BACKGROUNDER: President Biden to Announce New Measures to Strengthen U.S. Energy Security, Encourage Production and Reduce Costs

President Biden has pledged to do everything in his power to address Putin’s rising pump prices, and he’s delivering on that promise. Gas prices fell at the fastest pace in more than a decade this summer, with average prices down about $1.15 a gallon from their June peak — and about 30 cents above levels of February 24, when the war in Ukraine began. In fact, gasoline prices have fallen 15 over the past 18 weeks. According to an industry analyst, the most common price across the country today is $3.39.

President Biden is asking his administration to take additional steps to strengthen energy security, address supply shortages and reduce costs.

First, the Department of Energy (DOE) issues a notice of sale tomorrow morning for 15 million barrels of Strategic Petroleum Reserve (SPR) to be delivered in December. The sale will complement the historic drawdown of 180 million barrels announced by the President in the spring, which has helped stabilize crude oil markets and lower prices at the pump. The President also asks the DOE to be prepared to move forward with significant additional SPR sales this winter if necessary due to Russian or other actions disrupting global markets.

Second, the President announces that the administration intends to buy back crude oil for the SPR when prices are at or below around $67-72 a barrel, adding to global demand when prices are around that fork. As part of its commitment to ensure the resupply of the SPR, the DOE is finalizing a rule that will allow it to enter into fixed-price contracts through a competitive bidding process for products delivered to a later date. This buy-back approach will protect ratepayers and help create certainty about future demand for crude oil. This will encourage companies to invest in production now, helping to improve US energy security and lower energy prices that have been pushed up by Putin’s war in Ukraine.

Third, the President calls on companies to immediately pass on lower energy costs to consumers. The profit that energy refiners currently make on each gallon of gasoline is about double what it typically is at this time of year, and the retailer’s markup on the refinery price is higher. more than 40% at the typical level. These outsized industry profit margins — adding more than $0.60 to the average price of a gallon of gasoline — have kept 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 their savings on to consumers – now.

Continuing to Use the SPR to Advance U.S. Energy Security

In March, following Putin’s renewed invasion of Ukraine, the President authorized the largest ever release of the SPR and provided historic coordination with his allies and partners to release crude oil from their reserves as well. . Treasury Department economists estimate that these releases, along with coordinated releases from international partners, lowered gasoline prices by about $0.40 a gallon, relative to what they would have been otherwise. Average US gasoline prices are down more than a dollar a gallon from their peak at the start of the year.

Global crude oil supply flows remain a challenge, largely due to ongoing instability caused by Russia’s actions in Ukraine. To help stabilize markets and bolster supply in the face of these challenges, the DOE will sell 15 million barrels of SPR for delivery in December, issuing the notice of sale for those barrels in the morning. The sale, which complements the 180 million barrels the president authorized in the spring, will add about 500,000 barrels per day of supply to the market in December, providing continued supply certainty and some price relief.

The US SPR remains the largest strategic reserve in the world with approximately 400 million barrels remaining, which is greater than any SPR release in US history. Even as the DOE executes the plan to reload the SPR to previous levels in the coming years, the SPR remains more than ready to meet energy security needs today.

The president is ready to authorize significant additional sales in the coming months if conditions require. The DOE will be ready to act quickly to inject additional supply into the market if needed, and the Administration will not hesitate to use this tool, or others at its disposal, to shore up global energy supply, sustain levels national stocks and drive down prices for Americans.

Using SPR buyouts to encourage short-term production increases

The Administration is committed to rebuilding the SPR, which is an important 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 the interests of taxpayers, avoids upward pressure on prices in the short term, and encourages more production now by providing certainty about redemptions in the future.

US oil production is nearly 12 million barrels per day. By the end of this year, it will rise by about a million barrels per day from when President Biden took office, and it is on track to reach a new annual high in 2023. However, a number of industry players have suggested that, even with today’s high prices, they are concerned about investing in production as prices may fall in the future.

The administration announces its intention to use SPR buybacks to increase global demand for crude oil at times when the price of West Texas Intermediate (WTI) crude oil is at or below approximately $67 to $72 per barrel. This will protect the interests of ratepayers, as the SPR will repurchase at a lower price than recent sales, potentially allowing it to repurchase more oil than it released with the sale proceeds. It will also help address grower concerns about uncertain demand in coming years, encouraging immediate investment.

The DOE has finalized a first-of-its-kind rule that allows it to enter into fixed-price contracts with suppliers, through a bidding process, to buy back oil for future delivery windows. This new authority will support oil demand when supply is less uncertain and prices are expected to decline. For example, if the market priced barrels for mid-2024 delivery at $70, the new rule allows DOE to contract now for mid-2024 delivery of oil at a price equal to or lower than this price. The DOE plans to use this authority to enter into oil buyback contracts for the SPR, targeting a price of around $67 to $72 per barrel or lower, with initial buybacks being delivered in 2024 or 2025. In addition, the DOE is prepared to undertake additional SPRs. repurchases at times when the price of oil for current delivery drops to around $67 to $72 a barrel or lower, completing its future fixed-price contracts, if any.

This approach is a win for taxpayers – filling the SPR at a lower price than the barrels sold. And it’s a win for energy security – giving the producers who make the contracts more certainty of continued oil demand to inform investment decisions today, spurring needed increases in production to a time when Putin’s war continues to disrupt global energy markets.

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