In this episode of The Crude Report, senior reporter Chris Knight and associate editor Haik Gugarats discuss the latest US initiatives around energy policy.
President Joe Biden's push for Opec+ members to move faster to unwind crude production cuts has been a gift to his critics in the oil sector, while causing heartburn for allies who say a new climate report shows the need to shift off fossil fuels. But the gambit could pay off if it lowers inflation concerns from moderate Democrats he needs to pass roughly $4.2 trillion in proposed new spending.
TranscriptHaik: Welcome to The Crude Report. My name is Haik Gugarats. I'm an associate editor at Argus Media and I'll be talking today with my colleague, senior reporter Chris Knight, about the White House's recent push to keep gasoline prices affordable by asking Opec to pump more oil, and if that fits with President Joe Biden's management of drilling on federal lands, and his new goal for the US to shift rapidly towards electric vehicles.
And for context, the White House very publicly released a statement last week where it called on Opec to do more about oil prices, saying that Opec producers are not doing enough to support the global economic recovery and that the alliance needs to accelerate the timetable for winding down the production cuts made last year amid the global pandemic and the lockdowns that decimated the oil demand. So, to start us off, Chris, why do you think the White House is so worried about gas prices right now?
Chris: Well, they're so worried because they recently reached almost a seven-year high. Retail gasoline prices, regular grade, last week averaged $3.17 per gallon. So, this is an issue that voters have always paid attention to. There's giant billboards flashing gasoline prices every day as they drive to work and as they fill up. And you know, these high gasoline prices kind of feed into a narrative that Republicans have been talking about, which they're calling “Bidenflation,” just basically that Biden's policies are causing the prices of everything people buy to go up.
So, there's a good reason why the White House is concerned about this and why they're trying to show that they're taking proactive steps to try to bring down gasoline prices. The White House didn't just ask Opec to reverse the production cuts. They're also asking the Federal Trade Commission to investigate if anyone is offering prices that don't reflect the market. Biden said that they've seen that oil companies are paying less for oil, but the cost of gasoline isn't dropping as quickly. And he said that is not what you'd expect in a competitive market. So, they're using all the levers they have to try to affect the gasoline prices, and we'll see if that has any effect.
Haik: Doesn't every White House worry about gas prices?
Chris: Yeah, this has been an issue that has occupied a lot of space for every White House that I've been alive for. During the Obama administration they had prices that were even higher. You remember back then President Obama, was talking about drilling off the coast of the Atlantic to try to bring down prices. Under Trump in 2019, he was very publicly telling Opec they needed to bring down prices. And then the next year, during the pandemic, he called on Opec to cut production because he thought prices needed to go up. The thing is that the whole having gasoline prices be high, it is pretty terrible timing for the Biden administration's other policies.
There's a lot of moderate Democrats that are concerned about inflation. They're also concerned that Biden's energy policies are going to get the blame, basically, because Biden's been so active on climate issues and on federal oil production, that he'll take the blame for higher prices. And that translates to some hesitancy on passing more spending bills. There's a $1 trillion dollar infrastructure bill, there's a $3.5 trillion budget plan. And if inflation is at top of minds of voters, those moderate Democrats are going to have more reluctance to vote for that.
Haik: It probably doesn't help that the call from the White House came a day after the IPCC came up with its report that really talks about how oil and gas are contributing to climate change.
Chris: The IPCC puts out this report, I want to say, every three or four years, and it's a huge report, it summarizes all the best knowledge about climate science and how it might affect the world over the coming decades. And for the White House to come out just a day after the report comes out and says, you know, fossil fuels are causing all these problems, and then for the Biden administration to tell OPEC, "Hey, we need more oil on the market as quickly as possible." It sends some competing signals to everybody about what the administration's priorities are. So it's one of these difficult issues where the White House is trying to balance a lot of competing priorities.
Haik: A lot of Republicans and oil groups saw Biden's pleas to Opec, I guess, as putting foreign producers above domestic producers and totally contrary to all that climate action talk that we have seen from the Biden administration. So far, do they have a point?
Chris: They definitely have a point. President Joe Biden has come out forward on pursuing some restrictive policies on federal land. In his first weeks in office, he paused federal leasing on federal lands, they had a little bit of a slowdown to drilling permitting, although that has reversed itself. They've signaled that they're going to be developing a lot of new regulations covering federal land. Basically, there's a pause on new leasing until the administration releases this interim report on oil and gas development. And we don't know what's going to be in that interim report. But there's pretty widespread expectations that they'll seek royalty changes, they're going to ask for more environment reviews before allowing oil and gas development to go forward, they might take away some lands that have been eligible for leasing.
There's been a very public fight about drilling in the Arctic National Wildlife Refuge, there's been a pause on development there, even though some companies obtained leases at the very end of the Trump administration. Biden, very publicly on his first day in office, blocked the Keystone XL pipeline. So, all those are saying we don't want to see as much oil and gas production on federal land as there has been in the future and we don't want to lock in production for the next few decades. So doing that, while at the same time saying, “Opec, we want you to pump a lot more oil" definitely gives the impression to those in the oil industry and to the Republicans that Opec gets free reign to do what they want, and domestic producers have to cut back, they basically don't see that as fair.
But if you take a step back, a lot of what the oil industry is asking for and what Republicans would like Biden's administration do, these are long-term projects. If you hold the leases tomorrow, you're not going to see drilling on that lease for maybe a year or two. And you're not going to see commercial production for multiple years. So, if you lease land today, if you build the Keystone XL pipeline today, you're locking in probably decades of production, or at least several years. If you do that, that is not going to do a thing to oil prices or gasoline prices today. It certainly sends signals to people about the policies your administration might pursue. But it's not going to cause those gasoline prices you see when you pass the gas station to go down. So, if you think about what the Biden administration wants to do here, they don't want to have people in their minds think, pursuing green policies is going to make their lives miserable.
They've spent so much time, they spent the last six months trying to link this idea of, “We're going to pursue green policies and it's going to offer all these benefits, it's going to offer jobs, it's going to make your lives better.” And if people get the impression in their minds that actually, this push toward green jobs is going to make your gasoline prices go sky-high and you're going to have a rougher time, that's going to take a lot of the wind out of their sails for passing some of these huge bills. You've got these bills in the Senate, the reconciliation bill, as they call it, that is worth $3.5 trillion. It's expected to have lots of spending on green energy tax credits, electric vehicles, renewable energy help. So the Biden administration wants to maintain support for that type of bill and high gasoline prices don't do them any favors.
Haik, that brings me to one of my questions. Is this gambit asking Opec+ to reverse its production cuts — do you think that's actually going to work in causing them to increase production and actually cut prices?
Haik: Oh, as you point out, political pressure from Washington is not new for Opec or its Opec+ allies. Even if we go back into 1970s, when this first became an issue, every president since Nixon have tried it and the government, the US government, definitely has the institutional knowledge and the Biden administration has the capacity for diplomacy with Opec+, but its hands appear to be tied. And the biggest OPEC producer is Saudi Arabia and US relations with Saudi Arabia are...for lack of a better term, complicated.
Since the Biden administration came into the office, the relations have been defined by the US’ demands for Saudi disengagement from the Yemen civil war. And Biden has refused to directly engage with Saudi Arabia's de facto ruler, Crown Prince Mohammed bin Salman, because of something that has happened two years ago — the killing of Saudi dissident journalist Khashoggi. So then, there is this duality of messaging coming from Washington directed towards OPEC as the White House drums of support for its global decarbonization push ahead of the UN climate summit in Glasgow.
So, the US and Saudi Arabia are founding members of the so-called Net-Zero Producers Forum. It's been launched in April during the climate summit that Biden hosted at the White House. The idea is to encourage oil-producing countries to work towards achieving net zero-emissions. So, in a way United States is asking long term to lower oil demand and output, while the immediate need is to produce more oil. So there is this double messaging and it takes some time to even process. What is the US trying to accomplish?
Then there is also the inconvenient reality that even if Opec actually complies with the US request, our readers, our listeners are familiar with many types of oil. The type of oil that Opec can most immediately deliver into the market, the heavier sour oil, is actually not gonna be a good fit for addressing the immediate need of lowering gasoline prices because that rise in prices and gas prices reflects the market's deficit in lighter products. So that's another point.
And more broadly, with inflation, increasing oil prices, the increase in gas prices reflects the economic rebound that the United States is going for. The rates at which the economy is growing, it's forecast to be a 7% growth of US GDP, which isn't something that the US has experienced in a long time, but also is reflects the rebound from the pandemic. So even if you add crude supply, there are all the other economic effects that haven’t been overcome with the pandemic, such as transportation bottlenecks, even on a basic anecdotal level, housing construction shortages, there's all these things that tie into the inflation that gas prices alone cannot address. So, it's a heavy lift to ask for but also, Opec may not necessarily be able to immediately address it.
Chris: Is there anything else Biden or the White House could do right now to try to bring down oil prices or increase production?
Haik: So, having said that Opec supply may not help, if it's Opec supply that the White House is most interested in lifting, there is something the US can do that it can make immediately at least 1.5mn b/d of production available, and that's gonna be in the form of lifting sanctions on Iran. Of course, that's easier said than done because lifting sanctions that have been imposed on Iran, and have been in effect since 2018, is tied to the outcome of US-Iranian negotiations in Vienna.
It's diplomacy that has kind of stalled since June. Iran has a new government. They have been going through this negotiating package. We don't even know when the negotiations will resume. So that's one seemingly easy task. But of course, politically, it's quite difficult to do, although it is within the administration's power. Another country, Venezuela, another Opec producer, is also subject to US sanctions. And on that front, at least there is some movement. The US has said that it may consider sanctions relief against Venezuela if negotiations with the government of Venezuela and its opposition make meaningful progress. But the flip side of it is, even if you lift sanctions against Venezuela, that country's production, unlike Iran's, is not expected to rebound quickly or produce any meaningful increase in a global oil supply.
Chris: Now, I would be leaving something out if I didn't mention one more thing about this. The Biden administration, they just two weeks ago proposed new fuel economy standards, with a heavy emphasis on electric vehicles. This would basically unwind the Trump administration's rollback to those standards. That's expected to cut oil consumption by 74,000 b/d by 2025. But again, one other thing here is, this is a long-term action. If tons of people buy electric vehicles in the next year, there's still a huge fleet of existing vehicles. So, long-term, they can bring down the amount of oil consumption. But it's one of these things that it'll take a lot of time before it starts to have any effect.
Haik: Yeah, one interesting point to add to complaints that Biden's policies are restrictive, the one probably immediate fix that can help with gas prices, given the market’s deficit in lighter products. If there is more light sweet oil that is coming from the US shale sector, if that production actually increases, that might help. But here of course, it's not the government mandates that can help. Shale producers are, for now, only interested in sustaining output and giving money back to their investors. They're not showing any signs of spending more in capital expenditures to boost output as they did before. So I will leave you with that thought.
And with that, we've come to the end of this podcast. You can find our stories and more in-depth coverage of politics and policy and geopolitical news and insights, as it specifically relates to oil markets in both Argus Americas Crude and Petroleum Argus. You can find more information on both services at www.argusmedia.com. Thank you for tuning in. And we hope you'll join us on the next episode of The Crude Report.