Taking Biden’s oil strategy to the next level. By Matthew Yglesias

American production is at a record high — it’s time to brag

This week both Russia and Saudi Arabia announced cuts to oil production, causing a spike in prices. It’s telling and I think correct that seemingly no one in the climate movement has hailed this as a victory for the “keep it in the ground” campaign or asserted that it was good political news for Joe Biden because the higher prices will make it easier for the United States to hit its national emissions targets. Obviously these are foreign petro-states manipulating global prices for their own economic and geopolitical reasons, and in this case, those reasons almost certainly include trying to hurt Biden politically.

This is why it’s important, politically and economically and geo-strategically, for the United States to continue our best efforts to control our own energy destiny.

Part of this is a long-term Biden administration strategy that I think people generally know about — invest in domestic zero-emissions electricity, cultivate a domestic battery industry, encourage adoption of electric vehicles and heat pumps, and move over time toward a post-oil future. But part of it is a short-term Biden administration strategy to reject pure market forces in the oil industry and instead try to cultivate and manage domestic supply for the sake of stability, growth, and the responsible stewardship of our country’s enormous natural resource wealth.

And on the latter, I don’t think the administration has articulated its own strategy as loudly and clearly to the public as it should, which has also meant the actors inside the administration aren’t always all on the same page.

But here’s the good news about oil. This kind of coordinated OPEC+ action during the George W. Bush years would have been plainly devastating to the American economy, a huge blow not just to individual pocketbooks but to American global trade because we were importing so much oil. Things are different after the shale revolution — the United States produces more oil than either Russia or Saudi Arabia. And while we’re not nearly as big an oil exporter as either of those countries, we are a net exporter,

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so the negative impact of higher prices is partially offset by bigger oil earnings. Ideally, though, foreign production cuts shouldn’t just generate a windfall for American frackers but get funneled back into new investment.

New investment has three big virtues:

Increasing domestic oil production partially offsets the negative consequences of Russian and Saudi price hikes.

Increasing American market share of global oil production reduces the economic harm inflicted by higher prices.

Because (1) and (2) are on the table, we deter Russo-Saudi price hikes by making them think “if we do that, all that will happen is we lose market share to the Americans.”

So how do we close the prices/investment/production loop? We need to allow domestic drilling as a regulatory matter, which we do — this is why American production is now at an all-time record level.

But we also need to reassure investors that they won’t be hung out to dry if OPEC+ pivots in the future and tries to crash prices to bankrupt them as they’ve done in the past. There is a specific public policy aspect to this related to fixed-term contracts for refilling the Strategic Petroleum Reserve. But I think a big meta-piece is having the president and the whole White House preach more loudly and clearly that this — rather than some of the stuff they said back in 2020 — is genuinely the policy of the United States of America in a post-IRA world where NATO is in a not-so-cold war with Russia.

Joe Biden’s secret energy moderation

Traditionally, regardless of their actual policies, politicians have engaged in rhetorical strategies designed to make themselves seem more moderate. That’s how Donald Trump did it — claiming to care a lot about clean air and clean water even while weakening Clean Air Act and Clean Water Act regulations — but also Barack Obama and virtually every other president.

The Biden administration’s energy politics are different in a way that I find weird.

Ben Lefebvre did a good Politico piece in late August about how Republicans keep complaining that Biden has strangled American oil production when in fact, production is higher than ever. Republicans lying is not so new, but grafs 13 and 14 of the story offer this odd observation:

In fact, though, oil production from federal lands and waters has risen on Biden’s watch, reaching past 3 million barrels per day last year. The high mark during President Donald Trump’s term was 2.75 million barrels a day.

That’s data the White House rarely trumpets since it contradicts Biden’s 2020 campaign pledge to end new drilling on federal land, something his administration has not done.

I get that the dissonance with the campaign pledge is awkward. But fundamentally, I think “voters who believe Biden is more left-wing than they think he promised to be” is a bigger political problem for the White House than “voters who believe Biden is less left-wing than they think he promised to be.” The idea that the electorate would punish flip-flopping to a new, more moderate stance doesn’t make sense to me. If the feeling in the White House is that they need to explain why they switched, then I think it’s easy to cite Russia’s invasion of Ukraine and the IRA’s historic investments in long-term decarbonization as the motivating factors.

After all, even if every state joins California in its plan to ban new internal combustion engine car sales in 2035, plenty of ICE cars will remain on the road well into the 2040s, to say nothing of the oil used in things like airplanes, maritime shipping, freight rail, and heavy machinery. It’s smart, correct policy to invest in developing and deploying technologies that will make it possible to move to post-oil versions of those things. But in most cases,

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the technology does not currently exist, and we are going to continue to use oil for the foreseeable future even as decarbonization proceeds. The United States cannot afford to be indifferent to the geopolitics of its production.

Back in October 2022, the White House put out this policy statement regarding its approach to refilling the SPR, clearly articulating a desire to “help create certainty around future demand for crude oil” and “encourage firms to invest in production right now”:

Second, the President is announcing that the Administration intends to repurchase crude oil for the SPR when prices are at or below about $67-$72 per barrel, adding to global demand when prices are around that range. As part of its commitment to ensure replenishment of the SPR, the DOE is finalizing a rule that will allow it to enter fixed price contracts through a competitive bid process for product delivered at a future date. This repurchase approach will protect taxpayers and help create certainty around future demand for crude oil. That will encourage firms to invest in production right now, helping to improve U.S. energy security and bring down energy prices that have been driven up by Putin’s war in Ukraine.     

Since that statement came out, DOE has, in fact, issued some fixed-price contracts. But what they’ve done so far has involved very short-term deals. It’s not entirely clear why they haven’t been more ambitious, but I think at least part of it is that not all personnel are entirely on board with this vision. The White House needs to push them to build both physical and institutional capacity in the SPR, which would be complemented by a clearer public message.

Building a better SPR

My lodestar on all things SPR is, as usual, Employ America, which has a new policy brief out this week.

Right now, there isn’t that much the SPR can do to provide demand certainty, in part because they don’t have much money. But they don’t have zero money, and if they use what they have in a smart way, they can both build capacity for more stabilization in the future and also (perhaps equally importantly) demonstrate their determination to be a useful ally to the domestic industry.

One issue here is that as currently configured, the SPR literally cannot take physical delivery of the kind of oil that the shale region produces. I’m not going to pretend to really understand the difference between sour and sweet crude oil, but suffice it to say they are different and refineries need to be geared to work with one or the other. The SPR itself, meanwhile, is a bunch of big caverns that have to store one kind of oil or the other. The Gulf Coast produces mostly sour crude, so the SPR has been set up to acquire sour crude (and to send sour crude to appropriate refineries during releases). But the shale oil from Texas and New Mexico is mostly sweet crude.

And while the U.S. continues to produce oil in both places, it’s the shale output that’s the “swing” production.

Shale wells are both cheaper to construct and also shorter-lived than the Gulf projects, so when we talk about encouraging domestic production to stabilize supply, we’re mostly talking about shale investment. Ideally in the longer term, the SPR would primarily buy sweet shale crude during price busts and then sell it during spikes to stabilize prices. This means that in the short term, the SPR should be emptying the sour crude from some of its caverns and refilling them with sweet. We don’t want to do a massive refilling right now (the price is too high), but we want to be in a position where logistically we could do a massive purchase of sweet crude.

Speaking of the future, Employ America says that DOE should do a longer-term fixed price contract to buy future oil — not so much because such a contract would have a huge influence on oil prices as simply to demonstrate that they have the will and the capacity to do it:

Now that the DOE has successfully executed two forward fixed price contract acquisitions, it should leverage this know-how to establish better energy policy for America. It’s time now to show that the DOE can conduct a long-term contract, the kind that could ultimately be utilized to incentivize producers towards additional production and provide much-needed structure to American oil markets.

The DOE may balk at committing itself so far out—uncertainties ranging from unforeseen releases, the return of exchange barrels, or maintenance could arise that complicate intake into the caverns. Fortunately, this is all the more reason to build the institutional capacities to execute on long-term contracts—the further out the contract is, the larger a delivery window DOE can provide without incurring any considerable cost. Furthermore, DOE can and should communicate ahead of time an intention to release the producer from the obligation to deliver if tight market conditions necessitate it. This provides valuable optionality for both the SPR and the broader market. DOE has the incidental contractual flexibility to manage the complexity of a longer-term contract.

Again, the actual amount of money currently available to the SPR is too small to make a huge difference to oil markets. But it’s important to demonstrate capacity in advance so that future promises will be credible. And while Employ America is pretty focused on technical market structure issues, I think it’s important to pair this kind of move with a loud and clear political commitment.

Politics matters

Note that one reason DOE doesn’t have the money to execute this strategy in a more far-reaching way is that congressional Republicans are currently dead-set against appropriating any funds for the SPR.

This is opportunism on their part.

But it’s also genuine anger about the way Democrats handled the oil industry during the Covid-19 pandemic. Prices crashed globally in the spring of 2020, which presented a good opportunity to fill up the SPR at bargain basement prices. The Trump administration, sensibly, tried to get money for that included in Covid relief legislation. But Chuck Schumer got it stripped out, claiming that he prevented a “$3 billion bailout for Big Oil.” Then Biden took office. He made an initial, later-abandoned effort to halt new oil and gas leasing. And then when prices spiked, he released a ton of oil from the SPR. I don’t know how much of a difference it would make for Biden to say “Schumer fucked up,” but the fact is Schumer fucked up. Had we spent the $3 billion back in 2020, U.S. production would have recovered faster from the pandemic and the price spike of 2022 wouldn’t have been quite as severe.

More importantly, the SPR would have had more oil in it, so when Biden started selling all that oil, he would have been able to do larger sales without fully depleting the reserve — with a bigger impact on prices and larger profits for taxpayers.

This whole affair was not the biggest deal in the world and I think most Democrats don’t remember or even realize that it happened. But precisely because it was such an own goal, it’s a good token of two different policy objectives. The current Biden policy is to support domestic oil production for economic and geopolitical reasons, even while investing in long-term decarbonization via technological progress. The old Schumer policy was to try to take advantage of the pandemic to crush the domestic oil and gas industry. The effort to reassure investors should include the financial commitment of long-term contracts and improved SPR capacity. But it should also involve saying clearly that the new policy is the policy, and that American production records aren’t something Biden is ashamed of.

I’d like to see him do what Employ America suggests, and announce it not in a press release but at a live event somewhere in the shale patch attended by New Mexico’s senators and Colin Allred and whoever Texas Republicans want to come.

The economic impact would be magnified by the political statement, and the political statement itself, I think, would be powerful. It’s hard to find evidence on this, but my sense is that some of voters’ stated concerns about Biden’s age shouldn’t be understood as hyper-literally about his health. We are used to seeing presidents as forceful actors inside their own administrations, and as leaders who define and steer their party’s agenda. Biden’s low-key public presence has a lot of virtues, but it’s in exactly a situation like this, where his administration has boldly steered a moderate course that breaks with elements of the base, that I think the strong public presence is missed.

Biden’s actually existing energy policy is different, better, and more moderate than a generic progressive nonprofit energy policy. But the country — and the industry — needs to hear from the president that he has listened to the arguments and made a clear choice.

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The actual flow of crude oil into and out of oil refineries is very complicated, so we continue to import lots of oil even while we also export oil — the point is, we export more than we import.

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Fully electrifying the freight rail network is technically feasible right now, but it would take a ton of money.