In recent months, the Biden administration has released more than 125 million barrels of oil—1 million barrels of oil per day starting in April—to increase global supply and bring down gas prices. The US Treasury Department estimates these releases have pushed down gas prices by $0.40 a gallon.
Now the president is taking another tack that economists say will have a more substantial effect: He wants to promote oil production by promising to buy it in the future.
On Tuesday, the White House said the US Department of Energy will create a rule that would allow it to purchase oil futures contracts to refill the Strategic Petroleum Reserve (SPR).
Releasing oil from the strategic reserve discourages oil producers from investing in the necessary equipment to produce more oil in the short term, so the new rule is aimed at reversing that effect. Oil producers also fear a general price drop if there is a recession or OPEC countries begin to increase production. The futures contracts would assuage that fear.
This is the first time in US history that the SPR has been used in this way, and the measure will take some pressure off of the US Federal Reserve in its fight to curb inflation.
An oil policy proposal from labor economists
The White House’s proposal follows a similar one put forth by Employ America, a labor-market research and advocacy group, in March.
The group created the plan as an alternative to ideas such as a gasoline tax holiday, which would increase demand while doing nothing to address oil shortages.
The government’s purchases of futures contracts are meant to stabilize supply, doing away with what economists call oil supercycles—situations in which high oil prices result in higher gasoline prices, curbing demand from drivers and resulting in an oil inventory glut, and eventually, a crash in oil prices. This volatility complicates the transition into renewable energy.
It’s also a solution that would save the US government money since futures prices are usually far below spot prices, noted Skanda Amarnath, executive director at Employ America.
By the end of September, the Biden Administration will have drawn down 260 million barrels of oil; it could use the new rule to refill this or store even more oil in the SPR than there was before. Refilling these reserves won’t likely happen until after 2023, the White House said.
Buying oil tomorrow will further destroy the climate
But some say the proposal will prolong the use of fossil fuels. Promoting oil production will result in more carbon emissions and give more money to the oil industry, wrote Nathan Tankus, research director of the Modern Money Network. Because this plan will increase the amount of structures and equipment that oil companies have, its effect could last for 20 years or more, he added.
“The timeline under which we need to stop removing oil from the ground and burning it is far more strenuous than that for our existing oil and gas infrastructure,” he wrote.
Instead of stabilizing oil production, Tankus cites several other policy proposals that economists have put forth, including a fare holiday to encourage public transit use, or incentives for companies to encourage employees to work from home or carpool.
Futures contracts to back producers of other commodities
Researchers at Employ America want the Treasury Department to set a price floor for other commodities like wheat, palladium, copper, natural gas, and fertilizer inputs like potash.
The support from such a program, they propose, would be dependent on whether or not commodity suppliers make the investments necessary to increase production. The plan would also require that the Treasury develop the storage for commodities it has to buy in the future in case of a surplus.