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Release of US reserves can hardly curb oil prices

By Lin Boqiang | China Daily | Updated: 2022-04-19 08:22

A downtown gas station displays high gas prices in Los Angeles, California, on March 25, 2022. [Photo/Agencies]

The US Interior Department on Friday said it's moving forward with the first onshore sales of public oil and natural gas drilling leases under US President Joe Biden. The announcement comes as Republicans pressure President Biden to expand US crude production and rein in higher gasoline prices contributing to record inflation.

In fact, on March 31, US President Biden announced that he will release 1 million barrels of oil per day from the United States' Strategic Petroleum Reserve for six months starting May to stabilize global oil prices that have been rising-and wildly fluctuating-because of the Russia-Ukraine conflict.

This is the third time in six months that the US has decided to release oil from its reserve. And the fact that the Biden administration will release 180 million barrels of oil in six months, the largest in US history, shows its determination to curb surging oil prices and ease domestic inflation.

But will the US move stabilize global oil prices?

In the short term, the Biden administration's announcement has boosted market confidence and reduced some of the market's concerns about oil supply, and thus succeeded in bringing down oil prices. On April 9, the prices of both Brent Crude and West Texas Intermediate crude fell below $100 a barrel.

On April 7, the International Energy Agency, following in the footsteps of the US, said it will release 60 million barrels from its oil reserves, and the total commitments amount to a total of 120 million barrels.

However, these moves can only help meet emergency oil needs, not solve the global oil supply and demand problem, because until the Russia-Ukraine conflict ends, the oil prices cannot be stabilized. If Russia's oil supply is fully cut off because of the Russia-Ukraine conflict, the release of oil by countries and organizations from their reserves will not be enough to meet the global demand, and oil prices will continue to rise.

In the medium term, global oil prices can be stabilized only if the global oil production capacity is raised to a level where it can make up for the void created by the absence of Russian oil exports. According to a US Energy Administration report, the average daily oil consumption in the world and the US is expected to be 101.4 million and 20.66 million barrels respectively in 2022. This means the 180 million barrels of oil the US plans to release can meet the global demand for less than two days, or the US demand for about nine days.

Since Russia produced 534 million tons of oil in 2021, accounting for 12 percent of the global oil production, it cannot be easily replaced by other sources. And rapidly increasing the global production capacity to replace Russia's production is rather difficult, simply because major oil producing countries cannot drastically increase their output capacity.

Perhaps the world's major oil producing countries will coordinate their plans to expand production, and the Organization of Petroleum Exporting Countries and its allies hope oil prices remain high so they can use them to boost their financial strength and increase their influence in the global oil market. That's why they have been increasing production capacity slowly. For example, on March 31, OPEC and its allies decided to raise oil production by 432,000 barrels a day in May, which will have a negligible impact on global oil supply.

In the short term, it is difficult for the oil industry to dramatically boost its production capacity. Affected by the global transition to low-carbon economic development, investment in the oil industry has greatly reduced. So it will take time for major oil-producing countries to raise their production.

As countries around the world are promoting low-carbon development and reducing investment in the fossil fuel sector, the market will focus on green investment, which could further lower the investment in the oil industry. Which means countries and organizations are releasing oil from their strategic reserves so the oil industry can gain more time to increase oil production and other sources of energy can be further developed, and possibly the European Union can get more time to look for alternatives to Russia's oil.

As such, the world may have to cope with inadequate oil supply for the time being.

Oil prices mainly depend on supply and demand. And only when the market's concerns over the Russia-Ukraine conflict are eased can global oil supply and demand return to normal.

Besides, the Iranian factor in global oil supply cannot be ignored. Taking advantage of the Russia-Ukraine conflict, Iran may demand that the West lift their oil sanctions so it can return to the crude oil market to help meet some of the global demand.

In fact, in its latest draft budget, Iran has raised its forecast for oil export revenue from March 2022 to March 2023 by 27 percent, according to Iranian media reports. If the US and Iran reach an agreement on the issue, Iranian crude will officially re-enter the global market, and greatly ease concerns about global oil supply.

But we have to wait for the future for the results.

The author is a researcher at the Tan Kah Kee Innovation Laboratory and head of the China Institute for Studies in Energy Policy at Xiamen University.

The views do not necessarily reflect those of China Daily.

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