will make a difference," Biden said.
"It will take time, but before long, you should see the price of gas drop where you fill up."
The key details of the international intervention remain unclear, including the precise amounts that the major countries are contributing.
The White House initially announced that China would participate, but then Biden only said that China "could also do more."
The lack of details probably didn't impress Wall Street.
After initially falling on the news, US oil prices ended the day 2.2% higher.
Brent crude, the world's benchmark, rose more than 3%.
Unless China is stepping forward with a truly massive rollout of barrels, this coordinated effort appears to be more of a band-aid than a game changer.
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The world consumes 100 million barrels of oil a day
The problem is that the Strategic Petroleum Reserve will not solve the underlying problem.
Oil supply has not kept pace with rising demand as the US economy recovers from COVID.
While the release of barrels from strategic reserves can help, there is a finite amount of oil in reserve.
Countries cannot just release oil every month.
"Releasing oil from the strategic reserve probably won't have a long-term effect on lowering gasoline prices," said Rob Thummel, portfolio manager at Tortoise, an energy investment firm.
Supporters of the use of the strategic reserve acknowledge this point.
"It's not going to be a panacea. But we have to do what we can," Democratic Rep. Ro Khanna of California told CNN on Monday after sending Biden a letter urging him to use the SPR.
It's also crucial to keep the size of the shares in context.
Although the release of 50 million barrels by the United States is the largest in American history, that is roughly what the world consumes every 12 hours.
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Kick the can
Another factor is the way the Biden administration is releasing the barrels.
About 18 million barrels will be in an acceleration from a sale that Congress previously authorized.
The rest, 32 million barrels, will be released through exchange or exchange.
By definition, those kegs must be returned at a later date and that supply must come from somewhere.
"The market knows that the barrels have to be returned. To some extent, it is counterproductive," Mizuho's Yawger said.
Louise Dickson, a senior oil markets analyst at Rystad Energy, agrees.
"The move by Biden and other leaders may be driving the supply issue down the timeline," Dickson wrote in a note Tuesday.
"Since emptying the storage will put even more pressure on the already scarce oil reserves. And these countries eventually I have to go shopping to recharge the strategic reserves."
Biden officials note, however, that the futures market indicates prices will be lower next year.
Therefore, they see the move as a "bridge between the current high price environment and a period of lower prices in the future."
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Despite all of this, Biden officials felt compelled to act, in large part because high gasoline prices and general inflation are creating anxiety for millions of Americans.
And that anxiety is weighing heavily on Biden's poll numbers.
Biden is as "empathetic as anyone he has ever worked with," a senior administration official told reporters during a news conference.
"Consumers are facing challenges at the pump right now. And we are trying to deal with that situation and deal with it in a smart, personalized and aggressive way."
Tom Kloza, head of the Oil Price Information Service, said the coordinated rollout is more than a band-aid, arguing that "we could have been knocking on the door at $ 90 a barrel" if it weren't for the rollout of the strategic reserve.
However, Kloza is concerned that gasoline prices will rise sharply in early 2022, outpacing oil prices.
This, due to the withdrawal of refineries in California, New Mexico and Louisiana.
"They are not coming back and we are going to miss them," Kloza said.
"We're going to have a real apocalyptic spring, in my opinion. And it's not because of Joe Biden."
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'The nuclear option'
There are two main wild cards in the future.
First, the White House noted that Biden may not be done yet.
"The president is ready to take additional action, if necessary. And he is willing to use all his authorities working in coordination with the rest of the world to maintain an adequate supply as we emerge from the pandemic," the White House said in its fact sheet. .
In theory, Biden could release even more barrels in the future.
And some Democrats are calling on Biden to ban oil exports, although some experts warn that it would backfire because crude is a globally traded commodity.
But the bigger question is how OPEC and its allies, collectively known as OPEC +, respond.
The group, led by Russia and Saudi Arabia, is scheduled to meet next week.
The plan was to increase production by another 400,000 barrels per day.
However, it is easy to see how these producers scrap those plans.
OPEC + could easily cite emergency releases or covid lockdown in Austria as a reason why those barrels are no longer needed.
"That would be the nuclear option," said Helima Croft, director of global commodity strategy at RBC Capital Markets.
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