Dec 20, 2022 - Economy & Business

Biden administration offers new deal to reluctant drillers

Illustration: Sarah Grillo/Axios

The Biden administration launched its new push to use the Strategic Petroleum Reserve as a carrot to coax more oil out of reluctant domestic drillers.

Driving the news: The Energy Department announced a pilot program Friday to buy 3 million barrels of crude from oil producers at fixed prices — a big change — as the government starts refilling the reserve.

Why it matters: By purchasing oil with fixed-price, long-term contracts — instead of its previous practice of paying the market price at the time of delivery — the federal government can effectively help establish a long-term floor for U.S. oil prices, analysts say.

  • Crude oil producers who lock in prices by selling to Uncle Sam won't have to worry as much about prices collapsing after they spend cash to drill and pump.

Flashback: Such boom and bust episodes in recent years — see 2014, 2016 and 2020 — left investors with ugly losses and set off repeated waves of bankruptcies.

State of play: The new SPR buying program represents a more industry-friendly approach from an administration that has repeatedly complained that American oil companies aren't doing enough to boost production.

  • The president has accused oil companies of "war profiteering" and raised the specter of windfall profits taxes if oil companies didn't boost production.
  • Amos Hochstein — the administration's international energy envoy — has called investor opposition to increased U.S. shale oil drilling "un-American."

The other side: Critics, including Republicans in Congress and industry officials, have faulted the Biden administration for suspending the sale of new oil and gas leases on federal lands soon after taking office in 2021. (Sales restarted in June.)

  • They say the administration's focus on climate and environmental issues along with its criticism of the industry has disincentivized investment.

What we're watching: How interested the industry will be in bidding for these new fixed-price federal oil deals. The administration has said it will buy back 60 million barrels of crude for the Reserve. (And after selling high, buying back low might make the federal government a tidy profit.)

  • With rising worries about a global recession next year that could weaken oil demand — and U.S. crude prices currently hovering around $75 a barrel — some producers may feel it makes sense to lock in sales in the $67-$72 range the government has signaled it will pay.
  • But if this effort to nudge up oil production doesn't succeed, the administration could go back to its more adversarial posture toward the energy industry.
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