Strategic oil release comes with guaranteed buybacks, but will anyone do the drilling?

Oil companies have been hampered by labor and capital costs and $70 a barrel may not be enough to lure them.

This week, the Biden Administration said it would release an additional 15 million barrels of oil from the strategic petroleum reserve in an effort to curb gasoline prices. The White House has also chastised oil companies for not producing as quickly as Washington wants. 

But buried in that announcement is a note about the price the government is guaranteeing it will pay when it decides to replenish that oil — which might actually be good news for U.S. oil producers. 

The White House says it plans to buy oil to refill the Strategic Petroleum Reserve (SPR) at $67 to $72 per barrel. That’s about $20 less than today’s price.

That’s essentially a price floor, per Bob McNally, president of the consultancy Rapidan Energy Group. And the message behind that is clear: “Drillers, please keep drilling and invest.”

$70 is just about the break-even point for most on-shore U.S. oil producers, so that number is probably not a coincidence. And while rig count in the U.S. has been rising, Kaushik Deb, a senior research scholar at Columbia University’s Center on Global Energy Policy is skeptical that a price guarantee will do much to incentivize more activity.

“The oil and gas companies haven’t been investing in this business despite the fact that prices have been much, much higher than this,” Deb said.

There are a number of reasons the industry has been reluctant to drill, he said. For one, investors on Wall Street have been vehement about capital discipline, turning their focus more towards paying down debts and creating returns for investors rather than spending on new drilling.

Plus, beyond access to cash, oil companies are dealing with numerous other challenges, according to Ellen R. Wald, president of Transversal Consulting.

“It’s supply chain issues, it’s lack of steel and steel tariffs,” she said. “It’s labor costs, it’s finding labor. It’s emissions regulations.”

In terms of this particular policy measure, there’s a question about how much the U.S. Strategic Petroleum Reserve — at 700 million barrels of storage — can affect such a large, global market.

“I urge them to be cautious about communicating to the market that they want to create a price floor, you know, that the SPR is a tool that can be used to stabilize or affect even global prices of oil,” McNally said.

A larger SPR release earlier this year only had a modest effect on global oil prices. And, McNally added, OPEC+ actually has much more power than we do in determining prices.