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Setting a price floor on oil would help the clean-energy transition, since cheap gas encourages people to buy bigger, more polluting cars.
When oil prices soared last year, President Joe Biden turned to a little-known government authority to ease prices at the pump.
He sold 180 million barrels of crude—the biggest drawdown in history—from the Strategic Petroleum Reserve (SPR), a network of underground salt caverns along the Gulf Coast that was created after the 1973 oil crisis. The tool worked, helping the U.S. benchmark price to sink by somewhere around 38 cents per gallon, according to one estimate from the Treasury Department.
Biden didn’t stop there. In October, he announced that the Department of Energy would repurchase crude oil when West Texas Intermediate prices fall between $67 and $72 a barrel.
The pledge was intended to achieve multiple goals. It would turn a huge profit for the federal government, by buying low after selling high. Setting a price floor would also help the clean-energy transition, the thinking went, since cheap gas encourages people to buy bigger, more polluting cars.
Perhaps most importantly, committing to using the SPR more aggressively would help stabilize gas prices, which are notoriously volatile. The strategy sent a signal to the oil industry to encourage production, after a year when drillers had held back as profits soared. The White House specifically targeted a price band that is slightly above the break-even price per barrel, or the level at which drillers turn a profit.
“This repurchase approach will protect taxpayers and help create certainty around future demand for crude oil. That will encourage firms to invest in production right now, helping to improve U.S. energy security and bring down energy prices,” the White House said in a statement.
The SPR strategy is one example of a broader willingness by the Biden administration to intervene directly in the economy, especially when prices climb or investment flags. It signals the White House’s new approach to targeted stimulus and industrial policy.
It is also rapidly becoming a test of that approach. The administration appears to be facing a principal-agent problem: The Department of Energy has dragged its feet on carrying out the plan.
The agency’s reluctance could become a bigger headache for Biden. Using the government to spur private investment requires an executive who inspires confidence. Investors need to trust that the White House will make good on its pledge to purchase oil. And right now, Biden’s energy agency is undermining that credibility.
“The oil industry in general is not a natural ally of the Biden administration, and I think was understandably skeptical that the Biden administration would repurchase oil for the SPR,” said Rory Johnston, a former bank economist who writes a newsletter about commodities including oil and gas markets. “They have publicly committed to this path, and now they’re slow-pedaling it.”
Oil prices fell in March, as a string of regional bank failures raised worries of an economic slowdown that would curb energy demand. For weeks, prices hovered around the upper end of the band at which Biden said he would begin buying.
But instead of moving to refill the SPR, Energy Secretary Jennifer Granholm has punted, saying in March that “it will be difficult for us to take advantage of this low price.”
The strategy sent a signal to the oil industry to encourage production, after a year when drillers had held back as profits soared.
Granholm cites physical barriers: Two of the four SPR sites are down for maintenance, and therefore the government could not store the oil it purchased. She has also pointed to the fact that the Energy Department is in the middle of congressionally mandated sales of oil, saying that the department cannot simultaneously sell and take in crude.
But in October, the DOE’s rules were updated to allow fixed-price forward purchases of oil. That means it can sign a contract today to lock in current prices, and receive the oil at a later date. This makes the storage issue a moot point.
Granholm’s reluctance to move ahead on repurchasing has frustrated analysts at Employ America, a think tank that has led the push to use the SPR more creatively. The group’s proposal for using SPR authorities, published in March of last year, closely matched the policy that the Biden administration ultimately adopted. It catapulted the SPR from a niche issue to a major tool in the administration’s inflation-fighting tool kit.
Executive Director Skanda Amarnath told the Prospect that his main concern isn’t that the DOE has not repurchased oil yet, but that the agency has seemingly put the issue on the back burner. That leaves it unprepared to use the tool in the case of a price crash, and undermines the government’s commitment to backstop the market.
Reached for comment, an Energy Department official echoed Granholm’s point about physical constraints, and referenced issues with a fixed-price forward purchase late last year.
“We did a fixed-price approach back in December, but we didn’t receive any suitable bids from sellers. So we’re not going to just take in oil if it doesn’t match the characteristics that are required,” the official said, declining to specify why the bids were not suitable.
After publication, the DOE noted that it outlined a replenishment plan in March, designed to bring back millions of barrels of oil by the end of next year, and as much as 13 million in 2023. But it’s not clear what the price of oil will be at that time; the Biden administration’s promise was to purchase when oil hit a particular price band, which DOE to date has not done.
“The SPR remains the largest in the world and DOE remains committed to refilling the SPR in a manner that will deliver the best value for American taxpayers,” said Press Secretary Charisma Troiano.
Other outlets have indicated that the type of crude available for sale was an issue in December. There also may not be enough funding to buy back oil, because much of the proceeds from the initial sale was taken by Congress in a year-end spending bill.
In a blog post, Employ America wrote that the DOE may have been “spooked” by the pilot exercise in December, when they failed to receive competitive bids. They propose several ways to redesign the offering.
But right now, Amarnath is concerned that the Energy Department looks unprepared to buy oil—even if prices fall lower and stay low. They should run pilot exercises to demonstrate their operational readiness, he said. “Otherwise, people will assume DOE will remain on the sidelines and not give credible effect to the White House commitment.”
Johnston, who supports the new SPR strategy and has advised Amarnath’s group, blamed the delays on institutional inertia at the Energy Department.
“I think it comes down to the fact that they’ve done one thing for a very long period of time, and now they’re being asked to do something very different,” he said. “It’s not just small releases in the wake of a hurricane—they’re being asked, in a way, to step into a quasi-market management role.”
This article has been updated to include additional comment from the Department of Energy.
