U.S. motorists expected to save 10 cents a gallon via SPR release

WASHINGTON (Bloomberg) - American consumers can expect a small break in gasoline prices from President Joe Biden’s decision to tap the nation’s oil reserves, though the move risks falling short for voters already bristling at his handling of the highest rate of inflation in decades.

Although oil prices actually rose after the announcement, analysts estimated the release coordinated with other nations could ultimately shave 10 cents per gallon from retail gasoline prices that have been hovering around a seven-year high.

Biden, in remarks from the White House after the announcement, asked for patience. He said his action would “span the globe in its reach and ultimately reach your corner gas station - God willing.”

“I will do what needs to be done to reduce the price you pay at the pump,” Biden said.

Biden spoke as doubts about his handling of the economy were mounting. Just 43% of voters approve of his job performance, according to an analysis of polls by FiveThirtyEight. And a Washington Post-ABC News poll published earlier this month found that 70% of Americans regard the economy negatively, despite substantial growth in employment and economic output under Biden.

The U.S. consumer price index, a broad survey of inflation, increased 6.2% last month from October 2020, the fastest annual pace since 1990. While economists believe rising inflation is due to unprecedented consumer demand following the pandemic shutdowns, Republicans have blamed Biden and his economic policies.

Biden’s picks of Jerome Powell and Lael Brainard as chair and vice chair of the Federal Reserve earlier this week help him avoid a contentious Senate confirmation battle heading into a midterm election year in which inflation looms as a major issue. Although some progressives opposed a second term for Powell, the Fed chair drew broad bipartisan support.

For consumers, high retail gasoline prices are a chief indicator of inflation. Biden has to ease inflation concerns that are causing political blowback to his Build Back Better agenda, as well as “hurting the president’s rate of approval in polls and clouding Democratic prospects in the midterm elections,” said Jim Lucier, managing director of Capital Alpha Partners.

Prices Falling

The drop in crude oil prices over the past three weeks, partly because of the Biden administration’s signaling of Tuesday’s decision, should cause retail gasoline prices to drop by 10 cents or more per gallon through mid-December, said Bob McNally, president of consultant Rapidan Energy Group.

Patrick DeHaan, senior petroleum analyst at GasBuddy.com, said pump prices in the U.S. should decline 5 cents to 15 cents in the next two weeks. “It’s a little bit disappointing,” he added. “Motorists will get some decline in prices but it will be on the smaller side.”

The reduction in oil and gasoline prices is muted in part because traders had already factored in the SPR release, after weeks of White House indicating it was in the works.

“If the Biden administration hadn’t spent so much time telling folks something was coming, they might have been in a better position to just sit and wait,” said Kevin Book, managing director of research firm ClearView Energy Partners.

U.S. fuel prices were already falling before Biden’s move, with retail gasoline prices declining 0.2% to $3.271 per gallon during the week that ended Nov. 19, according to the U.S. Energy Information Administration. Diesel fuel prices fell 0.3% over the same time period, hitting $3.724 per gallon.

The oil market was underwhelmed by the details of the package. Much of the crude will need to be returned to the stockpile later by the companies that buy it, the type of crude being released isn’t relished by refiners and international contributions were smaller than many expected. After an initial dip in prices, oil gained.

West Texas Intermediate rose 2.3% after the announcement on Tuesday while Brent oil, the international benchmark, climbed as much as 3.3%.

A White House official downplayed the tepid market reaction Tuesday, asserting that this move was never about a single day’s oil price, but rather ensuring adequate supply.

Officials stressed that the White House is continuing to weigh other options to address high gasoline prices. However, some other actions, such as lifting U.S. shipping requirements and scaling back mandates to mix biofuel into gasoline, are politically fraught. Others -- such as taking steps to encourage U.S. oil production -- conflict with his climate and environmental agenda.

Even a move pushed by some congressional Democrats -- blocking exports of U.S. oil -- could backfire by discouraging domestic crude production.

The opening of the Strategic Petroleum Reserve “is the only thing within policy control at the moment,” Anastasia Amoroso, chief investment strategist at iCapital Network, said on Bloomberg Television’s “Surveillance.”

The breadth of the release is unprecedented; never before has the U.S. discharged 50 million barrels from its emergency stockpile, even during Operation Desert Storm in 1991.

Even so, it’s unlikely to have a sustained, long-term effect on gasoline prices. According to modeling by economists with the Federal Reserve Bank of Dallas, SPR releases since 1990 have lowered the price of oil by as much as $12 per barrel, but the effects are at least partly offset by private sector moves to increase crude inventories.

100 Million Barrels

Biden’s decision, in concert with other nations, will result in 100 million barrels being released and likely reduce the price of Brent crude by as much as $6 a barrel, which could effectively translate into gasoline savings of as much as 10 cents per gallon, ClearView said in a research note Tuesday. 

Oil prices have already fallen about 10% since reports of the U.S. effort began circulating, a White House official said.

The release of stockpiled oil comes before a widely expected seasonal dip in both crude demand and prices, forecast by the U.S. Energy Information Administration and other analysts. A senior administration official said Tuesday that the planned exchanges were calibrated for this market dynamic, meant to provide a bridge from higher prices today to lower prices in coming months. 

“You don’t ever want be accused of being indifferent to the suffering of people on fixed incomes,” said Benjamin Salisbury, director of research with Height Capital Markets. “Poor people, senior citizens, people who are really being ground up by inflation -- they can’t just be seen turning a blind eye to that.”

Still Salisbury said he wouldn’t necessarily call the decision a political win for the president. “It feels more like a salvage expedition that now puts oil prices – which he can’t control – atop his political score card,” Salisbury said.

Republican lawmakers and Senator Joe Manchin, a Democrat from West Virginia, argue that a better solution for consumers would be encouraging U.S. oil production.

“Today’s release from the Strategic Petroleum Reserve is an important policy Band-Aid for rising gas prices but does not solve for the self-inflicted wound that shortsighted energy policy is having on our nation,” Manchin, chairman of the Senate Energy and Natural Resources Committee, said in a statement.