The United States government announced this Tuesday that it will release 50 million barrels of oil from its “strategic reserves” to cope with the increase in price of gasoline, which is affecting the pocket of citizens.
This is a concerted measure that is not limited to the United States. The Joe Biden government managed to persuade other large economies such as China, Japan, the United Kingdom, India and South Korea to also release part of their strategic reserves and thus help increase supply in the crude market.
During the last year and a half, the flow of oil has remained restricted due to the effects of an agreement between the OPEC countries and other important producers such as Russia that have sought to keep the market under control in order to to prop up prices.
The United States has tried in vain to convince OPEC members of the advisability of increasing the oil supply in a more accelerated way to respond to the recovery of the world economy after the impact of the pandemic, but these producers have opted for a gradual and limited increase.
That the House Blanca decides now to resort to strategic reserves to face this type of situation is a measure unpublished that, in addition, can generate tensions with the OPEC countries, according to analysts warn.
An emergency resource
The SPR was created in 1975 after the economic crisis caused by the oil embargo that the Arab countries imposed on Western governments for their support of Israel during the Yom Kippur war in 1973.
This measure made for 1974 Crude prices quadrupled and generated fuel shortage problems in the United States.
From that moment on, the United States established this strategic reserve to protect itself from the ups and downs of the oil market world and any possible interruption in supply.
Although other large oil consumers also adopted similar measures, the US SPR is the largest in the world and is currently made up of some 620 million barrels that are stored in a system of caves dug in saline rock that extend from Baton Rouge (Louisiana) to Freeport (Texas).
In the past, the United States has resorted to SPR in emergency circumstances such as during the Gulf War of 1991 or after suffering the devastating effects of Hurricane Katrina, in 2005, which affected much of the oil infrastructure in the Gulf of Mexico. Also in other specific emergencies, it has “lent” part of its crude to some refineries to allow them to operate while a specific supply problem in the market is being corrected.
None of these circumstances are present in this moment.
“This is a very unusual measure. When the United States has released oil from the SPR, it has done so because there have been major supply disruptions. Did it in 2011, when the fall of Gaddafi in Libya led to the suspension of its oil exports. It is in those moments, when he makes use of these reserves “, says Raad Alkadiri, managing director of Energy, Climate and Resources of the Eurasia Group consultancy, to BBC Mundo.
“The United States has released small amounts in the past. Nothing on this scale or in response to prices, has always been as a measure before the physical interruption of the supply that occurred in another part of the world ”, he adds.
Aiming to inflation
Alkadiri highlights that an initiative of this type did not take place in the year 2008, when oil prices reached record highs of almost US $ 150, while at the moment the price of a barrel of oil is slightly above US $ 80.
But the Biden’s government is looking at other figures. “American consumers are feeling the impact of high fuel prices at gas stations and on their home heating bills; and US businesses also because the supply of oil has not kept up with the demand at a time when the global economy resurfaces from the pandemic, “the White House said in a statement.
The average price of gasoline in the United States this Tuesday stood at US $ 3, 40 per gallon, an increase 62% in a year when it was located at US $ 2, 11.
In a country, where oil continues to be the main source of energy, representing around 35% of supply, these increases are They note.
If other elements are added to this, such as the problems in the supply chains caused by the pandemic, the result is that the United States experienced an inf year-on-year variation of 6.2%, the highest registered in 30 years.
“Today we are launching a great effort to moderate oil prices, an effort that will spread throughout the world and finally reach the gas station on your street, God willing,” Biden said on Tuesday in a message from the White House.
A political signal
If the release of crude from the strategic reserve of the United States is an extraordinary measure, even more so that it is done in concert with other countries: that has not happened since 2011, when Gaddafi was overthrown in Libya.
Despite this, it is not clear whether this initiative will achieve a significant reduction in the price of oil or, if it does, will have a lasting effect.
This Tuesday, in fact, the price of Brent crude (a benchmark for Europe) and WTI (a benchmark for the United States) rose instead of falling.
Analysts believe that this is explains because the markets had already anticipated the announcement of the release of oil from strategic reserves.
The final impact of the measure will depend on two factors: the way in which it is released oil and the reaction of the OPEC + countries.
“The real question is the timing: when and how quickly This oil reaches the market ”, says Aldakiri.
“ If these volumes arrived at the same time, they would have a significant effect on the price. But from the way it seems to be planned, it will be done over several months and it is not yet clear how many barrels the government will be able to release quickly ”, he adds.
The expert warns, However, in the case of Biden, the objective of this measure goes beyond the possible reduction in the price of a barrel.
“What the government wants to do, more than anything, is send the signal that it is trying to stop the rise in energy prices, that it is trying to contain inflation in general in a very determined way,” says Aldakiri.
This also explains Washington’s interest in adding the support of other countries, since it would allow the White House to convey the image that it is leading an international effort to control the price of oil.
Aldakiri indicates that -beyond that they may also be experiencing inflation problems- for the other participating countries this initiative is an opportunity to earn points with the United States, which is a strategic partner.
Adds that China had already used its reserve in the past strategic strategy to face different problems, including price increases, and that in the current context is an easy way to show good will and defuse tensions with Washington.
The contributions of many of these countries will be relatively smaller compared to the United States. Thus, for example, the United Kingdom will release 1.5 million barrels and Japan, 4.2 million.
In the hands of OPEC +
Biden’s initiative could generate tensions with the OPEC + countries, which even before this measure was made official, had warned that they considered it unnecessary and had warned that they would probably take action on the matter if large consumers decided to make use of their strategic reserves.
Analysts such as Peter Flynn, from the Chicago consultancy Price Futures, consider that this type of initiative does not usually give results.
“History has shown that the liberation it will only have a short-term impact and is an open declaration of oil war with the OPEC + cartel, ”Flynn told Reuters.
Since April 2020, the OPEC + countries have maintained an agreement that allows them to increase gradually the flow of crude into the market. This agreement provides for increases of 400. 000 monthly barrels, but they are not automatic but are evaluated and approved every month by governments.
“This has been designed as a tool to manage the market on a month-to-month basis,” says Aldakiri.
The expert explains that the idea is that tight inventories drive high prices, but that they are not too high. “The concern of OPEC + is that the inventories next year are too high, that there is excess supply,” he adds.
The expert explains that the OPEC + countries will meet again at the beginning of December to decide whether or not to proceed with the increase in production expected for that month.
If they decide not to increase production, could cushion some of the price shock that Biden’s initiative seeks.
“The ball is in the territory of OPEC +”, warns Aldakiri.
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