Friday, May 20, 2022

Biden Releases US Oil Reserves as Domestic Production Rises Slowly

President Joe Biden announced that he will release one million barrels a day from the nation’s Strategic Petroleum Reserve (SPR) over the next six months, in an effort to offset the reduced amount of Russian crude oil on world markets, an increase in global demand, and a refusal by OPEC nations to step up their production to cover the current supply shortfall.

The release that Biden has ordered would be the biggest withdrawal in the SPR’s history. It follows two smaller SPR withdrawals over the past six months, which both failed to slow the rapid increase in gas prices at pump. As of March 25, the amount of oil in the reserve, which is held in salt domes along the Gulf of Mexico, stood at 568.3 million barrels. When the withdrawal is complete, it would reduce the amount of oil in the strategic reserve to 388 million barrels, about half of its total capacity of 714 million barrels.

The SPR was established by an act of Congress signed by President Gerald Ford in 1975 in response to the oil supply crisis created by the oil embargo which Arab OPEC members imposed on the US in retaliation for its support of Israel during the 1973 Yom Kippur War.

On November 23, 2021, Biden announced he would withdraw 50 million barrels to lower gasoline prices in coordination with US allies to “address the mismatch” between supply and demand during the pandemic. In March, the Energy Department announced plans to release an additional 30 million barrels of oil from the reserve in response to impact on oil markets from Russia’s invasion of Ukraine.

The new one-million-barrel-a-day drawdown that Biden announced last week equals about 1% of world petroleum consumption, and about 5% of US daily petroleum use. Russian oil exports have been reduced by an estimated three million barrels a day since the start of the war in Ukraine. About a quarter of that reduction is due to Biden’s announced ban on further US imports of Russian oil. The rest comes from similar import bans announced by Canada and the United Kingdom, and a voluntary reduction of purchases by global oil merchants who are refusing to continue doing business with Russia, in part due to the sanctions imposed following the invasion of Ukraine.

Oil trading executive Bjornar Tonhaugen of Rystad Energy told CNBC in an interview that some of the unsold Russian oil shipments are now being purchased, at sharply discounted prices, by new buyers such as India.

RECENT FLUCTUATIONS IN ENERGY PRICES

International shipments of oil by sea typically arrive at their destinations around three weeks after a deal is struck, meaning that the reduction in Russian oil supplies started to be felt about two weeks ago. Since then, prices for diesel fuel in Europe to power cars, trucks, and tractors have been soaring, but diesel fuel prices in the US have remained steady since the invasion, at an average of about $5.50 per gallon.

The day after Biden announced the drawdown from the SPR last week, the Paris-based International Energy Agency announced that its 31 member nations had also agreed to a new release from their emergency oil reserves. News of the releases from the reserves resulted in an initial 13% market oil price reduction, bringing West Texas Intermediate grade down to below $100-a-barrel for the first time since the Ukraine invasion. But the price of gas at the pump across the US has declined by only a few cents per gallon since Biden made his latest SPR announcement.

The Biden administration has been under intense political pressure due to the soaring price of gas at the pump, which was averaging nationwide about $2.90 a gallon a year ago, and is currently hovering at about $4.20 a gallon, creating a considerable financial hardship for lower income families heavily dependent on their automobiles and undermining consumer confidence.

Most of that price rise occurred before the Russian invasion of Ukraine on February 24, when the average price of gas had already reached $3.60 a gallon. But in President Biden’s speech last week to announce the SPR withdrawal, he falsely tried to characterize the cost increase as “Putin’s price hike.” He characterized the SPR release as a temporary “wartime bridge to increase oil supply. . . to the fall,” in an effort to provide sufficient gasoline supplies through the summer driving season and relieve the upward pressure on prices at the pump.

A senior Biden official said that the first barrels to be drawn from the strategic reserve would begin to impact the domestic gasoline market in May, and added that the administration is “committed to restocking the reserve once we’re through this emergency.”

NO PROSPECTS FOR SHORT-TERM PRICE RELIEF

Biden decided to tap the SPR after the OPEC+ group again turned down renewed US pleas to accelerate its planned increase in production by 432,000 barrels a day starting in May. The OPEC+ group justified its refusal by saying that the world oil market is “well-balanced” and that “current volatility is not caused by fundamentals, but by ongoing geopolitical developments [the war in Ukraine].”

The Biden administration had also specifically asked Saudi Arabia and the United Arab Emirates to increase their production by about two million barrels a day, which is well within their current capacity. But US relations with the both Persian Gulf oil producers have been frayed to the point that their leaders have recently refused to accept personal phone calls from President Biden.

The Biden administration has also received harsh criticism for its recent attempts to obtain oil from the rogue regimes of Iran and Venezuela, while steadfastly refusing to loosen its restrictions on the most obvious source — the domestic American fossil fuel industry.

BIDEN STILL ATTACKING THE US FOSSIL FUEL INDUSTRY

Instead of adopting more lenient policies that would stimulate greater domestic crude oil production, the administration has continued to push for and implement policies that are openly hostile to the industry. These include a ban on new drilling leases on federal lands, offshore, and in an Alaskan nature reserve; opposition to new natural gas and oil pipelines; an increase in minimum gas mileage standards on new automobiles; stricter methane emission standards on natural gas wells and pipelines; and efforts to discourage lenders and investors from providing the additional financing that companies need to drill more crude oil and natural gas wells.

At the same time, Biden has sought to blame US oil companies for listening to their investors, who lost a lot of money on those investments in recent years when oil prices were low. Those investors have been demanding that oil companies give them a larger share of their current profits to make up for their previous losses, instead of reinvesting all the current profits into a temporary expansion of current oil production.

Biden has only begun calling for increased domestic oil production now because he and the Democrats are desperate to bring down the high price of gas at the pump before the November election.

To take advantage of discontent over the high gas prices, the Republican National Committee has launched a campaign to register voters at gas stations across the country.

“It’s kind of a perfect [political] storm,” wrote David Axelrod, who served as President Obama’s top political strategist. “The economic dislocations caused by the pandemic and war in Ukraine have led to record gas prices, and with them, tremendous pressure to encourage more oil and gas production. All in an election year.”

SHORT-TERM SOLUTIONS WON’T SOLVE THE PROBLEM

Despite the unprecedented withdrawals from the SPR, oil industry experts are skeptical that anything less than a lifting of the Biden administration’s restrictions on domestic US fossil fuel production will result in a long-term solution to the chronic problem of heavy European dependence on Russian oil and natural gas exports.

“It will lower the oil price a little and encourage more demand,” said Scott Sheffield, chief executive of Pioneer Natural Resources, a large Texas oil company. “But it is still a Band-Aid on a significant shortfall of supply.”

The American Petroleum Institute also called for Biden to encourage domestic oil production by reducing regulations. The reserve “was put in place to reduce the impact of significant supply chain disruptions,” said Mike Sommers, the institute’s president, “and while today’s release may provide some short-term relief, it is far from a long-term solution to the economic pain Americans are feeling at the pump.”

But Democrat Senator Joe Manchin of West Virginia welcomed Biden’s announcement, saying it would “provide much-needed relief while also allowing for the simultaneous ramping up of domestic oil and gas production to backfill Russian energy resources.”

Manchin was personally responsible for killing Biden’s Build Back Better spending proposal, which would have devoted $500 billion to the transition of the US economy away from fossil fuels. Manchin has reportedly said he is willing to discuss a scaled-down version of the bill with the Biden administration, which would include some clean energy tax credits — but he is also insisting that the new bill include provisions to expand domestic oil and gas drilling.

REPUBLICANS HOLDING BIDEN RESPONSIBLE

Republicans have stressed that gas price increases and runaway inflation began when Biden first took office, a year before Russia invaded Ukraine, and accused the administration of using the current war as political cover for its anti-fossil fuel policies that have hurt American consumers.

Senator Bill Cassidy, a member of the Senate Energy and Natural Resources Committee, said that that “releasing additional oil from the Strategic Petroleum Reserve must be accompanied by a plan to increase production and backfill the supply,” and that “the Biden administration must not put our future energy security at risk for a short-term attempt to salvage the president’s plummeting poll numbers.”

Biden has pleaded with Americans to view the current era of record high gas prices as “a moment of patriotism,” a sacrifice made in the defense of democracy, as the result of Putin’s “brutal” invasion of a neighboring country.

“We can free ourselves from our demand from imported oil from across the world,” Biden said, urging Congress to pass legislation that would increase the US investment in developing green energy sources which would ultimately make America less susceptible to oil price fluctuations, but provide no immediate relief.

BIDEN STILL DEMONIZING US OIL COMPANIES

“Look, I know gas prices are painful…” the president told consumers. “I’ll use every tool at my disposal to protect you from [rising prices]” — but obviously only as long as it doesn’t increase domestic fossil fuel production.

“It’s not the time to sit on record profits. It’s time to step up for the good of your country,” Biden demanded of the oil companies, while refusing to give them any assurances that, in return for their cooperation, he would let up on his administration’s efforts to destroy the domestic fossil fuel industry.

Biden also called upon Congress to impose fees on oil companies to punish them for “hoarding” oil leases on federal land that have not yet been explored or developed into productive oil fields.

The president said he would adopt a “use it or lose it” policy to make companies pay a high price for maintaining their leases on drilling prospects being left idle. But oil and gas industry experts insist that obtaining a lease is merely the first step in a process that includes obtaining permits and spending money to investigate whether there is actually any fossil fuel below ground to be extracted from the leased area.

A spokesman for Congressman Kevin McCarthy, the Republican minority leader in the House, accused the president of “attacks on American energy production in order to fulfill his campaign promise to ‘get rid of fossil fuels.’ As a result, the American people are paying the price, as gas is more than $4 per gallon, and we are more reliant on other countries for energy.”

Fulfilling a presidential campaign promise he made to progressive anti-climate change advocates, Biden has been waging war on the domestic fossil fuel industry since the first day of his presidency, when he cancelled the Keystone XL oil pipeline that would have brought 800,000 barrels of Canadian oil a day into the United States.

OTHER OBSTACLES FACING US OIL COMPANIES

But even if Biden would agree to give the fossil fuel industry temporary relief from his hostile policies, it would still not be able to quickly ramp up crude oil production significantly because of a number of different obstacles it is currently facing.

One of them is financial, due to the lingering effects of an extended price war in the crude oil markets which started in 2015. By that point, the rapid increase in US domestic shale oil production over the previous decade had created a global surplus which threatened the global market share of Saudi Arabia and Russia. In response, the two countries agreed to step up their oil production in an effort to flood the market, deliberately driving the price of oil below the cost of US oil production and putting US drillers out of business. Then the pandemic hit, destroying global demand for oil and causing its market price to collapse completely. Hundreds of small, independent drillers in the US were forced to go out of business and sell their oil assets at bargain prices to their competitors with deeper pockets.

The surviving big oil firms learned the lesson from the demise of their competitors. They have become far more conservative about taking on new drilling projects in an effort to change the boom and bust cycle, which had by then, due to overproduction, given the oil industry a bad reputation in the lending and investment communities.

Another factor which has dried up sources of financing for new oil exploration projects is the rise of the ESG (Environmental, Social, and Corporate Guidance) investment movement. It has been relentlessly pressuring the corporate boards of publicly-held energy companies, as well as their banks and lenders, to reduce their investments on fossil fuels, while concentrating instead on renewable, zero-emission sources of energy, such as solar panel and wind turbine installations.

Meanwhile, individual states governed by liberal Democrats, who are beholden to climate change activists, have also been placing new regulatory and environmental obstacles in the way of drillers seeking to develop new oil and natural gas fields, as well as banning the construction of pipelines to deliver the fossil fuels generated in new fields to the markets which need them most, on the East Coast.

LABOR AND SUPPLY CHAIN SHORTAGES LIMITING PRODUCTION CAPACITY

But the most serious obstacle of all to an immediate major boost in domestic oil production are the same shortages in skilled labor and raw materials as the rest of American industry.

Adding to the problem is the fact that the fracking industry’s large backlog of drilled but uncompleted oil wells, known as DUCs, which had been built up during the years after 2015 to await higher oil prices, was exhausted during the pandemic, when new oil drilling came to a virtual halt. The number of DUC wells peaked in June 2020 at 8,800. As of this February, the most productive half of them had been put into production, leaving only 4,400 still in reserve.

That means that any additional production will now have to come from new wells that must be drilled from scratch. In addition, much of that new oil will have to be used to replace falling production from the DUC wells brought into production during the pandemic and which are now becoming depleted.

For example, Diamondback Energy Inc., one of the largest oil producers in the Permian Basin of West Texas, has added seven drilling rigs to the five it had working during the pandemic, just to maintain the current level of output, while inflation has increased the company’s projected operating costs for this year by $300 million.

Capital spending for the oil industry is up this year by an average of 23% over 2021, but about two-thirds of that increase (15%) is due to their inflated costs for oilfield services.

The Permian Basin now produces more than five million of the nation’s current daily output of 11.6 million barrels of oil per day. As of March 11, there are 316 oil rigs now drilling in the Basin, compared to 212 rigs working in the rest of the country.

The total number of oil rigs in production in the US has increased by about 20% over the past six months, but because many existing wells are in decline, domestic oil production by the end of this year is only expected to increase by a total of less than 10%.

CRUCIAL ITEMS IN SHORT SUPPLY

Even the smaller, private oil companies, known in the industry as “wildcats,” which have been more aggressive in drilling new wells over the past year, are being forced to slow down as costs rise and drilling rigs, essential materials, and skilled labor remain in very short supply.

The price of steel has soared, with global supply chain issues also making it hard for oil producers to get enough steel pipe to drill new wells.

Another crucial ingredient in the hydraulic fracturing process which is in short supply is a special type of “fracking sand.” Made up of silica crystals processed from pure sandstone, its small grain size and round shape allows oil and water to pass between them. At a drilling site, the sand is mixed with water and chemicals and injected into the ground at high pressure to break up shale in order to release and extract the oil inside. The cost of the sand has doubled over the past year due to labor shortages at sand mines in Texas, New Mexico, and Wisconsin, a lack of truck drivers to transport it, as well as the soaring cost of diesel fuel for those trucks. In addition, drillers can’t get enough of it.

Michael Oestmann, the CEO of Tall City Exploration, a company with two active rigs that is drilling 32 oil wells in West Texas, told Axios, “We can’t get enough sand. We’re running less than the number of (fracking) stages we could pump in a day, because we’ve run out of sand every day…”

“It’s hard to get pipe, sand, crews for drilling rigs, truck drivers,” Oestmann said, adding that the scarcity of supplies, equipment and people “is unlike anything I’ve ever seen.”

Oestmann says he has no plans to add more drilling rigs, but even if he did, he doesn’t think he would be able to find enough supplies to do so. “And I talked to a guy yesterday — a bigger company than us — trying to ramp up his operation to six rigs, and he goes, ‘I don’t know if I can get all the things I need to do that,’” Oestmann said.

John Volke, CEO of Crew Support Services, which houses oil field workers in temporary quarters known as “man camps,” says that his company has filled every one of its 1,500 beds in the Permian Basin, but there is still not enough skilled labor to meet the industry’s demand.

“Every one of our clients are trying to hire 20 to 40 people — field hands, labor for rigging pipe,” Volke said. “I don’t know where these people went to work, Amazon?”

According to Oestmann, when the demand for oil and gas workers dried up at the start of the pandemic, many of those workers got out of the industry for good. “[After] we quit drilling for a year,” Oestmann said, “a lot of those people that were working in the field just said, ‘Enough is enough. I’m out.’”

Further increases the price of crude oil and gasoline will not solve these problems.

“Even if oil jumps to $200 a barrel today, there’s nothing more that can easily be done,” said Manish Raj, chief financial officer at private oil producer Velandera Energy Partners LLC in Louisiana. He also said that all the drilling contractors his company deals with have told him that their rigs are fully booked-up through the end of 2022.

BIDEN PROMISES TO HELP EUROPE WITH US LNG GAS SHIPMENTS

While there are no short-term solutions in sight to the current high energy prices and looming shortages, especially in Europe, President Biden has announced a plan to step up US shipments of liquified natural gas (LNG) to Europe, as a partial substitute to imports of Russian natural gas, which currently provide 40% of the continent’s supply. However, in addition to stepping up US production, the plan will require the creation of a substantial new energy infrastructure in Europe to handle and distribute the American LNG.

Despite those problems, German Economy Minister Robert Habeck has announced an ambitious plan to end its Russian imports of oil and coal by the end of this year, and to halt most of Germany’s natural gas imports from Russia by the middle of 2024.

GERMANY SHIFTS ITS GREEN ENERGY POLICIES

The announcement was a major shift in energy policy for Habeck, who is also Germany’s vice chancellor, as well as for his Green Party. Habeck has also been holding discussions with officials in Norway and Qatar in a bid to diversify the sources of Germany’s fossil fuel, which, despite a major German effort to expand its renewable energy sources, still supply the bulk of the country’s energy needs.

Germany was scheduled to shut down the last three of its operational nuclear power plants — which supplied 12% of Germany’s electricity last year — by the end of 2022, but given the country’s new commitment to phasing out energy from Russia, it is possible that even Habeck’s Green Party might permit them to continue operating until other replacement energy sources come online.

Germany currently relies on Russia for around half of its gas and coal and about a third of its oil. However, since the war in Ukraine, Germany has halted its efforts to open Nordstream II, a major new undersea Russian natural gas pipeline. That project would have bypassed two current Russian natural gas pipelines feeding Europe, which run through Ukraine.

With the US commitment to provide additional LNG, combined with the setting of a cutoff date for deliveries of Russian oil and coal, the German economy minister declared that “the first important milestones have been reached in order to free ourselves from the grip of Russian imports.”

“[German] companies are letting their contracts with Russian suppliers expire, they’re not extending them and are switching to other suppliers,” Habeck said, “and at an insane pace.”

In addition to the LNG from the United States, Habeck says that Germany will embark on a crash program to expand its current sources of renewable energy, reduce the country’s energy demands, diversify its energy suppliers, and ramp up production of clean hydrogen fuel.

According to a progress report released by Habeck’s ministry, Germany is now negotiating to rent three floating LNG storage and regasification units to be docked off the German North Sea and Baltic Sea coasts as soon as the end of this year. Germany is also working with Poland to bring in large shipments of oil, via truck and rail, that will arrive through the seaport of Danzig.

Nevertheless, Habeck said, “Even if we become less dependent on Russian imports, it is too early for an energy embargo at this point in time. The economic and social consequences would still be too serious. But every supply contract that is terminated harms Putin.”

A POLITICAL OPPORTUNITY FOR A FOSSIL FUEL COMEBACK

A few days after the invasion of Ukraine began, Habeck told reporters in Brussels, where he was attending a meeting of European Union officials, “We need to admit that in the past we have been too reliant on Russian imports, [but] in the medium and long term, we are [still] going to significantly reduce the consumption of fossil fuels.”

This is another indication that advocates for restoring America’s energy independence, through the increased production of fossil fuels and the reversal of Biden’s green energy policies, will have to act quickly to take advantage of the political opportunity created by the current war-induced energy shortage.

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