President Joe Biden recently announced the release of strategic oil reserves to alleviate the global lack of supply and ease soaring gas prices. In parallel with nations such as China, India, Japan, South Korea, and the United Kingdom, the US Department of Energy has decided to release 50 million barrels of oil from the “Strategic Petroleum Reserve” to assist in lowering energy prices and address the current pandemic-induced mismatch between oil demand and supply.
Going back to basics, we can see how this move would help slow down rising gas prices for Americans: an increase in the supply of oil will put downward pressure on oil prices and cause an extension in the quantity demanded. The shortage of oil that is occurring due to economic recovery from the pandemic worldwide is risky for economic growth. Since oil is an input in numerous industrial activities, energy prices are a very important economic indicator. Oil prices directly affect the prices of goods made with petroleum products, and they indirectly affect the cost of things such as transportation, manufacturing, and heating. Thus, rising oil prices are generally indicative of rising inflation, and vice versa.
Biden’s announcement comes after producers in OPEC (The Organization of the Petroleum Exporting Countries) resisted calls to increase their supply in order to help cool down the market and ease rising inflationary pressures. It is important to note that around 30 million of these barrels are in fact an exchange, where companies and traders will take the oil now and return it over a specific time frame in the future. This allows the Department of Energy to leverage its Strategic Petroleum Reserve, which includes over 600 million barrels stored in Texas and Louisiana, during future economic crises. An additional 18 million barrels will be “an acceleration of a previously authorized sale.”
Outlook to the future
The President has been under a spotlight pressuring him to provide Americans with economic relief to combat high gas prices and inflation. He has been blamed for the current economic state of the country, namely the record-high inflation levels. In addition to his decision to release the reserves, he has called on federal regulators to investigate whether oil and gas companies are engaging in”illegal conduct” (anti-consumer or anti-competitive behaviour) by profiting from skyrocketing energy prices during the pandemic.
As inflation in the States remains exorbitantly high, we can only wait and see what impact Biden’s current plans will have on domestic consumers and how they impact the macroeconomy.