How Biden could reshape the oil market

Welcome back to another Energy Source.

I have a story up today looking at the fresh push to build new carbon capture and storage projects across the US.

The technology has long been touted by the oil industry and others as a vital tool in the climate fight. Yet it has a history littered with high-profile failures and unmet promises. The climate bill passed by Congress promises to inject billions of dollars into the industry, which its backers are calling a, pardon the cliché, game changer. One analyst said the new tax incentives will lead to hundreds of new CCS projects in the coming years.

I’d be interested to hear what ES readers think. Is CCS a climate white knight or white elephant? Let me know at justin.jacobs@ft.com.

In today’s newsletter, we follow up on president Joe Biden’s latest Strategic Petroleum Reserve moves. He has shown a remarkable willingness to use the power of his bully pulpit and the nation’s deep well of strategic crude supplies to influence global oil markets. And in Data Drill, the IEA is crediting a surge of renewables and electric vehicles for a smaller than expected rise in emissions this year.

Thanks for reading.

PS: Join Anglo American, Standard Chartered, BHP, and more on October 20-21 for our annual Mining Summit, where we will discuss the opportunities and obstacles that must be overcome to mine the global green transition. Reserve your pass today.

Biden dives deeper into oil markets

There’s a joke in oil circles about how every time oil prices start to plunge a “senior official familiar with Opec’s thinking” will emerge to float potential supply cuts in an attempt to boost prices. This is known as jawboning the market — or using the threat of action to influence sentiment and prices.

It looks like president Joe Biden is getting into the same game in a push to keep fuel prices tamped down and buoy his political fortunes.

Biden made his latest foray into the oil market yesterday, announcing the final 15mn barrels of his 180mn barrel release from the nation’s strategic petroleum reserve would be hitting the market soon.

He also said more could be coming if prices start rising again.

“I’ve told my team behind me here to be prepared to look for further releases in the months ahead if needed. We’re calling it a ready and release plan. This allows us to move quickly to prevent oil price spikes and respond to international events,” Biden said.

As pump prices have become deeply intertwined with how Americans perceive the health of the economy and pace of inflation, keeping a lid on petrol costs has been a top priority for Biden. The SPR has emerged as his tool of choice to influence prices. Here’s what to expect next.

Are more big SPR releases imminent?

This seems unlikely, at least in the next few weeks.

For pure electioneering, it would make little sense. Another big release on top of the 180mn barrels unleashed this year would not arrive in time to influence prices at the pump ahead of the midterm election in three weeks. But holding the threat of another release over the market could do a similar job in influencing the market, without tapping into the reserves.

The president also needs to consider what’s left in the strategic stockpiles. A pretty healthy 409mn barrels remain in the nation’s reserve, enough to deal with any foreseeable emergency.

But reserves are at the lowest level since the early 1980s after this year’s big release. Biden can probably only go back to the SPR well one more time without running reserves down to dangerously low levels.

There are good reasons for Biden to save that shot. For one, prices are not extraordinarily high right now; the US WTI benchmark is trading at about $84 a barrel. For all the sound and fury around the Opec+ decision to cut supplies earlier this month, it has not driven crude prices meaningfully higher — although it may have kept prices from falling.

More importantly, there is a looming threat to oil supply that Biden is will want to keep the SPR ready for.

New European sanctions are set to come into force against Russian oil in December and the US and Europe are also likely to try to impose a price cap on Russian crude. Russian president Vladimir Putin could respond by curtailing his own supplies to global markets, potentially taking more than 1mn barrels a day or more off the market. That could constitute a genuine supply crisis which would justify the US and its allies deploying their strategic reserves again.

That does not mean we will not see more barrels flowing from the SPR. Congress in recent years has authorised the Department of Energy to sell 33.5mn barrels of crude out of the SPR to raise funds for various government programmes. Expect Biden to make a show out of these releases with the aim of continuing trying to shape the market’s sentiment.

What’s the president’s plan to refill the strategic stockpile?

After drawing down the SPR’s inventories, the Biden administration knows it will have to restock at some point.

It hopes to do so in a way that will buoy domestic oil production. The administration says it will start buying crude from US producers when prices fall to about $70 a barrel, effectively aiming to put a floor under prices for the domestic oil industry.

“Oil companies can invest to ramp up production with confidence they’ll be able to sell their oil to us at that price in the future,” Biden said in a speech yesterday.

The SPR has never explicitly been used in this way before.

Will it work? I’ve asked a couple of shale executives about the idea in recent weeks. They say it is an interesting concept but they’re doubtful it will meaningfully influence decisions today about whether or not to drill. The consensus is that it would be difficult to count on a US government supported price floor, especially while dealing with major uncertainties around future global energy supplies and a potential recession.

Data Drill

The International Energy Agency has forecast global CO₂ emissions from fossil fuel combustion to rise less than one per cent this year, smaller than expected after last year’s surge.

The IEA says emissions will rise about 300mn tonnes this year, but said it would be closer to 1bn tonnes if not for a big rise in the deployment of renewable energy and electric vehicles. The smaller than expected increase comes even as major disruptions in global energy markets following Russia’s invasion of Ukraine have pushed coal demand to new highs.

“Emissions are growing far less quickly this year than some people feared,” said Fatih Birol, executive director of the IEA. “Policy actions by governments are driving real structural changes in the energy economy.”

Power Points