Will tapping the Strategic Petroleum Reserve result in lower prices?

In late November, President Biden announced that the U.S. – in concert with several other developed nations – will be tapping its strategic petroleum reserve over the next several months in order to meet high demand for oil. This is apparently a response to efforts by oil-producing countries to rein in supply so prices stay high.

The strategic petroleum reserve contains about 600 million barrels of oil. According to the announcement, the U.S. will release 50 million barrels over the next several months. Of that, 18 million will represent an acceleration of sales that Congress had already authorized.

As of the date of the announcement, gas prices in the U.S. were averaging $3.40 per gallon. Prices in Europe and Asia are almost $5 a gallon. Other nations that are set to release strategic oil reserves include China, India and the U.K.

The White House doesn’t predict that the release of these reserves into the market will bring prices down immediately. Instead, it expects the release of our own and significant foreign reserves to bring down oil prices over time. It also noted that oil prices dropped 10% simply based on early reports of the proposed release.

The gap between wholesale and retail prices is higher than usual

If you have an oil installation on your land, you probably think that high oil prices have been good for you. However, the White House notes that the companies that sell refined oil on the retail market have been keeping an increasing share of the profits.

“If the gap between wholesale and retail gas prices was in line with past averages, Americans would be paying at least 25 cents per gallon right now. Instead, companies are pocketing the difference as profit,” President Biden said in his announcement of the release.

That may mean that producers haven’t been getting much from the high prices. Biden called on the FTC to investigate whether oil and gas retailers have been engaging in illegal or anti-competitive behavior in order to increase the gap between wholesale and retail prices.

Will the release work to drive prices down?

This is unclear. Arguably, oil-producing countries have been intentionally reining in supply in order to drive prices up. It makes sense to counter that behavior by releasing additional oil onto the market. Whether the plan works, however, will depend in part on the response of those oil-producing countries

If they further restrict supply to maintain prices at their current, relatively high level, the heavy consumers may not have enough in reserve to continue driving prices down.

If you are considering allowing a petroleum company to lease part of your land for oil extraction, you should have the lease examined by an experienced energy law attorney. When prices go up, producers like you expect to get more money – and that should be in your lease.