Joe Biden's oil supply gamble risks backfiring

As millions of Americans took to the road for Thanksgiving last week, their travels would have been notably pricier than previous years.

A year ago petrol averaged roughly $2.11 per gallon. That figure has since jumped 61pc to $3.40 after oil prices roared back from their pandemic slump.

While the factors behind this are complicated, motorists at many forecourts are being told to direct their blame at one person in particular - the US president.

When the price for refilling flashes up, a sticker next to it - placed by activists - shows a grinning Joe Biden pointing at the number with the caption: “I did that!”

The potent attack being levelled at the president and his party comes as the Democrats sweat over dismal poll numbers and midterm elections due next year.

Republican opponents accuse them of mismanaging the economy and triggering a tsunami of price rises, egged on by a Federal Reserve that is too loose with money.

It was against this backdrop that Biden announced one of the biggest ever releases from the US Strategic oil reserve last Tuesday, in a desperate bid to solve the lack of supply and tamp down inflation at the pumps. The US has coordinated with a host of other countries including the UK, China and Japan, to together release 50m barrels of oil into the market over the coming weeks.

Biden’s decision came after his pleas to the Opec+ alliance of oil producers - including key producers such as Saudi Arabia, an ally, and Russia - were repeatedly rebuffed.

But with the Opec cartel set to meet late this week, analysts are warning Biden’s gambit - seen as too small to have a significant impact - could dramatically backfire.

Already, anonymous Opec delegates have been threatening to retaliate in media reports.

This could potentially see the cartel scrap a plan that would have seen them increase it gradually - albeit not as fast as Biden would like - and maintain output at current levels.

Separately, oil traders were left unimpressed and sent the price of the commodity rising in the immediate aftermath of the announcement. On Friday oil prices plunged more than 10pc alongside a wider market rout, in the largest one-day drop since April 2020.

The president’s plan has set up a showdown with Opec and risks triggering the opposite impact than desired - piling further pressure on American drivers.

Marc Kimsey, equity trader at Frederick & Oliver, says the 50m barrels being released by the US is just a fraction of the 20m it consumes every day.

“Biden’s move is pointless at best and, should he proceed with further draws, reckless at worst,” he says.

“It will fail to force the hand of Opec, who ultimately dictate prices. His provocation is more likely to result in the cartel holding firm on production.”

While potentially reckless, Biden is attempting to stem surging petrol prices that have in part arisen as the world recovers from the pandemic.

After travel and manufacturing plunged as much of the globe locked down, demand for Brent crude collapsed. The price per barrel hit a low of $21 in April.

But demand roared back as economies began to open up again, catching producers on the hop and squeezing supply.

This has helped the price bounce back, with Brent hitting a high of $84 last month before settling at around $80 - still higher than pre-pandemic levels.

Petrol prices are affected by the price of crude oil, as well as refining and distribution costs - and the US uses more of the fuel than any other country in the world.

Despite current concerns, petrol prices have been higher than they are now - they reached $4.11 in 2008, for instance.

But the recent big jump has opened the White House up to criticism that its big-spending policies, signed since Biden came into office in January, could be fueling the surge.

They include a $1.9 trillion rescue plan and a $1 trillion infrastructure investment and jobs act, while the Democrats are teeing up another $1.75 trillion package of social and climate programmes, known as “Build Back Better”.

Critics have argued that - combined with the Fed’s massive $100bn per month bond-buying programme - the huge spending is spurring on inflation and threatens to send prices soaring further.

Ronna McDaniel, chairman of the Republican National Committee, said: “Biden’s Build Back Broke agenda… would pump trillions of dollars in reckless spending into the economy, further increasing prices and raising taxes on hard-working Americans.”

Such fears were further stoked by official figures this month showing US inflation climbed 6.2pc in the year to October - the largest jump in 31 years.

Meanwhile, Biden’s policies at home have also been blamed for the inability of American firms to compensate for the supply squeeze themselves.

Although the US remains the world’s biggest oil producer, firms are increasingly deciding not to invest profits in expanding production amid anger over the White House’s green energy policies.

The industry’s top lobby group the American Petroleum Institute, for instance, has blamed Biden's rejection of new oil pipelines and a pause on leasing federal land for their reticence.

Harris Kupperman, chief investment officer at Praetorian Capital, told Reuters: “Biden is getting rid of pipelines and messing with permits and making it difficult to operate.”

Kevin McCarthy, the top-ranking Republican in the US House of Representatives, said the policies were “kneecapping American energy production”.

And, in response to Biden opening the taps of the strategic petroleum reserve, Paul Mosvold, president of oil drilling firm Scandrill, added: “The release of the strategic petroleum reserve is strictly a bandage.

“The only way to create a sustainable lower price and stability is to encourage drilling in North America and create a regulatory environment that makes it economical and sustainable.”

Biden has asked US competition watchdog, the Federal Trade Commission, to launch an investigation into oil and gas companies for alleged “anti-consumer” behaviour, claiming that the price of unrefined petrol had fallen 5pc in a month while prices in forecourts increased 3pc.

At the same time he argued that using the reserve, which is only supposed to be used in the event of “severe energy supply intervention”, would help to provide “the supply we need as we recover from this pandemic”.

However, Goldman Sachs has compared the 50m barrels now due to be released - combined with as much as 30m more from other countries - to a “drop in the ocean”.

Its analysts say the 70-80m it is expected to bring to market is below the 100m many traders were expecting and will do little to move prices.

Still, use of the reserve - which was created in 1975 after an Opec oil embargo to act as a bulwark against any future threat of disruption - marks a big historical decision.

Previous presidents have only used it three times: in 1991, when 33.75m barrels were made available on the outbreak of the Gulf War; in 2005, when 30m barrels were offered after Hurricane Katrina knocked out some domestic production; and in 2011 when 30m barrels were released under an international effort to tackle supply disruptions in Libya and other countries.

While the effectiveness of the President’s policy is in doubt, it may provide political cover for Saudi Arabia, Russia and other Opec+ members to further tighten supplies.

US motorists hitting the road again this Christmas, however, will have little to be thankful for at the petrol pumps.