Is anyone amazed yet?

The United States federal government announced the release of 50 million barrels of crude this week in a bid to lower retail fuel prices, which have been on a tear in recent months, weighing on President Biden’s approval ratings and Americans’ wallets. Several U.S. allies also said they would release some oil from their strategic reserves but none on the scale that the U.S. did it. Oil prices jumped. Is anyone amazed yet?

The reserve release as a tool for lowering retail petrol prices has hogged headlines for a couple of weeks now, with a number of people familiar with how the oil industry works warning that using this tool may not have the desired effect. In fact, they warned, it may have the opposite of the desired effect. Amazingly, these people turned out to be right.

Other people, familiar with how both oil and geopolitics work warned that releasing barrels from the SPR might perhaps be counter-productive for U.S. relations with its ally Saudi Arabia and the rest of OPEC+. Let me just note here briefly that OPEC alone, that is, not counting Russia and the Central Asian partners in OPEC+, accounts for 40% — this is forty percent — of global crude oil production. The U.S. accounts for 18.6%. With Russia, which has a 12% share in global oil production, the OPEC+ total comes in at over half of global oil production.

What happened this week was effectively Washington flipping the bird to that same OPEC+ that supplies more than half the world’s oil. Rather, it tried to flip it the bird, despite the warnings it may be an unwise move, and despite insistence by experts that releasing any amount from the SPR will only have a short-term effect on prices. The Biden administration, it seems, really wanted to show OPEC who’s boss and, in a certain way, it did. Not a day after the official announcement of the release, the first reports emerged that OPEC+ is mulling over a suspension of production additions. Amazing, isn’t it?

Riyadh and Moscow are considering a pause in their “recent efforts to provide the world with more crude,” the Wall Street Journal reported on Wednesday, citing people familiar with the matter. The report went on to note that Saudi Arabia was worried the U.S. oil release would boost global supply and undermine prices, according to other unnamed sources. Of course, this was the point of the release and it came after Washington repeatedly asked OPEC to boost its own production, to the understandable chagrin of U.S. oil producers.

John Kilduff from Again Capital earlier this week described the situation in no uncertain terms: “The battle lines are being drawn,” he told Bloomberg.  “Certainly, OPEC and the Saudis can win this in that they are holding all the cards. They can keep more oil off the market than a SPR release can put on the market. If you see WTI get under $70, then I would expect a response from OPEC+.”

Indeed, there could hardly be a simpler explanation than the above. Which means that what we have seen coming from Washington, put bluntly, is at best confusion caused by desperation and at worst dangerous incompetence. I’m writing this on Thursday morning EET, and Brent crude is trading at over $82 per barrel, while WTI is a little over $78 per barrel. Brent is up, WTI is slightly down. Is it down enough for American drivers to start liking their president again? I seriously doubt it. You see, the problem with the SPR release is not only in the amount.

Bloomberg reported on the day of the official SPR release announcement that the oil the White House had ordered released was sour. And U.S. refiners dislike sour crude. Per the authors’ quite simple explanation, sour crude grades need additional refining to remove the higher sulfur content that has earned them the name. But this additional refining requires natural gas.

Natural gas prices are rising. This means that if refineries decide to take in the sour crude to produce more gasoline so prices at the pump can go down, they would need to use expensive natural gas and… well, let’s just say prices at the pump won’t go down. Incidentally, the price of ethanol, which refiners are mandated to add to finished petrol, is also surging, by even more than unblended petrol.

I’m afraid all of the above points to incompetence rather than confusion, and incompetence could have costly consequences. Take, for example, the idea of banning oil exports. It came from a group of House Democrats led by California’s Ro Khanna, who argued that “the economics of it make sense,” according to a quote in Bloomberg.

Apparently, that was as far as Khanna’s argumentation went and the legislator did not provide any details as to how exactly the economics of a ban on crude oil exports would make sense in view of lowering oil prices. In fact, in response to a note that U.S. refineries do not operate with 100% local output from the shale plays, Khanna said that refineries could be reconfigured. Like Khanna, I am no oil industry expert. Unlike him, however, I suspect the reconfiguration of a facility as complex as an oil refinery would take more than a couple of hours.

As to whether the economics of a ban make sense or not, here’s an explanation of why they don’t by Kyle Isakower, senior vice president of regulatory and energy policy at think tank American Council for Capital Formation. Anyone is free to argue about the political leanings of the organisation but I found it hard to argue with the reasoning:

Limiting U.S. crude to the domestic market means fewer potential buyers, and less demand, for that crude. That would likely be followed by a corresponding drop in American production. Since crude oil is traded globally, reduced U.S. production — regardless of where it is ultimately refined into fuels – lowers the global crude supply. Less supply on global markets puts upward pressure on price — not downward. Therefore, banning crude exports is more likely to raise prices than to lower them.

Is anyone amazed yet? Perhaps those who believe balancing the oil market is like balancing the bread market — whenever the price of bread goes up, you simply add more bread to the market and it goes down — are amazed. Yet the balance would depend on the prices of the commodities that the bread is made from, of course. So, what the administration has done is insisting on being incompetent in the face of multiple warnings and explanations why and how this incompetence could backfire.

A friend and co-worker of mine said the other day that Americans could see $100 oil for Christmas if the ban on exports somehow makes it to a law. I agree with her and I would wager that if the energy enthusiasts in Congress get their way with the NOPEC bill, slim as the chance of that happening may be, oil could go even higher. It would all be OPEC’s fault, of course, like the current level of retail fuel prices.

By this point, you would be wondering what’s Biden’s deal with the U.S. oil industry. The president came into office with a clearly anti-oil agenda and, in all fairness, he has stuck to it. I believe it is this same agenda that has prevented the administration from approaching U.S. oil and gas producers for help in reducing prices (not all U.S. shale oil is sour. A lot of it is sweet.). In what is perhaps a rare instance of clear thinking, Biden’s advisers must have realised that cosying up to Big Bad Oil would cause a prompt and negative reaction among those voters who voted for him because of the anti-oil agenda. In fact, they are already protesting.

I find it in a way admirable how the Biden administration has managed to antagonise both the local oil and gas industry, and OPEC with such apparent ease. One would think such a feat would require a lot more time and effort but here it is, done and done. OPEC is considering oil supply cuts, U.S. oil and gas probably wouldn’t boost production now if the president himself came to them with an empty petrol can. Meanwhile, inflation, both at the pump, and elsewhere, continues up. These are the dangerous consequences of incompetence.

In the thirty years since the totalitarian regimes of Eastern Europe fell I have seen more than my fair share of political incompetence. Shunning preferential terms for gas deliveries from Russia in order to impress the EU and the U.S. is one example. Stopping a nuclear power plant project to appease the budding environmental movement (and certain corporate interests) is another in what is a very long series. Every time politicians are being incompetent, it’s the regular people who pay, whether in higher gas bills or taxes. And, of course, the more power incompetent politicians have, the greater the repercussions for more than their constituents.

If OPEC+ goes ahead and stops adding output to their combined supply, this would increase prices in the United States but it would also increase prices in other parts of the world as well, including in developing countries where poverty is already rife and higher fuel prices won’t help. Of course, it is not the job of any president or prime minister to worry about the whole world. But if a country represents itself as a global force for good, it might pay for its administration to consider the consequences of its actions beyond its borders.

I realise I must sound like a sour driver who doesn’t like what she’s seeing at the local Lukoil and Shell but the truth is I’m not that busy a driver. I could live with higher prices. Yet higher fuel prices invariably mean higher prices for everything that is transported by internal combustion engine vehicles, which is… literally everything we consume. In other words, Washington’s incompetence would mean higher prices for the consumers in every oil-importing country. I resent using the word ‘consumer’ but here it happens to be the accurate one.

Meanwhile, OPEC+ is meeting next Thursday to discuss how exactly to punish those who think they can flip it the bird. And OPEC+ holds all the cards. On the one hand, this is a great argument in favour of the green transition and everyone becoming more self-sufficient with wind and solar as we ditch fossil fuels. On the other hand, if only it were so simple the world would be paradise.