Evaluating the Biden Administration’s Proposal to Lower Energy Prices

Introduction

On October 19, 2022, the Biden administration unveiled its three-part plan for reducing oil prices. It features 1) authorizing the release of 15 million oil barrels from the Strategic Petroleum Reserve, 2) promising the federal purchase of excess oil production in the future, and 3) calling on U.S. oil producers to not price gouge and lower consumer prices (“Press Briefing” 2022). Such a plan is direly needed. Uncertain demand forecasts, recession fears, and the war in Ukraine have caused rapid increases in the price of crude oil. As a result, energy prices worldwide have hit their highest levels in decades and still fluctuate wildly (Fernández Alvarez and Molnar 2021), creating a massive political headache for the Biden administration. The 2022 midterms have only added to the sense of urgency to alleviate inflationary pressure on consumers, all of which has culminated in the Biden administration’s current plan. Unfortunately, President Biden’s new proposal will not meaningfully combat rising oil prices. However, the nature of oil as a global commodity limits Biden’s other options, leaving him with few politically appealing ways to reduce energy prices.

Overview and Evaluation of Current Policy

The centerpiece of Biden’s new plan involves authorizing the release of 15 million barrels of oil over the next month from the Strategic Petroleum Reserve (SPR), a federally maintained stockpile of crude oil to maintain US energy security. It has the capacity to store 700 million barrels of oil, and currently contains 400 million barrels. This represents the final tranche of Biden’s earlier promise to release a total of 180 million oil barrels from the SPR (Deese 2022).

However, it is worth noting that the United States consumes 19 million barrels of oil per day (Energy Information Administration 2015), which is more than the total amount authorized over an entire month. Furthermore, because of the global nature of oil markets, any change in a single country’s production only slightly changes prices on a global scale, as opposed to drastically reducing prices at home. Consequently, this policy is expected to alleviate gas prices by just 15 cents (Ivanova 2021).

The second part of Biden’s plan promises domestic oil producers that any future excesses will be bought by the federal government to restock the SPR, so they shouldn’t worry about overproduction. This promise is effective for two reasons. It addresses concerns about depleting the SPR by announcing a specific plan to restock it, as well as concerns from oil producers that if they ramp up production now, they’ll become unprofitable when the war in Ukraine ends and demand dries up. The Biden administration further specified that such purchases will occur when oil prices are at or below $67-$72 (Natter and Tobben 2022). This is also effective because it allows the government to guarantee low purchase prices for itself, ensure purchases will occur when demand is low, and provide unprecedented certainty for oil producers all at once.

The final part of Biden’s plan, calling on companies to pass on savings to consumers, is less policy and more political theater. Biden’s announcement does not specify any specific measures by way of incentives, penalties, or enforcement (Lefebvre 2022). Therefore, producers have no reason to actually change their behavior and pass on lower energy costs to consumers, and this third part of the policy amounts to more of a request for change rather than a cause of change.

Therefore, this announcement’s main accomplishment lies in incentivizing production through the promise of future purchases. To be fair, the Biden administration was faced with limited options to begin with. The main alternative options to lower oil prices – leasing new land for federal drilling, negotiating with Saudi Arabia, and price caps – are either politically unappealing or simply ineffective.

Evaluating Alternative Measures

On the campaign trail, Biden once proclaimed, “No more drilling on federal lands, period” (Teirstein 2022). Whether or not he upholds that promise is a complicated question. The Interior Department did originally announce a ban of new leases of federal land for drilling, but a federal judge struck the ban down in 2021. The Biden administration complied by offering a small number of new leases, but lawsuits from environmental groups put those leases in jeopardy. Last month, a federal appeals court vacated the earlier judge’s order, paving the way for the Interior Department to reinstate its ban on all new leases (Grandoni and Phillips 2022). Even ignoring the uncertain legal future of such a ban, the Biden administration faces political pressure from environmentalists to re-implement the ban, and pressure from the energy industry to do the opposite (Blackmon 2022). And regardless of political pressure and legal questions, the global nature of oil and gas markets would likely minimize the price effects of any new drilling anyways.

The next option is to work collaboratively with larger oil producers abroad, specifically Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC). Successful negotiations with Saudi Arabia and/or OPEC would allow the United States to influence 40% of oil production and 60% of the global petroleum trade (17% of which comes from Saudi Arabia) and would certainly impact energy prices (Ellerbeck 2022). However, in the broader context of human rights abuses and Biden’s “re-evaluation” of the US-Saudi relationship, such cooperation seems unlikely (Wagner et al. 2022). Even if the United States were to collaborate with Saudi Arabia, it’s unclear whether that would cause a change in behavior. Numerous countries have engaged in extensive oil diplomacy to try to convince Saudi Arabia to ramp up oil production, but none have been successful. Biden himself did visit Saudi Arabia, and U.S. officials allegedly believed they had an agreement on oil production (Turak 2022). As evidenced by Saudi Arabia directing OPEC to cut oil production by 2 million barrels per day, they were wrong.

That leaves Biden with few remaining options for reducing energy prices. Direct price controls are a political non-starter and considered economically inefficient after the failure of energy price controls during the Nixon administration (Verleger and Litan 2001). Legislation to limit price gouging has been introduced in the House but faces an uncertain future in the Senate, and it’s also unclear what effect such legislation would actually have on prices (Gardner 2022). Biden’s three-part plan for reducing U.S. energy prices is far more likely to have a moderate impact on prices rather than drastically reduce them. However, faced with turbulent markets and few other options, it may be the only plan available.

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References

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