Biden Wants Cheap Gas. But Not Too Cheap.

Biden Wants Cheap Gas. But Not Too Cheap.

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If you drive along the Gulf of Mexico from Corpus Christi, Texas, to Baton Rouge, Louisiana, you will pass four U.S. government sites that look like nothing special–a bland patch of concrete, a few office buildings, some oil silos huddled together. These facilities conceal something extraordinary: a network of cathedral-esque caverns carved into underground rock salt that can collectively hold more than 700 million barrels of oil. These caverns are large enough to swallow the Empire State Building and form the Strategic Petroleum Reserve. It is a feat of American engineering.

The Strategic Petroleum Reserve, or SPR, is one of those pieces of infrastructure that nobody needs to think about in ordinary times. The vast majority of people have never thought about the SPR. Created after the 1973 oil embargo, the reserve has become a kind of all-purpose cushion for oil supplies in times of war or natural disaster. But in recent months, it has become a lifeline for President Joe Biden. Since April, the government has sold about 1 million barrels a day from the reserve to private oil companies. It is the largest and fastest release of SPR supplies ever, an emergency release that Biden says is justified by “Putin’s price hike at the pump.” Along with recession fears and China’s ongoing lockdowns, the release has helped lower oil and gasoline prices since they peaked earlier this year.

But, the reserve may soon be playing a greater role in the lives of the American people and the Biden administration than it currently does. The White House declared yesterday that they would change the regulations governing the reserve to allow it to buy one barrel of oil, without having it delivered for several months. This will provide domestic oil drillers insurance, and help keep oil prices down. The policy is supported by many who believe it will stabilize the energy market, reduce gas prices and help to the climate.

Let’s back up. After entering the White House with dreams of becoming the next FDR, Biden’s many plans have been tripped up by, well, just about everything–inflation, the war in Ukraine, Senator Joe Manchin, and his own mistakes. Biden’s approval ratings have fallen to such an extent that they are now in danger of being buried under a salt cave. Democrats are heading for a disaster in this year’s midterm elections, and some people in his party have contemplated replacing Biden on its 2024 ticket, when he will be 81.

Part of Biden’s struggle is that his desires seem to be directly at odds with one another. His biggest priority is to slow down the scorching inflation that is driven in part by high energy prices, especially oil prices, that have surged largely because of Russia’s invasion of Ukraine. To fill the Russia-led gap and lower global oil prices, lowering global oil prices will almost undoubtedly mean encouraging U.S. drilling.

Yet Biden doesn’t want to burn more fossil fuels. During the 2020 campaign, Biden said that climate change was one of the four major crises facing the country. One of his first acts as president was to block the Keystone XL pipeline and hit pause on new permits for oil drilling on public lands. Especially now that the Senate has given up on his climate bill, Biden is under pressure to make good on his climate rhetoric and reduce emissions.

The White House seems to have followed a Plan by Employ America, a liberal think tank. The group made a statement that sounds too good to true over the last few months: He could fight climate change while also lowering gas prices at the same time. By using the Strategic Petroleum Reserve as a swing buyer and seller of oil, he can put a de facto floor and ceiling on oil prices, the group claims. Biden’s ability to slow down the rising gas prices, ward off recession and prevent a complete collapse of oil prices can be a boon to people who don’t need or want to travel.

In essence, the Strategic Petroleum Reserve’s ability to hold enormous amounts of oil for long periods of time–a very specific task that the government knows how to do well–can be harnessed for the greater good. It allows the government to intervene in the oil market when the price of oil falls too low or too high, buying or selling oil to keep the price in a certain window, then holding that oil until the price changes. This type of intervention will be possible with the new rule changes.

At the root of its proposal is an alluring idea: There is a “Goldilocks zone” for oil prices. Oil can become too expensive and cause economic stagnation. Oil that is cheap can have a negative impact on the environment. It can lead to a slowdown in the transition of energy, increase the use of cars, and generally cause an increase in emissions. But critically, cheap oil is also bad for oil companies, because it does not provide them with enough revenue to pay off their debts or invest in new drilling. Although pushing the fossil-fuel industry into insolvency might sound attractive to many progressive politicians in the short term, it can come back to bite them–as Biden is seeing now. This is because companies shut down their refining capacities and stopped drilling for oil during the oil price collapse, which partly led to the current cycle.

Employ America distributed a memo last week suggesting that the Biden Administration rewrite rules used by the Department of Energy to buy oil from the reserve. (It wasn’t the first group to propose a rethink of the SPR: Researchers at Columbia University did the same in 2018.) The government could be able to act as de facto swing supplier by buying oil more when there is less demand and then selling the excess when it is high in demand. That could add as much as 1. 8 million barrels a day, claims Skanda Amarnath, Employ America’s executive director. This would be more than OPEC Plus can do to raise production prices.

The initial tool suggested by Employ America is the same one that the White House announced: It will allow the government buy oil at the market price, without taking immediate delivery. (Instead of using fixed-price forward contracts, Employ America proposed that the government should write a type of contract called a put option that allows, but does not obligate, oil companies to sell it oil. But that is a minor difference. )

The second tool–which the Biden administration has not yet adopted–is auctioning off contracts to oil producers through a type of auction called a Dutch auction. Through such a procedure, Employ America hopes that the reserve can account for more than the price of a marginal barrel: It could write options for companies that would be able to drill the most additional barrels, for instance, or for companies that could use high environmental standards to drill. In that way, the government might even use its power as a buyer of first resort to encourage oil companies to reduce their methane leaks or wasteful flaring.

Here’s the rub: Yes, replenishing the SPR does help the fossil-fuel industry, at least in the short term. Although the White House’s plan will provide more price certainty for consumers, it does so via a subsidy for fossil-fuel producers, Mark Paul, an economics and environmental- studies professor at the New College of Florida, told me. That means it will “increase extraction, which will increase greenhouse-gas emissions.”

It will also underwrite the creation of fossil-fuel infrastructure that will last for decades to come. Paul stated that once additional resources for extraction are created, it is not likely they will be shut down in two years. “It’s a policy to increase extraction when all the data show us we can’t extract even the oil reserves we already have.”

The plans’ advocates respond that gas prices are a first-order political crisis for Biden: If Democrats can’t lower them, then they will lose in 2022 and Biden will lose in 2024, putting the White House–and the power to regulate carbon from any sector of the economy–out of reach for years. Biden could be able keep gas prices within the “Goldilocks Zone” and help consumers remain happy, without making it so expensive that potential EV buyers opt for SUVs. And Paul agreed that there are better and worse ways to encourage extraction: If most of the surge in drilling comes from shale wells, which produce most of their oil in the first 18 months, then Biden can avoid significant carbon lock-in, he said. “But that isn’t the way [the White House announcement] is written,” he said. “Producers will get to make that decision.”

The Biden administration hasn’t yet said what price it will seek as a floor for oil. After asking around among experts, I’ve heard suggestions anywhere from $70 to just below $100 a barrel for the “ideal” price of oil at this moment–enough to unlock production but still encourage continued decarbonization.

But Biden may not need such a complicated proposal to do the same amount of good, Ben Cahill, a senior fellow at the Center for Strategic and International Studies, told me. Although he had not analyzed the specifics of Employ America’s proposal, he worried that such an intricate plan to intervene in the oil industry or refinery system would create opportunities for canny investors to exploit. “We should be skeptical of new initiatives that could just support refiner or trader profits,” he said. “I tend to think the market is pretty clever.”

But Cahill still agreed that it’s time to get more creative about using the SPR. The world has changed significantly since the SPR’s creation. It was designed to protect the U.S. from a dramatic cutoff of imports,” Cahill told me, but that risk is much less likely now than it was in the 1970s. More recently, it’s often used to cushion oil prices after a major natural disaster–usually a hurricane–takes out production capacity. “But the idea that we’re going to have a series of natural disasters so big they deplete the SPR is just fanciful,” he said.

If this approach works, then eventually, the government could expand its energy stockpiles beyond petroleum and other fossil fuels. It could open a lithium, cobalt, or graphite reserve, which are essential to the energy transition and much simpler to store than oil. You need a warehouse and not a salt cave. It’s unclear whether the White House could open a strategic reserve for these inputs without further approval from Congress.

One of the key lessons from the pandemic was that the government should flex its muscles where it has the expertise and the capacity to do so during an emergency. In March 2020, the government quickly sent checks to most Americans–it does a version of that with most people’s tax returns, after all. But it struggled to lend money to small businesses as effectively and fairly. The government had the infrastructure and state capacity to buttress sending checks, but not keeping small firms solvent.

The good thing about the SPR plan is that the government already has this capacity: It knows how to store, sell, and buy up oil. Biden’s future political position could hinge on his ability to use this power creatively.

The post Biden Wants Cheap Gas. But Not Too Cheap. appeared first on The Atlantic.