President Biden has pledged to do everything in his power to respond to Putin’s price hike at the pump, and he’s delivering. Gas prices fell at their fastest pace in a decade this summer, with average prices down about $1.15 a gallon from their peak in June — and about 30 cents above levels on Feb. 24, when the war in Ukraine began. In fact, gas prices have fallen 15 times in the last 18 weeks. According to an industry analyst, the most common price nationwide today is $3.39.
President Biden is directing his Administration to take additional action to strengthen energy security, address the supply crisis, and lower costs.
First, the Department of Energy (DOE) is issuing a Notice of Sale this morning for 15 million barrels from the Strategic Petroleum Reserve (SPR) that will be delivered in December. This sale will end the historic, 180-million-barrel drawdown the President announced in the spring, which helped stabilize the crude oil market and reduce prices at the pump. The President also calls on the DOE to be ready to proceed with significant sales of SPR this winter if necessary due to Russia or other actions that disrupt global markets.
Second, the President announced that the Administration intends to buy back crude oil from the SPR when prices are low or below around $67-$72 per barrel, adding to global demand when prices are around that range. As part of its commitment to ensure the replenishment of the SPR, DOE is finalizing a rule that will allow it to enter into fixed-price contracts through a competitive bidding process for production introduced at a later date. This buyback mechanism will protect taxpayers and help create certainty about future demand for crude oil. That would encourage firms to invest in production now, help improve US energy security and lower energy prices that have been driven up by Putin’s war in Ukraine.
Third, the President calls on companies to pass on lower energy costs to consumers immediately. The profit that the energy refining companies now take from each gallon of gasoline is about double what is normal for this time of year, and the margin of the seller over the price of refining is more than 40 percent above the normal level. These outside industry profit margins — adding more than $0.60 to the average price of a gallon of gas — have kept pump prices higher than they should have been. Keeping prices high despite falling input costs is unacceptable, and the President will call on companies to pass on their savings to consumers – now.
Continuing to use SPR to advance US Energy Security
In March, after Putin’s invasion of Ukraine, the President authorized a major release of the SPR and confirmed historic coordination with allies and partners to release crude oil from their reserves as well. Treasury Department economists estimate that these emissions, along with coordinated emissions from international partners, reduced gas prices by about $0.40 per gallon, compared to what they would otherwise have been. Average US gas prices are down more than a dollar per gallon from their peak earlier this year.
Global crude oil distribution remains a challenge, due in large part to ongoing instability caused by Russia’s actions in Ukraine. To help stabilize markets and shore up supply in the face of these challenges, the DOE will sell 15 million barrels from the SPR for delivery in December, issuing a Notice of Sale of these pipes this morning. The sale, which completes the 180 million barrels the President authorized in the spring, will add about 500K barrels per day to the market in December, providing continuity of supply and some price relief.
The US SPR remains the largest strategic reserve in the world with approximately 400 million barrels remaining, the largest amount of any SPR drawdown in US history. Even as DOE plans to replenish the SPR at earlier levels in the coming years, the SPR remains more than ready to respond to today’s energy security needs.
The President is prepared to authorize significant additional sales in the coming months if conditions warrant. The DOE will be prepared to act quickly to put additional supply into the market if necessary, and the Administration will not hesitate to use this tool, or others that may be used, to increase energy supplies worldwide, support domestic inventory levels, and lower prices for Americans.
Using SPR Repurchases to Promote Near-Term Productivity Increases
The administration is committed to replenishing the SPR, a national security priority, so it can continue to serve its purpose in the future. And, it is committed to doing so in a way that protects taxpayers’ interests, avoids putting upward pressure on prices in the near term, and encourages more production now by providing certainty about future repurchases.
US oil production is nearly 12 million barrels per day. By the end of this year, it will be about a million barrels a day compared to when President Biden took office, and is on track to reach an annual peak in 2023. However, a number of industry participants suggested that, even with today’s high prices, they are wary of investing in products when prices may drop in the future.
The administration announces its intention to use SPR buybacks to supplement global crude oil demand at times when West Texas Intermediate (WTI) crude oil prices are at or below around $67 to $72 per barrel. This will protect the interest of the tax payers because the SPR will buy back at a lower price than the latest sales, which will allow it to buy back more oil than is released at the market price. It will also help address farmer’s concerns about uncertain demand in the coming years, encouraging rapid investment.
The DOE has finalized a first-of-its-kind rule that enables it to enter into fixed-price contracts with suppliers, through a competitive bidding process, to buy back oil in future delivery windows. The new mandate will increase demand for oil when oil supplies are uncertain and prices are expected to fall. For example, if the market would price a barrel for delivery through 2024 at $70, the new law allows the DOE to enter into a contract now through 2024 for the delivery of oil, at or below that price. The DOE plans to use this authority to enter into repurchase agreements for SPR oil, targeting a price of approximately $67 to $72 per barrel or less, with the first repurchases being offered in 2024 or 2025. In addition, DOE is prepared to conduct additional SPR. repurchases at times when the price of oil for current delivery drops to approximately $67 to $72 per barrel or less, adding futures contracts for a fixed price as appropriate.
This method is a win for taxpayers – refilling the SPR at a lower cost compared to commercial pipes. And it is to win energy security – to give producers entering into contracts more certainty in the demand for oil that continues to inform investment decisions today, thus encouraging the necessary increase in production at a time when Putin’s war continues to disrupt the world’s energy markets.