President Biden has committed to doing everything in his power to respond to Putin’s pump price hikes, and he’s delivering. Gas prices fell at their fastest rate in a decade this summer, with average prices down about $1.15 a gallon since their peak in June — and just 30 cents below the level when war broke out in Ukraine on Feb. 24. In fact, gas prices have fallen 15 times out of the last 18 weeks. According to industry analysts, the most common price nationwide today is $3.39.
President Biden is directing his administration to take additional actions to strengthen energy security, address supply constraints and lower costs.
First, the Department of Energy (DOE) is issuing a sell-off notice tomorrow morning for 15 million barrels to be delivered in December from the Strategic Petroleum Reserve (SPR). The sale would complete the historic, 180-million-barrel drawdown announced by the president in the spring, which helped stabilize the crude oil market and lower prices at the pump. The President is urging the DOE to be prepared to proceed with additional significant SPR sales this winter if necessary due to other actions that disrupt Russian or global markets.
Second, the President is announcing that the administration intends to repurchase crude oil for the SPR when prices are at or below $67-$72 per barrel, adding to global demand when prices are around that range. As part of its commitment to ensure compensation for the SPR, DOE is finalizing a rule that would allow fixed price contracts to be entered into through a competitive bidding process for product delivered at a future date. This repurchase approach will protect taxpayers and help create certainty about future demand for crude oil. It would encourage companies to invest in production now, help improve U.S. energy security, and help bring down energy prices driven up by Putin’s war in Ukraine.
Third, the President is urging companies to immediately pass on lower energy costs to consumers. The profit that energy refining companies are now making on each gallon of gasoline is double what it usually is at this time of year, and the retailer’s margin on refinery prices is more than 40 percent above typical levels. These outsized industry profit margins — adding more than $0.60 to the average price of a gallon of gas — keep pump prices higher than they should be. Keeping prices high even as input costs fall is unacceptable, and the president will call on companies to pass on their savings to consumers – now.
Continue to use SPR to advance US energy security
In March, following Putin’s next invasion of Ukraine, the president authorized the largest-ever release from the SPR, making historic coordination with allies and partners to release crude oil from its reserves. Treasury Department economists estimate that these releases, along with coordinated releases from international partners, have reduced gas prices by as much as $0.40 per gallon, compared to what they would have been otherwise. Average US gas prices are down more than a dollar per gallon from their peak earlier this year.
Global crude oil supplies have been challenged by instability caused by Russia’s actions in Ukraine. To stabilize the market and increase supply in the face of these challenges, the DOE will sell 15 million barrels from the SPR for delivery in December, issuing a sale notice for these barrels in the morning. Completing the 180 million barrel sale authorized by the President in the spring, the market will add 500K barrels per day of supply in December, ensuring continued supply and some price relief.
The US SPR is the largest strategic reserve in the world with about 400 million barrels remaining, more than any SPR release in US history. Although DOE is operating on a plan to refill the SPR to previous levels in the coming years, the SPR is better prepared to respond to energy security needs today.
The President is prepared to authorize significant additional sales in the coming months if conditions warrant. DOE would be prepared to act quickly to put additional supply into the market if needed, and the Administration would use this tool, or other tools at its disposal, to increase global energy supplies, support domestic inventory levels, and lower prices for the American people.
Using SPR repurchases to encourage near-term output growth
The administration is committed to replenishing the SPR, a vital national security asset, so that it can continue to serve its purpose well into the future. And it is committed to doing so in a way that protects taxpayers’ interests, avoids upward pressure on prices in the near term, and encourages more production by providing certainty about future repurchases.
US oil production is about 12 million barrels per day. By the end of this year, it will rise by nearly 1 million barrels per day from when President Biden took office and is on track to hit a new annual high in 2023. However, many industry participants have suggested that, despite today’s high prices, they are concerned about investing in production when prices may drop in the future.
The administration is announcing its intention to use SPR buybacks to boost global crude demand when West Texas Intermediate (WTI) crude prices are at or below around $67 to $72 per barrel. This would protect taxpayers’ interests as SPR would repurchase at a lower price than recent sales, potentially allowing it to repurchase oil in excess of the sale proceeds. It will also help address manufacturers’ concerns about uncertain future demand by encouraging immediate investment.
DOE has finalized a first-of-its-kind rule that enables fixed-price contracts with suppliers to be entered into through a competitive bidding process to repurchase oil for future delivery windows. This new authority will boost demand for oil when supplies are less uncertain and prices are expected to fall. For example, if the market has priced a barrel at $70 for delivery in mid-2024, the new rule allows DOE to contract now for delivery of oil around or below that price in mid-2024. DOE plans to use this authority to enter into an agreement to repurchase oil for the SPR, with initial repurchases delivered in 2024 or 2025, targeting a price of around $67 to $72 per barrel or lower. In addition, DOE is prepared to undertake additional SPRs. Repurchases when oil prices fall to around $67 to $72 per barrel for current delivery or supplement its future fixed-price contracts as appropriate.
This approach is a win for taxpayers – replenishing the SPR at a lower cost than the barrel sold. And it’s a win for energy security – producers are given more assurance of continued oil demand to inform today’s investment decisions, leading to a much-needed increase in output as Putin’s war disrupts global energy markets.