Biden’s New Oil Plan Has Some Very Big Flaws

After releasing the largest amount of oil ever from the U.S. emergency petroleum reserve, the Biden administration has signaled that it will soon replenish the reserve, a multibillion-dollar endeavor that it thinks will stimulate the stagnant domestic drilling industry.

According to industry executives and experts, many domestic manufacturers will find it difficult to sell the proposition. Olivier Le Peuch, CEO of Schlumberger Ltd., an oil-field services provider, stated it’s a little bit more complicated.

President Biden said for the first time on Wednesday that the Energy Department will begin acquiring oil to replenish the U.S. Strategic Petroleum Reserve when oil prices fall between $67 to $74 per barrel. Officials also said that the agency had finalized a regulation allowing it to acquire oil at a set future price, which they think would encourage producers to drill more.

Energy executives and experts voiced skepticism that the strategy would result in a substantial output boost in the near future. Many oil corporations hesitate to commit to sales when commodities prices are volatile and intend to capitalize on the current high oil prices. In addition to rising drilling costs and investor pressure to limit output and return surplus cash to shareholders, the prospect for production growth is dimming, they warned.

Mr. Biden stated that a further 15 million barrels would be supplied in December, bringing to a close the sale of 180 million barrels he authorized earlier in the year to curb surging oil prices. He added that the Energy Department would, if necessary, continue to draw from the reserves.

Mr. Biden’s oil releases, which are approximately comparable to Libya’s daily oil output, have reduced stocks to their lowest level in 38 years. As of October 14, the Strategic Petroleum Reserve had around 405 million barrels of oil out of a maximum capacity of 714 million barrels. Following Russia’s invasion of Ukraine, Mr. Biden stated that the releases were intended to reduce American energy costs and stabilize the markets.

Massive drawdowns have thus far been accompanied by a modest increase in domestic output. Even though the benchmark price for U.S. crude oil reached $120 a barrel earlier this year, producers have kept a low profile, producing over 12 million barrels per day, a 6% increase from January, according to federal figures for the week ending October 14.

Investors have been harmed by the industry’s years of unbridled expenditure demand that oil companies hold steady output while raising buybacks and dividends. This is one reason for the constraint. According to economists, this financial discipline has enabled producers to clean up their balance sheets and placed them in a strong position to weather market turbulence.

Mr. Biden stated on Wednesday that oil corporations should not use their earnings to pay out investors during the Ukraine conflict and urged them to expand output. According to administration officials, the proposal to replenish the Strategic Petroleum Reserve offers producers security of future demand, allowing them to increase drilling immediately.

Oil-industry organizations have asserted that Mr. Biden’s releases are to blame for sluggish production growth over the past several months. Depleting reserves unfairly reduce prices in the near term, discouraging investment in new oil production.

Linhua Guan, chief executive officer of driller Surge Energy Inc., stated that Mr. Biden’s offer may entice some investors but that his administration’s other oil-and-gas industry-related policies made fresh investments unattractive. A Wall Street Journal analysis of government statistics revealed that Mr. Biden’s administration had significantly slowed the issuance of new oil leases on federal lands, a subject of complaint for the industry.

The longer these poor policies persist, the less likely it is that output will rise, Mr. Guan stated. As a candidate, Mr. Biden committed to ending drilling on public lands, stating that the nation must move to sustainable energy.

According to Marshall Adkins, managing director of investment bank Raymond James Financial Inc., producers are less inclined to presell oil if they believe crude prices will remain elevated for the near future. He stated that shale companies have been allowing their hedges and contracts to sell future output at a predetermined price to expire to increase their exposure to rising commodity prices.

Mr. Adkins stated that production curbs by the Organization of the Petroleum Exporting Countries, along with sanctions against Russia and a possible comeback in demand from China, may result in a supply imbalance that would send oil prices back to $120 or possibly higher. He stated that if he believes oil will be significantly higher a year from now, he will not hedge at $70.

According to Robert McNally, owner of the consulting firm Rapidan Energy Group and former energy adviser to President George W. Bush, the potential that the cost of materials, equipment, and labor would continue to rise makes companies uninterested in fixing pricing. He remarked that the shale-oil corporations have no idea what their expenses will be in two years.

Some analysts believe that switching from releasing the reserves to replenishing them might remove substantial quantities of oil from the global market, constraining supply and adding to inflation.

The time to restock is during economic downturns when there is excess oil to purchase, said Kevin Book, managing director at ClearView Energy Partners LLC.