As Biden weighs US response to Opec, he has few good options

For US President Joe Biden, the easy part was threatening a response. Now comes the tougher challenge of delivering one.When last week Biden pressed Opec+ to bring oil prices down with a large output hike, he warned of consequences if the cartel rejected his appeal: “What we’re considering doing on that, I’m reluctant to say before I have to do it.”Now, Biden has to match words with action or risk looking weak in his struggle with oil alliance. On Thursday, Saudi Arabia and its Opec+ allies not only refused to boost output by more than the 400,000 barrels a day they had already planned, but also declined to make even a token gesture to placate Washington. It was nothing but a flat-out no. “The ball is back in Biden’s court,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd in London.Within minutes of the Opec+ announcement, the White House accused the oil alliance of putting the “global recovery for countries around the world” in jeopardy. “We will consider the full range of tools at our disposal to bolster resilience and public confidence,” a spokesperson said.Biden certainly has tools at his disposal. Perhaps the strongest is the country’s strategic petroleum reserve, a huge crude stockpile of more than 600mn barrels kept underground in Louisiana and Texas for major emergencies. The SPR has enough crude to replace all the oil the US imports from Opec+ for more than a year.There are more radical options. He could ban American oil exports, keeping more crude at home, or encourage American lawmakers to pass legislation that would allow the US federal government to sue Opec for acting as a cartel.But all of those measures bring big political, diplomatic and market risks, according to traders, consultants and diplomats.Biden is in a “tough spot,” said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. “He’s both raised expectations of doing something while simultaneously, and correctly, noting nothing he does can really lower gasoline prices near term.”The oil market is now abuzz with talk of a SPR release, either in coordination with allies inside the International Energy Agency, which includes the likes of Germany, the UK, Japan and South Korea, or even alone. The US could also seek to release the reserves in alliance with non-IEA countries like China and India.“The SPR is certainly on the table as an option. The president will have more to say about that,” Energy Secretary Jennifer Granholm told Bloomberg TV on Friday. “The Biden administration is very concerned about the price at the pump,” she added.But many in the oil market question whether the current situation justifies a stockpile release. Beyond ad hoc responses to localised oil disruptions, the US has only tapped its oil reserve a handful of times, notably in response to hurricanes in 2005 and armed conflict: the Gulf War in 1991 and in 2011 during the Libyan civil war.The closest use of the SPR to today’s situation nearly came in 2000, during the tight presidential election between Al Gore and George W Bush. With oil prices rising, President Clinton ordered a 30mn barrels release in what one of his senior energy officials said was needed  “to make sure American families keep warm this winter.” The release was technically a swap, with companies having to return the oil within a year. Oil prices initially fell in response to the release, but within weeks they set new highs.Oil prices fell on Thursday on speculation that Biden would tap the reserve. In particular, traders unwound bets that oil inventories in Cushing, a key storage hub in Oklahoma, would fall further. The belief is that a SPR release would halt the drain on Cushing’s tanks, which has helped spur the rally in US benchmark oil prices.To tap the reserve, Biden will need to invoke special powers to deal with supply disruptions. Outside an emergency, an SPR release is limited to 30mn barrels. The impact of such a small amount is likely to be “modest and temporary,” according to Damien Courvalin, oil analyst at Goldman Sachs Inc. He estimates that even an emergency-scale 60mn barrels release would knock down oil prices by less than 5%.Even if Biden were to achieve a big price drop, it could also backfire. “Any larger negative price impact that further slows the US shale oil activity rebound would in turn lead to much higher prices next year,” Courvalin said.The White House can also release oil from the reserve through a back door. Since 2015, America has sold crude from its stockpile to pay for budget deals. These mandated sales have committed nearly 275mn barrels of oil for sale until the end of the decade. Although most of the sales are prescribed for specific fiscal years, the White House has some flexibility to front load them. For example, a 2015 deal mandates sales of oil of about 18 million barrels in 2022 and 2023, but the White House could sell that crude immediately.But such a back-door SPR release is unlikely to impact prices much.“The SPR can only fill the gap during temporary production disruptions and not fix structural issues of underinvestment and rising demand,” said Giovanni Staunovo, a commodities strategist at UBS Group AG, a bank.The second most powerful tool is banning US crude exports, keeping oil at home. The problem is that American refiners can only handle so much of the kind of crude pumped in the Permian and other shale basins. Trapping domestic supplies inside the US would result in a price collapse for a few types of crude, while gasoline prices would remain elevated.Politically, the most expedient tool is to encourage lawmakers to pass the so-called “No Oil Producing and Exporting Cartels Act,” or NOPEC, which proposes making the cartel subject to the Sherman Act antitrust law, used more than a century ago to break up the oil empire of John Rockefeller.US politicians have tried several times since 2000 to pass the NOPEC bill, but the White House opposed it – both George W Bush and Barack Obama threatened to use their veto. And Even Donald Trump, who spoke publicly in favour of it, ultimately didn’t support it.The problem with NOPEC is that it wouldn’t lower prices in the short-term. And its passage would open a huge diplomatic conflict with Middle Eastern countries that the US has long considered allies.For Biden, the biggest problem, perhaps, is that his administration’s public diplomacy failed to move Opec+, underlining the limits of its personal influence with a group that once used to pay close attention to what Washington had to say.The White House said the battle wasn’t over. “We’re going to continue to, you know, continue to work on this, this is not the end,” White House spokeswoman Karine Jean-Pierre said on Thursday.