US to release Oil reserves in a bid to cool down inflation?

Hello everyone! This week I will be analysing the decision of the US government to release 15 million barrels of crude oil into the market and the possible effects it will have on the domestic economy.

The Biden administration plans to release 15 million barrels of oil from its Strategic Petroleum Reserve in December as the EU prepares to implement the Russian Oil embargo on 5th December. The decision by the US comes as a bid to offset the effect created due to the blockade and prevent the volatility of prices in the oil market. The decision also comes at a time when the US is battling 40-year high inflation, this release will help the American people to cope with the rising inflation while also helping the economy by ensuring low domestic gasoline prices. So far, Washington D.C. has released about 165 million barrels of crude oil in the market with around 400 million barrels still left in its stockpile. The release will also help the US deal with the OPEC+ oil cut blow. This move also sheds light on America's dwindling oil reserves which hit a 38-year low as the country scrambles its reserves to stem inflation in the economy. However, the US administration plans to refill its stockpile by encouraging oil companies to boost production and limit their fuel and energy exports.

Key Reasons behind the release:

OPEC+, the biggest oil cartel in the world that controls 40% of the global oil supply announced its biggest production cuts in October. Starting in November, OPEC+ members have planned on cutting oil production by 2 million barrels per day, soaring up oil prices in the global market. To counter the effect of the oil cut on the US economy, the Biden Administration tapped its strategic oil reserves in a bid to avoid even higher inflation rates in the economy and ensure low domestic gasoline prices.

Another big reason for the US tapping its reserves is the Russian oil embargo put in place by the West. Soon after Russia's invasion of Ukraine, the US and other western nations implemented an oil embargo on Russian oil and vowed to phase out Russian oil from their markets by the end of the year. This decision, however, seems to have 'come back to haunt the West' . Removing Russian oil from the markets has resulted in higher inflation rates in western economies as the supply of oil tightens.

Biden's Counter-attack?

In order to cushion the high oil prices, the Biden Administration has planned to release 15 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) into the domestic market. The main aim of the American government remains to drive fuel prices down, by increasing the oil supply and controlling the already spiralling inflation across the country. The move also intends to reduce the expected volatility in the oil market after the Russian Oil embargo has been put in place.

However, the reaction from the Biden administration comes at a very high cost. Concerns have already been raised about US's falling Petroleum reserves and the SPR has depleted from 605 million barrels to 450 million barrels since President Biden took office sending reserves to their lowest levels since 1984. However, the government is expected to release even more additional reserves this winter in a bid to keep the prices low.

Analysis:

Since Russia's invasion of Ukraine, energy prices across the world have been rising at a swift rate. They have raised inflation in almost every nation when the world economies have already been dealing with the post-pandemic demand. The oil cut, therefore, raises inflation and grows the prospects of the world facing a 'global recession' next year. Therefore, in order to keep the prices low in the American economy, the US administration has planned to release 15 million barrels of crude oil into the market in December.

However, the release comes at a great price to the economy that has already been dealing with diminishing oil reserves and this release will only take it lower. Therefore, instead of planning additional oil releases after December, the government should be looking at various other sources for oil imports in the world market such as Canada and Norway or increasing domestic oil production. America should focus on increasing its oil import option rather than using its SPR which can only be a short-term solution to the nation's inflation problem. In the long run, the US can speed up its green transition to avoid the oil market fluctuations entirely.

Conclusion:

The oil cut by OPEC has raised concerns in the United States and the US government has responded strongly against the move by exploiting its Strategic Petroleum Reserves, however, this strategy comes at a cost and it will not be feasible for the US to use this plan in the long run. Therefore, the US government must either increase oil imports from non-OPEC countries and boost its oil production or end up facing the burden of high oil prices fixed by OPEC.

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References:

Kaylatausche. (2022, October 18). Biden to announce release of up to 15 million barrels of oil from Strategic Petroleum Reserve. CNBC. Retrieved October 24, 2022, from https://www.cnbc.com/2022/10/18/oil-prices-biden-to-announce-release-from-strategic-petroleum-reserve.html

Buchholz, K., & Richter, F. (2022, October 19). Infographic: Releases Diminish Strategic Petroleum Reserve. Statista Infographics. Retrieved October 24, 2022, from https://www.statista.com/chart/28498/strategic-petroleum-reserve/

Staff, A. J. (2022, October 19). Biden releasing 15 million barrels of oil from Strategic Reserve. Energy News | Al Jazeera. Retrieved October 24, 2022, from https://www.aljazeera.com/news/2022/10/19/biden-releasing-15-million-barrels-of-oil-from-strategic-reserve

Boak, J., & Miller, Z. (2022, October 19). Biden to release 15 million barrels of oil, sending reserve to lowest level since 1984. PBS. Retrieved October 24, 2022, from https://www.pbs.org/newshour/politics/biden-to-release-15-million-barrels-of-oil-sending-reserve-to-lowest-level-since-1984#:~:text=That%20has%20sent%20the%20strategic,effort%20to%20keep%20prices%20down.

Person, & Gardner, T. (2022, October 19). Explainer: What is the SPR, the U.S. emergency oil stash? Reuters. Retrieved October 24, 2022, from https://www.reuters.com/business/energy/what-is-spr-us-emergency-oil-stash-2022-10-19/

Biden administration to tap oil reserve again ahead of midterms. POLITICO. (n.d.). Retrieved October 24, 2022, from https://www.politico.com/news/2022/10/18/biden-spr-oil-reserve-release-fuel-prices-00062269

Person. (2022, October 19). Biden, battling high gas prices, says U.S. will tap, Refill Oil Reserve. Reuters. Retrieved October 24, 2022, from https://www.reuters.com/markets/commodities/biden-battling-high-gas-prices-says-us-will-tap-refill-oil-reserve-2022-10-19/