Will Joe Biden’s gamble on big oil pay off in leveling gas prices?

Can Joe Biden push big oil to drill for more oil, lower gas prices and speed up the switch to electric vehicles? That's the ambitious aim of a plan the Biden administration is implementing as drivers continue to wrestle with soaring gas prices. Unusually, the plan has support not just from the oil industry but some economists and environmentalists.

As 2022's gas prices set off inflation and oil companies celebrated record profits, Biden practically begged industry executives to take a basic step that could have brought down costs: pump more oil to increase supply. His pleas fell on deaf ears.

While critics charge the industry with acting out of greed, oil companies see real risk in pumping more oil. Since 2008, oil oversupplies have repeatedly caused prices to collapse, leaving companies with dwindling profits.

"Exxon is not going to do a national service by producing a lot more oil and risk a massive oversupply, because the executives know that if they get that wrong, then their shareholders will fire them," said commodity analyst Alex Turnbull.

In late July, the Biden administration changed tack, moving forward with a risky if innovative plan designed to protect consumers from high gas prices, reduce oil companies' risk and push the nation toward electric vehicles. The proposal would work by wielding the Strategic Petroleum Reserve, the federal government's store of oil, in a way that sets a partial floor and ceiling on oil prices.

In short, when demand is weak and prices fall so low that pumping more oil becomes unprofitable, the government would buy at a price that's high enough to buoy industry's profits and store barrels in the reserve. When demand is strong and prices climb, the government can intervene by flooding the market with reserve oil, which could help bring down prices.

If it works, the plan could be managed to keep gas prices high enough that consumers continue switching to EVs, but not so high that they harm the economy. While many will question the wisdom of a plan to reduce greenhouse gasses by pumping more oil, the idea still has support from a "strange-bedfellows coalition", said Skanda Amarnath, executive director of Employ America, a progressive thinktank that has pushed a similar plan.

A proposed change to Department of Energy rules would allow the government to take steps to stabilize the oil market. As the rules are currently written, the DOE has to pay market price for oil on the day it receives the barrels.

Under the proposed rules, the government could use "fixed price forward" contracts to buy oil for several years at a set price. Oil is forecast to cost around $84 a barrel in May, so the government could contract to buy it at that time for $90 a barrel. Even if the war in Ukraine ends and the market price drops to $50 a barrel as Russian oil floods the market, the government will still buy it for $90, eliminating much of industry's risk.

That would, in theory, spur more investment in drilling, and though it takes about a year for new shale oil to make it to market, the mere prospect of stability could bring down the prices sooner. So could this proverbial olive branch from a once-industry-hostile administration, said Amarnath.

"It sends the right signal to the market and reassures the oil industry that Washington, especially Democratic Washington, is not going to undermine them in the short term," he added.

The math also makes sense for the government, which has been selling oil for $100 or more in recent months, and will buy it back at a lower rate.

But Biden's plan marks a controversial shift from the reserve's intended purpose.

Composed of deep salt mine caverns in Texas with space to store more than 700m barrels of oil, the reserve was established as a protection against Opec cutting off supplies after the 1973 oil crisis. Not everyone is convinced using the reserve as a price control tool is a good idea. Depleting its stock could leave the nation vulnerable in the event of a major emergency, said Phil Flynn, an energy market analyst at the Price Futures Group.

Since April, the US has been releasing about 1m barrels a day from the reserve, which the Treasury estimates has kept gas prices down by about 40 cents per gallon, and oil prices had dropped for over 50 straight days through mid-August. But fewer than 440,000m barrels remain, the lowest level since 1985, and the DOE is eager to replenish its stock.

However, Flynn questioned whether the US can compete with Opec in a price war, and said the Biden reserve releases were "bringing a squirt gun to put out a forest fire". Instead, he argued, the free market and drop in demand is driving the recent decrease in oil prices.

And why should industry's risk be socialized, especially when its dizzying profits helped spike costs across the economy, inflicting pain on many Americans?

Doing so will ultimately benefit the public, Amarnath said. Oil companies operate in what he characterizes as "feast or famine cycles" - marked by price spikes and collapses.

When demand dried up during the 2008 recession, oil prices plummeted from all-time highs of about $133 a barrel to about $39 within six months. Amid Middle East turmoil and high demand, prices and profits grew through 2014. But oversupply stemming from the US fracking revolution and increased Opec production cratered them that year. After a brief recovery, Covid dried up demand and, by May 2020, oil prices collapsed into the negative.

By then, companies had stopped exploring for new oil, leading to the current scenario in which demand and prices are high, but industry isn't increasing production. Banks that lend to oil companies have also lost money, Turnbull noted, so the government's partial floor price makes borrowing to cover the costs of new drilling easier.

While 2008 and 2021-2022 were "banner years" for oil companies, "there were a lot of crap years in between", Amarnath said.

"A number of major producers have effectively committed to not growing production, and have said 'We played this game too many times and our shareholders are too unhappy with us,'" he added.

By setting a partial floor on prices, the administration's plan provides short-term stability through 2024 and 2025, and will encourage new drilling, Amarnath said. Though the administration hasn't said where it will attempt to steer prices, observers say the ideal zone is between $70 and $100 a barrel, which could keep gas in the $3 to $4 a gallon range.

On the surface, pumping more oil and propping up industry runs counter to climate goals, but the plan's supporters say short-term environmental pain is now essential to meet longer-term climate goals.

Building out clean energy infrastructure is a lengthy process that requires fossil fuel in the interim, especially diesel for the supply chain, and oil shortages would spark an energy crisis that sets off inflation. Funding clean energy infrastructure becomes impossible when inflation pushes up borrowing rates, Turnbull said.

"There's this really dumb view on the left of accelerationism, of 'Let's precipitate a crisis,'" he added. "If you wish this upon yourself then you're just some fuckwit in Brooklyn."

A provision included in the Inflation Reduction Act recently approved by Congress aims to reduce oil production methane emissions. That could "buy ourselves time to work out longer-term solutions" and make a short-term increase in pumping oil more palatable, Halff added.

Democrats' political future also depends on lowering gas prices immediately - should gas prices remain high, the party's already dim midterm prospects will become even worse, and Biden would probably lose in 2024. The clean energy transition would dramatically slow under a second Trump administration or another GOP president.

But pumping more oil to bring down prices is a "recipe for disaster", said Kassie Siegel, director of the Center for Biological Diversity's Climate Law Institute. High oil prices, she argued, are a result of "profiteering" as companies capitalize on the Ukraine invasion.

Although oil prices were lower in July 2008 than this June, gas prices and oil industry margins were higher and wider in 2022, respectively, Siegel noted, and she called on the Biden administration to rein in the industry. In the UK, the conservative government instituted a 25% windfall tax on oil companies' profits.

Siegel said Biden could also take steps that don't increase production, with Congress's approval, such as reinstituting a crude oil export ban that was in place until 2015. The US is shipping a high amount of oil to Europe, and portions of reserve sales have gone to other countries. Keeping it in the US would boost domestic supply and push down gas prices.

"We're out of time for back steps and side steps," Siegel said. "We need to be taking giant leaps forward so every step backwards leads off of the cliff to climate disaster."