Summary

The benchmark West Texas Intermediate (WTI) spot price for crude oil has settled at or below the President’s committed $67-$72 refill range for nearly two weeks. Back in October of 2022, the White House finalized groundbreaking regulatory revisions to support the price and production of crude oil, alongside a clear commitment to make purchases when price fell sufficiently (in both scale and duration). Unfortunately, the Department of Energy (DOE) has yet to show any indication that it is prepared to give credible effect to the President’s commitment, with Secretary Granholm providing underwhelming excuses about logistical constraints. Oil prices may have exited the refill range on their own, but the DOE does not seem to have a serious strategy for dealing with the scenario in which oil prices fall sharply or durably below $72. Unless clearer guidance and processes are provided, market and industry participants are more likely to treat the President’s commitments with less credibility, thereby undermining its potential stabilizing effect. As we lay out in this piece, there are multiple procedural pathways, including the reliance on deeper futures markets, for the DOE to effectively execute the President’s policies.

Discussion

When the White House announced the refill strategy in October, it stated that it “intends to repurchase crude oil” when WTI prices were at or below $67-$72, in an effort to “help create certainty around future demand for crude oil… [to] encourage firms to invest in production right now, helping to improve U.S. energy security…” There was no mention of the SPR’s logistical constraints as a caveat to the President’s commitment, in part because DOE’s regulatory changes provide a direct path to overcome those constraints.

Secretary Granholm’s comment sowed more confusion and uncertainty at a time when the DOE should have been ready to step in with efforts to repurchase crude oil for the SPR. The DOE should be working on developing robust processes for repurchasing crude oil and publicly communicating those processes. If DOE continues to demonstrate reluctance, it risks President Biden’s credibility in a way that could neuter the potential of what should be a groundbreaking policy.

Now is an opportune moment to add certainty for crude oil market and industry participants. The full fallout from the banking crisis is not yet clear. With the prospect of continued rate hikes—the risk of a recession looms considerably larger than it did even just a few weeks ago. Failure to act could spark another cycle of disinvestment in oil production, setting the stage for future sharp price spike. Breaking President Biden’s commitment would be a failure of energy risk management and could come at a heavy price to the administration, future administrations, domestic industry, the American consumer, and even the President’s climate goals. Supporting the price of oil against deeper oil price downturns might go against short-term benefits to polling numbers and the news cycle, but the administration knows all too well that smoothing volatility and delivering greater certainty carry more substantial long-term benefits.

Unfortunately, DOE is missing in action at this critical juncture. Last week, Secretary Granholm stated that deferred maintenance combined with the delivery of congressionally mandated sales (between April and June), would “make it difficult to buy back oil this year.” While these exigencies undoubtedly complicate physical delivery, they are logistical challenges to be managed, not binding roadblocks preventing any acquisition. Secretary Granholm seems to be missing the full potential of her own groundbreaking regulatory reform, mixing issues with physical delivery with the objective of repurchasing crude oil to help stabilize the market. There are numerous ways for DOE to purchase crude oil even while ensuring that physical refill occur at a time when mandated sales and maintenance are not constraining the SPR’s availability.

The lowest-hanging fruit would be providing clarity on the process behind their refill strategy, perhaps as simple as offering the conditions precedent necessary for DOE to begin acquiring. There is a place for strategic ambiguity and discretion when expressing purchasing intentions, but that discretion also needs constraints. After hitting the price range a few weeks ago, Amos Hochstein stated that the administration was taking it “a day at a time.” A fair strategy, but as the days turn into weeks, market participants and industry actors will start to take administration inaction as a lack of commitment. As Bob McNally stated (as crude prices fell further last week), “... market participants were expecting — some were anyway — that the DoE (Department of Energy) would be refilling since prices have entered the Biden buy-zone.” By failing to offer even the slightest clarity on its intentions, rather than assisting a market craving certainty, Secretary Granholm’s remarks further increased uncertainty.

The DOE’s shortcomings can be salvaged and fully rectified in short order. At a minimum, DOE should announce clear processes that they stand ready to kickstart when oil prices are potentially in the range for repurchasing crude oil.

  • If the SPR is available to receive immediate delivery, they could potentially engage through index-price contracts.
  • Where the SPR is not as freely available for immediate refill (as is the case right now), or there is simply too much uncertainty (as there might be later this calendar year), the DOE can purchase crude oil through longer term fixed-price forward contracts. By purchasing crude oil through these contracts, the DOE would be giving credible effect to the President’s repurchase commitment while still working around the logistical constraints the SPR faces in this calendar year.
  • The DOE should also consider providing guidance on what kind of oil market conditions would prompt the issuance of an acquisition notice. Such guidance can be quantitative or qualitative, so long as the DOE can back up those words with transparent action.

The DOE might be spooked by the failure of the pilot fixed-price forward acquisition that ran from late December 2022 to early January 2023, but there are clear remedies available. We have already offered clear fixes that could improve the competitive bidding/offering process that the DOE currently uses, which inefficiently shifts risks onto prospective auction participants. DOE could also diversify their acquisition and sale processes in ways that take advantage of a more efficient and competitive market infrastructure for purchasing and selling crude oil: futures contracts traded at high liquidity and scale on the Chicago Mercantile Exchange (CME).

  • CME futures for West Texas Intermediate crude oil (delivered at Cushing, Oklahoma) are a highly efficient market for engaging in the direct acquisition and sale of crude oil
  • There would still need to be a competitive bidding process for arranging the swap of lighter and sweeter grades of crude oil (tied to futures contracts) with what the DOE might prefer (sour, potentially heavier).
  • A competitive bidding process would also need to encompass the cost of transporting crude oil to an SPR site.
  • The cost of swapping crude oil and transporting it to an SPR site can be dealt with closer to the time of physical delivery if more convenient to the DOE, while still giving immediate, credible, and efficient effect to the President’s repurchase commitment.

The DOE might be reluctant to bind itself into acquisition given uncertainty about when the SPR can take delivery. Though understandable—these concerns can be managed. DOE already retains considerable flexibility when acquiring crude, including the opportunity to delay or cancel delivery if exigent circumstances require. Furthermore, the new acquisition regulation is helpful because it authorizes the separation of physical settlement and financial settlement. DOE has the authority to purchase now and leave itself ample flexibility for physical settlement to meet any number of situations. Whatever the exact method—there are numerous ways for DOE to add certainty to the market.

President Biden has invested time and capital into unlocking a groundbreaking toolkit to impact oil prices amidst a transition to a clean energy future. These policy tools could also mark the first time in post-war history when a serious oil price shock did not ultimately hasten a recession (in marked contrast to 1974, 1979, 1991, and 2008). Now is the time to realize the potential of that toolkit. Otherwise the administration may find itself much more vulnerable to future oil shocks over the coming 18 months.