Donald Trump has a plan to lower US petrol prices – but history shows it might actually make things worse
- US President Donald Trump is reportedly considering tapping emergency oil reserves ahead of the November midterm elections in his country.
- But some analysts doubt a release would be effective.
- They see it as a way to shift the conversation away from Trump's decision to withdraw the US from the Iran deal.
As the administration of US President Donald Trump reportedly considers turning to emergency oil reserves, some experts see it as more of a distraction from foreign policy decisions that have faced blame for rising oil prices – and so pushed up petrol prices in South Africa too – than a meaningful effort to address supply concerns in the energy market.
The US federal stockpile under consideration, called the Strategic Petroleum Reserve, is mainly intended to be a safety net the US can turn to during war or natural disaster. But non-emergency releases can be authorised by the president.
"The reason [Trump] brought up an SPR release is because he wants to change the conversation," Helima Croft, head of global commodities research at RBC, told Business Insider.
Through his tweets, Trump has appeared increasingly anxious about oil prices ahead of the US November midterm elections. A favourite of his to fault is OPEC, which in 2016 struck a deal to coordinate output cuts amid a global oil glut.
"The OPEC Monopoly must remember that gas prices are up & they are doing little to help," he wrote on Twitter earlier this month. "If anything, they are driving prices higher as the United States defends many of their members for very little $’s."
But US Democrats have been quick to blame petrol prices — which recently hit four-year highs — on the US president's decision to withdraw the US from the Iran deal, a 2015 agreement that lifts sanctions on the country in exchange for restraints on its nuclear weapons programme. As part of that move, the State Department last month ordered all countries to cut off all Iranian barrels by November.
"According to energy analysts and experts, President Trump’s reckless decision to pull out of the Iran deal has led to higher oil prices," Senate Minority Leader Chuck Schumer said at a press conference outside an Exxon facility in May. "These higher oil prices are translating directly to soaring gas prices, something we know disproportionately hurts middle- and lower-income people."
To be sure, there is a multitude of other factors that drive oil prices. But analysts see cutting off barrels from Iran, the third-largest member of the Organisation of Petroleum Exporting Countries, at the top of the list. The country exported about 2.7 million barrels per day in June.
Prior to the Iran deal, the Obama administration asked companies to reduce oil purchases from the Islamic Republic by about 20% every 180 days. But that is a stark contrast to the Trump administration's intentions of cutting off all Iranian barrels.
"The Obama administration never said they wanted to take Iran out of the oil market," Croft said. "I think people are missing that. They think: oh well, Trump now realises this is crazy and this will be like Obama all over again."
Analysts say that while an SPR release would initially lower petrol prices through a "knee-jerk" reaction among traders, they doubt it would be effective for long. Jon Rigby, an analyst at UBS, thinks a release could even have the opposite effect soon after.
"We think it would highlight the structural tightness of the market and the lack of options available to deal with it," he said.
The last time Washington turned to the SPR was in 2011 when the Obama administration released 30 million barrels to address supply disruptions in the Middle East during the Arab Spring. West Texas Intermediate prices were 9% higher than before one month after the release.
And heading into the winter of 2000, the Clinton administration sold off 30 million barrels amid concerns about heating supplies. Prices initially fell but once again were higher than before the release within a month.
"An SPR release is simply not a sustainable solution for keeping oil prices low if the US maintains its hawkish foreign policy stance," RBC analysts wrote in a recent note.
While energy costs alone don't seem to rouse voters, they tend to play into overall sentiment toward the economy. Gregory Wawro, a political science professor at Columbia University, said that rising prices at the pump could be damaging if they were tied into a broader narrative about the consequences of the Trump administration's foreign policy decisions.
"I think it would have to be linked with a general argument about how Republicans' actions are hurting the economy," Wawro said.
"With headlines popping up more regularly about firms cutting jobs and investment because of the trade war, it's possible that Democrats could build a compelling multifaceted case that the Republicans have mismanaged the economy on several fronts."
Still, Croft said relying on the SPR to help mitigate the effects of withdrawing from the Iran deal is a "high-risk" strategy, especially with multiple other key oil producers — especially Venezuela, Iraq and Libya — facing major output disruptions.
"We don't have a lot of room for error if you want to prevent higher fuel prices," Croft said. "So, I think that's why we're talking about SPR. It's more to shift sentiment as opposed to tackling some of the structural issues."
The White House did not respond to emails requesting comment.
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