Biden’s Oil-Relief Plan Seen Backfiring as Drillers Dig In Heels

(Bloomberg) -- U.S. President Joe Biden's plan to tackle record gasoline prices with an unprecedented release of emergency oil reserves may stifle domestic crude drilling just when it's needed most.

Although the immediate impact of Biden's latest energy initiative has been a 7% drop in oil prices, analysts warned any reprieve will be short-lived. The president wants to exact financial penalties on drillers for unused federal permits, and enhance the focus on clean energy, leaving oil executives less inclined than ever to invest the proceeds from $100-a-barrel crude into new wells.

“What that is doing is disincentivizing sustainable production from coming on, and is in fact incentivizing demand to stay high,” Saad Rahim, chief economist at Trafigura Group, said on Bloomberg TV Thursday. “In reality you really need to be doing the opposite.”

After making climate a keystone of his campaign, Biden had a fractious relationship with the domestic oil industry from the very start of his term last year. And when Russia's invasion of Ukraine upended global energy markets, relations went from bad to worse: the president scolded American oil companies for rewarding investors at the expense of raising output.

For the oil industry, the most-contentious facet of the plan Biden announced Thursday would impose penalties on companies that hold federal oil permits they fail to drill.

‘Political Scapegoating'

The penalty program is a “use-it-or-lose-it policy,” Biden said during televised remarks. Companies that sit on oil leases must “start producing or pay the price” for inaction.

“It's silly to think that increasing fees on producers will result in lower energy prices,” said Anne Bradbury, chief executive officer of the American Exploration & Production Council, which represent shale explorers. “This is more about political scapegoating and finger pointing rather than resolving the underlying issues of supply and demand imbalances. A more constructive approach would be to incentivize domestic oil production over the long term.”

The dispute comes at a difficult political moment for Biden as he seeks to punish Vladimir Putin with sanctions that inhibit Russian oil exports while seeking to tamp down pump prices just months before key elections. Earlier this month, U.S. Energy Secretary Jennifer Granholm pleaded with oil executives at a Houston conference to boost oil production for the good of the country -- to little effect.

U.S. oilfields are pumping about 11.7 million barrels a day, about 10% lower than they were prior to the outbreak of the Covid-19 pandemic, despite the doubling in domestic crude prices since the beginning of 2021.

Although major explorers like Exxon Mobil Corp. and Chevron Corp. are increasing output from their U.S. assets, it's intended to offset declines at older sites around the world, so the overall impact on global supplies will be minimal. The next tier of publicly traded drillers are mostly holding production flat or nudging it up by 5% or less -- targets that haven't changed in response to the administration's latest appeal.

Cost Pressures

“This is an extremely short-sighted, short gain for Biden,” said said Ed Hirs, a professor of energy economics at the University of Houston. Why would oil CEOs ramp up output “when the guy who's asking me to do it is going to make sure I don't make a profit?”

The oil industry also is contending with shortages of labor, pipes, trucks and other equipment, driving up costs and eating up some or all of the windfall from higher prices.

“The release of the SPR feels like it's a little bit of a move from a political perspective to try to get gas prices down in front of the election,” said Matt Portillo, an analyst at Tudor, Pickering, Holt & Co. “But at the end of the day, it doesn't really change the production constraints that are in the industry at the moment.”