Oil Price: Is the US planning a collective SPR onslaught to tame the crude oil markets?

 

The price of crude oil tumbled on Wednesday in the aftermath of Biden-Xi talks that took place virtually on Tuesday.

Although both sides were tight-lipped about what were under discussion during the three-and-half-hour long conversation, the Chinese media started guessing the contents in dribs and drabs.

One of the main items that the two leaders discussed was, among other things, according to these sources, the global energy crisis.

It goes without saying the damage inflicted on the world’s two large economies due to the current energy crunch, despite one being the largest crude oil producer on the planet.

China, in the absence of such nature-luck, is at the mercy of its imports and the steep rise in gas prices created a major energy problem in the country that led to power shortages across the vast nation.

The determination of the Chinese authorities to play their role in cutting down on carbon emissions too had an adverse effect on the energy crunch, as the power suppliers were forced to look for alternatives for coal – in the absence of such one.

Finally, China managed to dealing with the crisis by switching back to the old ways, as it did not have a choice, when factory output fell dramatically in proportion to the power shortages.

The short-term measures, however, could not reverse the decline in China’s growth due to high energy costs that in turn contributed to lingering supply chain issues.

On this front, China is not the only major economy that suffers at present. The US is in the same predicament too.

Having failed to force the OPEC+ to pump more oil, President Biden and his team have been contemplating on the use of ‘other tools’ in order to tame the crude oil markets.

Since President Biden came to power on top of a ‘green wave’, he cannot appear to be contradictory by encouraging the local producers to pump more. Nor can he increase the Federal funding for expanding fossil fuel extractions – for obvious reasons.

In short, his hands are tied by the rope of ‘green credentials’.

Then, he turned to the OPEC+, perhaps, as the last resort - with no success.

The only choice left for him at present is releasing some of the US SPR, Strategic Petroleum Reserve, despite analysts questioning about its positive impact on the price.

The potential failure to achieve the intended goal may be the reason behind the delay in taking such a bold step, despite political backlash at home for doing nothing in order to curb the inflation.

Having weighed the pros and cons of releasing the SPR, the team Biden appears to be going for a collective attempt rather than individual action, while asking the other major economies to do the same.

The move also implies President Biden’s diminishing hope of Iran’s contribution to the global crude oil supply, when the talks on reviving the JCPOA, 2015 Iran’s nuclear programme due to start on November, 29.

As far as releasing the SPR is concerned, it may be easier said than done, though. Japan, for instance, has already expressed the constitutional friction against such a move, as it has not faced a war-like situation or national emergency.

As for China, it has been releasing its own SPR for some time in order to bring down the cost of fossil fuels; since it SPR of any nation is not a bottomless pit, there is a limit when it comes to tapping it.

India, the world’s third largest consumer, is in the same position; it has used up some of its SPR too.

Despite the questionable pragmatism of such a collective move – and its success – the crude oil markets are edgy at the moment, clearly reflected by the sharp fall in the price of crude oil on Wednesday.

The OPEC+ also has tools in its ‘armoury’ to hit back, though. It can, for instance, selectively raise the price of crude oil on individual basis; some members have reduced the price of crude oil in the past few months and they have a right to reverse it too.

The global oil crunch, meanwhile, is slowly moving from the realm of economics to that of politics, casting a palpable dark shadow over both that will take many months to disappear.