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Explainer-Oil prices rise, with few U.S. government brakes available

Explainer-Oil prices rise, with few U.S. government brakes available
Explainer-Oil prices rise, with few U.S. government brakes available   -   Copyright  Thomson Reuters 2021
By Reuters

By Jessica Resnick-Ault

NEWYORK – Oil prices have soared to seven-year highs as the global economy has recovered, and driven the U.S. retail gasoline cost to $3.42 a gallon, the highest in seven years.

The White House has said it has steps it can take to address the rising costs for consumers, but its options are somewhat limited.

WHYAREOILPRICES SO HIGH?

Growing demand for oil worldwide has outpaced supply growth as economies have begun to recover from restrictions and shutdowns during the worst outbreaks of the COVID-19 pandemic. The price of Brent crude, the international benchmark, recently traded at more than $84 a barrel, near its highest since 2014.

WHAT IS OPECDOING?

The Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, account for about half of global production. This group, led by Saudi Arabia, raises or lowers its output based on worldwide economic factors.

The group cut its output in 2020 by more than 10 million barrels per day (bpd) and has lately been increasing supply at a rate of 400,000 bpd per month. The United States has pressed OPEC+ to raise production, but the Saudis are concerned about lack of spare capacity, and argue U.S. drillers could boost their own output.

Some OPEC+ countries, including Nigeria, have not been able to reach production targets.

DOESTHEUNITEDSTATESSTILLRELY ON OPECFOROIL?

Not the way it used to. The U.S. imports more crude from Canada than any other country, receiving an average of 3.6 million bpd in 2020, according to federal data. Most of that crude is shipped through pipelines, which are largely full.

IF THE U.S. DOESNOTRELY ON THEMIDDLEEAST, WHYAREGASOLINEPRICESSTILLGOING UP?

OPEC‘s outsized influence on market prices means its overall production will affect prices worldwide, given the global nature of the oil trade.

CANTHEUNITEDSTATESFORCEOILCOMPANIES TO DRILLMORE?

The U.S. government cannot tell oil companies to increase their output. The only exception to this is during emergency measures, such as those used during war.

DON‘T U.S. COMPANIESWANT TO DRILLMOREANYWAY?

Not necessarily. The United States is currently producing roughly 11.5 million bpd, short of the late 2019 peak of nearly 13 million. Some companies have reduced drilling and instead are using higher revenues to reduce debt and return cash to shareholders.

U.S. oil companies including Exxon Mobil and Chevron intend to start additional oil rigs, but the crude produced would not be available until early next year.

WHATABOUTTHESTRATEGICPETROLEUMRESERVE?

The United States maintains a Strategic Petroleum Reserve (SPR), currently with an inventory of 612 million barrels, used largely for emergency situations like hurricanes.

The Biden administration could release crude from the reserve, or try to coordinate a release with other countries that also have reserves. However, an international release is challenging, since the United States accounts for about half of total global strategic reserves.

Analysts have warned an SPR release would only produce a short-term effect in the market, as it would not increase U.S. production capacity.

ARETHEREOTHEROPTIONS?

The United States could subsidize households to offset price gains, but this could increase demand, driving prices still higher. It could temporarily reduce federal gasoline taxes, but that idea wasn’t even implemented in 2008, when the retail price surged to a record $4.11 per gallon.

CANTHE U.S. TARGETOPEC?

In 2020, when a Saudi-Russia dispute caused the market to become flooded with oil, driving prices briefly to negative-$40 per barrel, the Trump administration threatened to cut off security arrangements that Saudi Arabia enjoys. The Saudis and other nations curtailed supply, stabilizing oil prices.

The Biden administration has so far not broached anything this drastic, and at $84 per barrel, the price of oil is not likely to warrant such a response.

Washington could also reconsider legislation to allow the United States to sue OPEC and break up the producer group. That, too, could have fallout, causing global production oversupply and delaying future investment, said Kevin Book, managing director of Clearview Energy.