The price of crude oil was already dropping by the time the Biden administration announced the coordinated effort among allies to release crude oil from their reserves.
With roughly 1.05 billion barrels in reserve, some of which are used to meet basic demand each year during hurricanes or other periods of stress, the United States is not in a position to influence oil prices beyond the near term by releasing a portion of the strategic petroleum reserve.
By the end of last week, the price of the U.S. benchmark West Texas Intermediate crude oil had dropped by 10%, from $76 to $61 per barrel. (As of Sunday evening, the price had recovered 4%, moving to $71 per barrel in weekend trading.)
Spending $35 to $50 to fill up a car tank will eventually lead to decreased consumer demand.
Yet it’s hard to argue that the planned sale of crude from the U.S. strategic petroleum reserve was the only thing pushing WTI prices lower.
Beyond the jawboning of the oil market by the administration, there was the spread of the coronavirus delta variant in the U.S. and Europe among the unvaccinated, and then last week’s initial reports of the even faster spreading omicron variant in South Africa.
All of that continues to increase the concern over the pandemic’s lingering effects on global supply chains and economic growth.
In addition, there was the effect of higher energy prices on the cost of all goods. In other words, in the oil market high prices are often the ultimate solution to high prices.
Spending $35 to $50 to fill up a car tank will eventually lead to decreased consumer demand as households are forced to shift discretionary spending to essentials.
It’s also difficult to identify the impact of the use of the strategic reserve on the price of crude. The reserve is notorious for its role in quietly funding government spending, giving the strategic petroleum reserve the name of the nation’s piggy bank.
The drop in the strategic reserve over the past five years is difficult to explain otherwise. And the release of 50 million barrels is a fraction of the total use of the petroleum each year. The release of oil from the reserve is probably best thought of as jawboning or symbolic action—it can’t hurt for the allies to back their concern with action.
The U.S. Energy Information Administration reports two categories of crude oil reserves: the government-operated strategic petroleum reserve, which has been in general decline since 2016, and nonspecified reserves, which logically tend to increase when demand is low and decrease when demand is higher.
This can be seen more readily when looking at nonspecified reserves during the oil glut and the behavior of West Texas Intermediate during the commodity price collapse of 2013-16.
Economists refer to this period as the “mini-recession,” with crude reserves rising and prices falling as demand for energy pushed lower during an economic slowdown.
Since the mini-recession, nonspecified reserves and the price of WTI have moved in opposite directions from year to year. If the omicron variant magnifies the resurgence of the pandemic, we would expect a decrease in travel, an oversupply of crude and a continued drop in prices at the pump.
