Since the White House’s historic commitment on October 18th to repurchase crude oil “when the price of West Texas Intermediate (WTI) crude oil is at or below about $67 to $72 per barrel”, oil prices have never traded lower than they have today (November 21st). Oil prices were within $4 of hitting the upper bound of the White House’s specified range ($72). There are numerous factors and uncertainties at play, but the DOE should be ready to announce how it intends to implement the President’s commitment. President Biden announced this commitment in order to “help address producer concerns about uncertain demand in future years.” To persuade producers to accelerate investment through a unilateral promise (as opposed to bilateral contracts), the Department of Energy (DOE) must be ready to specify a plan for giving credible and meaningful force to the White House’s expressed intentions. Since the purpose of this commitment is–in part–to provide greater price and demand stability to producers, tactical repurchases must be scaled and structured accordingly.
Oil prices are so close to the President’s price range that the DOE has to be prepared to ensure that the President’s words are backed up with credible implementation. We appreciate that such a complex market requires accommodating a number of uncertain and dynamic factors. The upcoming OPEC decision and speculation associated with it–which was the proximate cause of today’s short-lived selloff–will play an ongoing role in short-run price volatility. Likewise, the supply risk related to the Dec. 5 deadline for the Russian oil price cap still looms large. There are ways to incorporate these uncertain dynamics into a transparent process that gives substantive force to the President’s October 18th announcement.
Should oil prices fall below the specified $67 to $72 range without the DOE announcing a plan for implementing tactical repurchases, the Administration’s credibility would be directly undermined. The potential for the SPR to smooth out energy investment would be undercut, leaving global production more vulnerable to deep shortfalls and oil prices more vulnerable to steep spikes. As soon as the moment calls for it, the DOE must be ready to provide a transparent plan explaining the process by which it will execute these tactical repurchases.
The challenges associated with unilateral policy promises and credibility preservation also demonstrate why it is critical for the DOE to move swiftly to to engage in fixed-price market-contingent contracts.The SPR’s acquisition authority can ensure the requisite level of “contingent supply,” specifically by contracting ahead of time with producers to insure some of their investment and production against future price shortfalls. There are numerous challenges that the DOE must consider as it engages in this new type of acquisition, including auction design and logistical risk. Unfortunately, given how quickly prices can fall, both aspects of the repurchase strategy–tactical repurchases and fixed-price market-contingent contracts–-must be pursued with urgency. Right now, the DOE must stand ready to make tactical repurchases to support stable prices, production, and investment.