President Biden and his administration are trying to figure out how they can counter OPEC+’s oil production cuts from raising gasoline prices before the mid-term elections. Biden’s attempts started in early September when he tried to make a deal with OPEC to purchase 200 million barrels of oil for the Strategic Petroleum Reserve (SPR), which he has decimated trying to keep gas prices under control, in return for no production cuts by OPEC. Since that approach did not work, he is now considering banning petroleum exports, including gasoline, diesel and other refined petroleum products. The White House has asked the Department of Energy (DOE) to analyze whether a petroleum product ban would lower fuel prices. More recently, Biden is back to removing sanctions on Venezuela so that the country can start pumping oil again. In other words, Biden is trying almost anything other than working with domestic oil producers to allow them to increase oil production in the United States.
Biden’s Efforts to Court OPEC
A senior US official acknowledged that the administration lobbied the Saudi-led coalition for weeks to try to convince them not to cut oil production. Included was a U.S. proposal that if OPEC+ decides against a production cut, the United States would announce a buyback of up to 200 million barrels to refill its Strategic Petroleum Reserve (SPR), an emergency stockpile of petroleum that Biden has been tapping into to lower oil prices.
The White House reportedly made a secret offer to buy up to 200 million barrels of OPEC+ oil at $80 a barrel to replenish the reserve in exchange for OPEC+ not cutting oil production. The White House wanted to reassure OPEC+ that the United States “won’t leave them hanging dry.” The Democrats, in the spring of 2020, killed a proposal by President Trump to replenish the SPR with oil from American producers at a price of $24 a barrel, much less than the $80 a barrel that the Biden White House promised to OPEC+. Trump wanted to stabilize the American oil industry after the Covid-19 pandemic reduced oil demand and proposed spending $3 billion to fill the SPR.
The Democrats’ opposition to refilling the SPR was a major error because it cost the United States billions in potential profits and resulted in tens of millions of fewer barrels of oil that Biden could use to counter price surges. Further, it will take significantly more oil today to fill the SPR than it would have two years ago since Biden had pledged to release 260 million barrels. In spring 2020, the SPR contained 634 million barrels out of a capacity of 727 million. Now, the reserve is below 442 million barrels–—its lowest level in 38 years.
It also appears that the Biden White House is sacrificing America’s commitment to human rights for the president’s possible political gains to control gas prices. Biden had blamed Saudi Arabia’s Crown Prince Mohammed bin Salman for the murder of Washington Post columnist Jamal Khashoggi, for which bin Salman took responsibility. To sweeten the potential deal with Saudi Arabia, the Biden administration sought a 45-day delay in a civil court proceeding over whether Saudi Arabia’s Crown Prince Mohammed bin Salman should have sovereign immunity for the murder.
Officials across the Biden administration’s economic and foreign policy teams were involved with reaching out to OPEC governments to stave off a production cut. The White House asked Treasury Secretary Janet Yellen to make the case personally to some Gulf state finance ministers, including those from Kuwait and the UAE, to try to convince them that a production cut would be extremely damaging to the global economy. In the long-run, they argued, a cut in oil production would create more downward pressure on prices – the opposite of what a significant cut would be designed to accomplish. Their logic is that “cutting right now would increase risks of inflation,” leading to higher interest rates and ultimately a greater risk of recession.
Banning Petroleum Exports
The White House requested that the DOE analyze how an export ban on petroleum products would affect gasoline prices if imposed for 30 or 60 days. The request came after a tense meeting between administration officials and oil industry executives.
Gasoline prices have surged since Biden became President due primarily to his anti-oil and gas policies and were exacerbated by Russia’s invasion of Ukraine. Prices have declined somewhat from their $5 a gallon high in June, but have risen again recently, just four weeks before midterm elections, and are expected to continue increasing as OPEC+ has cut oil production 2 million barrels per day beginning in November. The proposed ban, however, would likely backfire by raising costs even more for consumers, disrupting markets and cutting off European allies when they desperately need energy supplies. The two largest markets for petroleum exports for the United States are Canada and Mexico. In the United States, the import-reliant East Coast where fuel inventories are low is a major problem.
Limits on pipeline capacity and US-flagged tankers capable of carrying gasoline and diesel from the Gulf Coast to New England has that area depending on imported fuels. With fewer U.S. fuels on the world market, the price of those imports would also increase. The pipeline connectivity or the range of economic shipping alternatives is insufficient to transport significantly more fuel to the East Coast from refineries in the Gulf. Banning exports of fuel from the United States will not eliminate this challenge or make it easier and more affordable to supply American-refined fuel to the East Coast. Instead, by cutting into global fuel supplies, it would likely raise the cost of fuel imported into the East Coast from the global market, at a time when New England is already facing very expensive winter heating costs. For example, Massachusetts estimates that “household heating costs this winter are projected to be higher than last winter for all heating fuel sources due to higher expected consumption and prices. The cost of heating for residential customers is expected to be 28.6 percent higher for homes heating with natural gas, 18.6 percent higher for heating oil, 3.0 percent for propane, and 54.6 percent for electric heating.”
Allowing Venezuela to Pump Oil
The Biden administration is preparing to scale down sanctions on Venezuela’s authoritarian regime to allow Chevron to resume pumping oil there, paving the way for a potential reopening of U.S. and European markets to oil exports from Venezuela. In exchange for the sanctions relief, the government of Venezuela would resume talks with the country’s opposition to discuss conditions needed to hold free and fair presidential elections in 2024. The countries also worked out a deal that would free up hundreds of millions of dollars in Venezuelan state funds frozen in American banks to pay for imports of food, medicine and equipment for the country’s electricity grid and municipal water systems. Details are still under discussion and since the deal is contingent on Venezuelan President Maduro’s top aides resuming talks with the opposition in good faith, it may fall through. President Maduro does not have a reassuring history of “good faith” discussions.
If the deal goes through, only a limited amount of new oil would be put on the world market in the short term, but it would send a signal to the market that more oil would be coming in the future. Venezuela was once a major oil producer and exporter to the United States, producing over 3.2 million barrels a day during the 1990s, but the state-run industry collapsed over the past decade because of underinvestment, corruption and mismanagement attributable to their totalitarian/socialist government. U.S sanctions further reduced production and forced Western companies out of the country.
The Biden administration is concerned that high gasoline prices would pose a political threat to Democrats in the November mid-term elections given his record of stifling increased North American production. So, the OPEC announcement of a major production cut is forcing the Biden administration to look for ways to counter the cut and keep gas prices under control through Election Day. Of course, the administration could sell more oil from the emergency reserve, decimating it more.
They have also tried a secret deal with OPEC to keep the production cut from happening, which back-fired. Biden has asked DOE to conduct a study regarding a ban on petroleum exports. But, that would disrupt global markets, harm U.S. national security and raise fuel prices domestically. Banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies. The administration is also hoping to make a deal with Venezuela to produce oil in exchange for “good faith discussions” about a free and fair election in 2024.
Instead of making deals with these countries, the Biden administration could allow for expanded domestic oil production. But, Biden is continuing with his anti-oil and gas policies that he began on his first day in office. For example, he has issued fewer leases for on-shore and off-shore oil production than any president since World War II. And, his climate/tax bill, the Inflation Reduction Act, raises costs for oil produced both on federal and non-federal lands.