President Biden announced that he will release one million barrels of oil from the strategic reserve each day for the next 180 days in order to increase the supply. While Biden is correct that a reduction in the supply of gas has caused gas prices to rapidly increase, the action he has taken is simply wrong.
And it’s wrong for a number of reasons.
First, this action is temporary. It will likely lower gas prices about 15 cents per gallon during the six-month period. However, because prices will fluctuate widely over the next six months, the decrease in price will not be easily noticeable by the general public. After it expires, the price will return to normal. His action doesn’t really increase total supply, it simply takes supply from the reserve and puts it onto the market.
That means the strategic reserve will be depleted by about 50%. Eventually, the reserve will have to be replenished. If oil hovers at $100 per barrel the cost to replenish the reserve will be a whopping $18 billion. That huge number is actually worse than it looks.
In April 2020, with most of the world locked down and not using cars for transportation, oil that was on tankers saw no buyers once they reached port. Oil producers needed the ships back at the fields to be loaded up with the oil being produced. As a result, prices fell to encourage countries to purchase oil on the tankers.
Still, no countries were purchasing oil. Eventually, the prices became negative, falling to negative -$37 per barrel. In other words, producers said they would pay $37 per barrel to anyone who would take the oil. President Trump saw this as an opportunity and got paid hundreds of millions of dollars to take the oil. Trump was able to completely fill the strategic reserve.
So Biden will replace oil purchased at -$37 per barrel with oil costing at least $100 per barrel. That makes his action very expensive.
Much of the reason that the US today is producing about 1.5 million fewer barrels of oil than was produced at peak production during the Trump Administration, is due to Biden’s energy policies. Worse yet, had Biden not revoked the permit to continue constructing the Keystone XL pipeline in January 2021, there would be another nearly 900,000 barrels more being shipped to US refineries.
In addition, Biden revoked the permits to drill on federal lands, revoked the permits to drill on ANWR off the coast of Alaska and added a slew of new regulations just to get a permit to drill anywhere. This coupled with Biden saying that he wanted to end the use of fossil fuels and his actions in the banking industry that discouraged lending to oil companies, created a shortage.
Gas Prices Were Already Up 50% Under Biden
Even before Putin’s actions, gas prices had risen by nearly 50% to more than $3.50 per gallon by mid-February 2022. In January 2021 before Biden’s supply restricting actions, gas was $2.38.
The correct action for Biden to take today to increase the supply of gas and permanently meet the rising demand is to completely reverse his energy policies as this column noted more than a month ago. He should immediately renew the permit to complete the Keystone XL pipeline, allow drilling on federal lands and on ANWR as well as cancel the counter-productive regulations he instituted last year.
He should also say that his policy to wean the country from fossil fuels will be more gradual and more market driven. When the majority of Americans decide to start using less fossil fuels and more renewable energy, the demand for fossil fuels will decrease. That means less fossil fuels will be produced.
When consumers demand more renewable energy, business will increase output to meet that demand and the country will move to a position more closely related to Biden’s policies. That’s a market-driven response where consumers interacting with business determine both the price and the quantity for fossil fuels and for renewable energy.
Capitalism Allows Market to Find Equilibrium
Since Biden believes that his administration knows what is best for Americans, rather than Americans determining what is best for themselves, he will not take the action that allows the market to behave as it has for all products nearly all of the time.
A temporary, costly increase in market supply is not a long-term solution to high prices and shortages. The market solution is always the best. If only the President knew that.