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Commodities 2022: Election will force White House to keep pragmatic message on US oil supply

Highlights

Energy secretary urges US drillers to 'get your rig count up'

White House drops talk of reimposing crude export ban

Biden under pressure to curb inflation ahead of midterms

The Biden administration started 2021 with an oil and gas leasing moratorium that put US drillers on notice about shrinking opportunities ahead. The message is quite different heading into 2022.

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"Please take advantage of the leases that you have. Hire workers. Get your rig count up," Energy Secretary Jennifer Granholm told the National Petroleum Council on Dec. 14.

The shift in tone reflects the turbulent year for oil markets and US consumers as a range of factors including returning demand and gas-to-oil switching caused energy prices and inflation to soar.

The Biden White House will have to strike a similarly pragmatic balance when addressing US oil and gas production in 2022: increase fossil fuel supply now to meet current demand even while transitioning to the green energy future.

The Nov. 8 midterm elections -- which will determine if Democrats retain control of Congress -- will keep the pressure on the administration to satisfy progressive Democrats who want quicker action on climate policy while also responding to US drivers' sensitivity to rising gasoline prices.

"On the surface, it seems like an irony," President Joe Biden said in October at the G20 summit. "The idea we're going to be able to move to renewable energy overnight ... and from this moment on, not use oil or not use gas ... is just not rational."

Ruling out export ban

Granholm gave US drillers an early Christmas present in the same petroleum council speech by saying the White House had taken a crude export ban off the table after months of hinting that it was considering such a drastic move to respond to high prices.

Calls for reconsidering how much oil and gas the US ships onto the global market have increased steadily among some Democrats who argue the flows contradict the Biden administration's climate policy ambitions, as well as industrial manufacturers paying higher energy bills.

The idea was also kept alive for months by the Biden administration itself, as Granholm, White House Press Secretary Jen Psaki and others said that reimposing a crude export ban was among the tools for responding to high gasoline prices.

The 2015 lifting of crude export restrictions transformed the US upstream sector and reshaped global markets. Likewise, surging US LNG exports are playing a significant role in the global supply crunch and geopolitics.

The US exported roughly 25% of its domestic crude production and 8% of its gas output in September, according to the most recent data by the Energy Information Administration. Propane exports, by comparison, represented a huge 71% of domestic output that month.

No pump price relief

For crude markets, cutting off most US exports would "depress WTI prices, bloat domestic inventories, raise international prices and upset allies," said Paul Sheldon, chief geopolitical adviser for S&P Global Platts Analytics.

US Midcontinent refiners would be able to "gorge on trapped shale oil for a while and make huge profits," said Bob McNally, president of Rapidan Energy Group.

But savings would not flow down to drivers, as retail gasoline prices would still be tied to international Brent crude futures.

The US oil patch would get hit hardest, with the impacts echoing through the economy, said Kevin Book, managing director of ClearView Energy Partners.

Book said he has no doubt White House policy advisers weighed these potential repercussions but for a time saw it as a political solution nevertheless.

"We did not think an oil export ban was likely, but we saw it as a pressure tactic aimed at industry," Book said. "We pointed to President Biden's multiple, recent requests that the Federal Trade Commission investigate possible 'price gouging' and 'illegal conduct' as a mechanism by which the White House could demonstrate responsiveness to voters' pump price woes while tacitly nudging domestic and international producers to add to supply."

Inflation pressures

The Biden administration had to answer Dec. 10 to a second month of record-high inflation data, with energy costs rising faster than food, services and other categories. Brian Deese, director of the National Economic Council, said price declines for oil and natural gas in recent weeks would be slow to show up in the monthly inflation report.

Analysts said the White House holds the power to impose new restrictions on US energy exports without Congress' approval.

LNG export policy flows through the Department of Energy, which has fielded more requests by industrial manufacturers for a "consumer safety valve" on export levels as global gas and LNG prices have surged in recent months.

Unlike the crude export ban, the Biden administration has not shown any signs it is considering intervening in LNG export markets, given the geopolitical importance of US supply to allies in Europe and Asia.

Executive power

Congress lifted US crude export restrictions in December 2015 but explicitly preserved the president's authority to restrict the flows through the International Emergency Economic Powers Act, said Glenn Schwartz, Rapidan Energy Group's energy policy director.

The law "offers the president near-total authority over exports, including the imposition of anything from an outright ban, to quotas, to restrictions based on some characteristic of the crude itself, like sulfur content," Schwartz said. It must be triggered through an emergency declaration, but such a decision would be "basically beyond judicial review from a practical sense," he added.

"Biden could declare a new emergency, based on climate change for example, or piggyback off an existing emergency," Schwartz said.

Book does not expect White House pressure on US producers to let up if prices remain high. He pointed to US onshore rig counts rising less with WTO prices than they did during the last two rig-count run-ups.

"In that context, we are inclined to interpret the Secretary's explicit entreaty for additional production -- and its close proximity to her implication that the Administration was ending 'uncertainty' about a crude oil export ban in order to stimulate drilling -- as something of a quid pro quo: if production does not pick up, pressure from White House -- via other means, perhaps -- soon could."