President Joseph R. Biden Jr.’s decision to unilaterally release 180 million barrels of oil from the United States’ Strategic Petroleum Reserve raises questions as to the continued relevance of the OPEC+ alliance led by Saudi Arabia and Russia. It also signals a reversal of roles with the United States now effectively acting as the swing producer for a market in turmoil following what has been viewed as a lukewarm response to the Ukraine crisis by the OPEC+ producers.

Biden said on March 31 that the volume to be released is the “largest release from our national reserve in our history,” and is designed as a “wartime bridge” for six months. This translates into 1 million barrels per day of oil being sold each month. At the end of the six months, U.S. oil production is expected to have risen by a roughly equal volume. Revenue from the sale will be used to restock the reserve when prices are lower, Biden said.

The oil market was already tight on the supply side before the February 24 Russian invasion of Ukraine. A number of OPEC+ producers failed to meet higher quotas as the group began the gradual tapering of the production cuts agreed to in April 2020 at the onset of the coronavirus pandemic. The International Energy Agency, in its March Oil Market Report, estimated that the shortfall between the OPEC+ target and actual production in February was 1.1 mb/d.

The IEA sees potential for the loss of 3 mb/d of Russian oil supply in April as a result of a cascade of international sanctions imposed on Moscow. These have, for the most part, excluded direct sanctions on Russia’s energy sector, though the complex web of financial and banking sanctions has deterred trade in Russian oil. In early March, the Biden administration said it would no longer import oil, liquefied natural gas, or coal from Russia as part of an effort to deplete Russian President Vladimir Putin’s “war chest of foreign reserves.”

The United Kingdom also said it would phase out Russian oil imports by the end of the year. Canada and Australia have also declared a ban on Russian imports, but the European Union, the largest market for Russian oil, is finding it harder to replace Russian barrels. The EU has faced opposition to proposals to extend sanctions to energy imports from several of its members, particularly Germany, which is heavily reliant on imports of Russian oil and gas.

Biden called “Putin’s war” one of two main reasons for the surge in gasoline prices in the United States. The other was the post-pandemic recovery in the United States, which meant that “demand for oil shot back up much faster than the supply,” causing the cost of gasoline to rise by nearly $1 per gallon since the start of the year, he said. With mid-term elections due in November, failure to bring down prices at the pump could prove a liability for the Biden administration and partly explains the decision to proceed with the Strategic Petroleum Reserve release unilaterally rather than through the IEA’s emergency response mechanism.

The IEA chimed in April 1 announcing that its governing board, currently headed by U.S. Secretary of Energy Jennifer Granholm, had agreed to a new release of an as-yet-unknown quantity of oil from strategic stocks held by its 31 members. Details of the stock release will be made public next week, the IEA said after an extraordinary board meeting. This would follow a release of 62.7 million barrels in March from IEA members’ strategic holdings in anticipation of what the Paris-based energy watchdog said was “the prospect of large-scale disruptions to Russian oil production.”

Russia is the world’s third-largest oil producer after the United States and Saudi Arabia and the largest exporter, accounting for roughly 12% of global trade, according to the IEA. It exports around 5 mb/d of crude oil, of which 60% goes to Europe and another 20% to China. Exports of refined products occupy an even larger space, accounting for 15% of global refined product trade, including diesel, a fuel used in industry and agriculture.

The IEA’s March Oil Market report noted that there were “scant signs of increased supplies coming from the Middle East” or a significant reallocation of trade flows even as refiners, particularly in Europe, were scrambling to source alternative supplies. It added that the OPEC+ alliance had agreed on March 2 to stick with its modest 400,000 b/d monthly increases “insisting no supply shortage exists.”

OPEC+ ministers met again March 31 and swiftly endorsed a July 2021 agreement to raise output by just 432,000 b/d from May, a piddling increase that reflects higher baselines for five of its members – Saudi Arabia, Russia, Kuwait, Iraq, and the United Arab Emirates. A brief communique at the end of the 12-minute meeting attended by Russia made no mention of the Ukraine crisis nor did it explain the group’s abdication of responsibility to balance a market that was predisposed to tightness even before the Russian invasion of Ukraine.

The alliance of OPEC and Russian-led non-OPEC producers was conceived in late 2016 in response to the surge in U.S. oil production, which eroded OPEC’s share of global oil trade and exposed its inability to manage the oil market without Russia’s participation. OPEC, which is dominated by Middle Eastern oil producers with Saudi Arabia the de facto leader, has resisted calls by the United States and the EU to suspend its alliance with Russia, according to a report by MEES. OPEC+ has made clear that it considers the recent spike in oil prices as driven by geopolitics rather than by fundamentals of supply and demand. Saudi Arabia and the UAE hold the bulk of the world’s spare production capacity but have been reluctant to fill the gap that emerged as a number of mainly African producers delivered less than their allocated quotas due to capacity constraints. Iran, a potential source of additional oil supplies, is under U.S. sanctions and their removal is subject to the conclusion of nuclear talks in Vienna that appear to have stumbled at the eleventh hour.

After the March 31 OPEC+ ministerial meeting, OPEC’s secretariat said that, in the videoconference, it was noted that “continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market, and that current volatility is not caused by fundamentals, but by ongoing geopolitical developments.” The next OPEC+ ministerial meeting is scheduled for May 5, when the extent of disruption to Russian oil production may become clearer and might prompt the producers to act.

The UAE’s energy minister, Suhail Mohamed Faraj al-Mazrouei, speaking at the March 28 Atlantic Council Global Energy Forum in Dubai, made clear that the alliance with Russia was not negotiable because there was no other producer with the capacity to replace Russian barrels. “Russia is an important member. And leaving politics aside, that volume … is needed today,” he said and continued that unless another producer is willing to bring 10 million barrels per day, “we don’t see that we can – someone can substitute Russia.”

Mazrouei admitted that several years of underinvestment in upstream oil projects had led to production losses amounting to 1 million barrels in one year alone due to natural declines and capacity losses. But he added the group would act in concert, and no member would increase production unilaterally. More investment was needed to maintain production and add new capacity. But forecasts of impending peak demand for oil made it difficult for investors while international energy companies were stepping back from investment in hydrocarbon projects because of shareholder pressure and net-zero carbon commitments.

Saudi Energy Minister Prince Abdulaziz bin Salman, speaking at the same forum, was asked why the kingdom was not responding to the call for more oil on moral grounds. “When we get into that OPEC meeting room, everybody leaves his politics at the outside door,” he said. As the two biggest producers in OPEC+, Saudi Arabia and Russia act as co-chairs of the ministerial conferences and have increasingly spoken with one voice. “The reason we have managed to maintain OPEC+ is that we discuss these matters, these issues, in an entirely siloed type of approach whereby we are much more focused on the common good, regardless of the politics,” Prince Abdulaziz said.

OPEC, the Saudi minister added, had dealt with member countries under sanctions, mentioning Iraq and Iran as examples. Iraq remained an active member of OPEC during the years when it was under sanctions following its invasion of fellow OPEC member Kuwait in 1990, and Iran is still subject to U.S. sanctions that have crimped its production, though it is also an active member despite political differences with Saudi Arabia and other Gulf Arab states.

The IEA singled out both Saudi Arabia and the UAE for their reluctance to tap into their reserves as the only producers with substantial spare production capacity. At current production, Saudi Arabia, the UAE, Iraq, and Kuwait hold just under 4 mb/d of spare production capacity that could be brought online within 90 days and will shrink as OPEC+ unwinds its production cuts between now and September. The IEA’s executive director, Fatih Birol, has been vocal in expressing his views on the decision by OPEC+ to maintain its output policy without change, saying its failure to raise production beyond 400,000 b/d was “disappointing.”

His remarks, followed by a 10-point plan issued by the IEA as a guide for members to reduce their oil consumption, seem to have rankled OPEC. In a separate statement after the March 31 meeting, OPEC said it would drop the IEA as one of the secondary sources used to assess monthly production by its members with “immediate effect.”

The move suggests the emergence of a rift between OPEC and the IEA, which was set up as guarantor of energy security for OECD members following the 1973 Arab oil embargo. But relations had grown closer in recent years with the two sides holding regular technical discussions and meetings at the senior level. In dropping the IEA, OPEC has signaled that it will brook no external interference or infringement of the sovereign rights of its members to set output policy.

Amos Hochstein, the U.S. Department of State’s senior advisor for energy security, in early April visited Saudi Arabia to discuss the latest developments. During an interview with Bloomberg television he insisted that the relationship between Riyadh and Washington was “strategic,” however he did not agree with OPEC’s assessment of the state of the market. “I must have a difference of opinion … I can see the physical evidence that the market is short about 2 million barrels a day, if not more, from Russian supplies into the global market. That is clear to me. We can see that … Obviously, some perhaps in OPEC don’t see the shortage of supply,” he said. “At the end of the day, they’ve done what they needed to do … announced that they are going to continue the increases of production. We don’t think that’s right.”

U.S. oil companies have said that they plan to increase production by 900,000 b/d to 1 mb/d this year but that will only come on in the third quarter. Hochstein said the Strategic Petroleum Reserve release was needed to fill the gap while U.S. operators are scaling up oil production. “We have a gap between now and that period of time … the U.S. government is going to fill that gap,” he said. This did not mean that it was replacing the private sector but allowing consumers to benefit from lower prices now. Stocks would be replenished over the next couple of years.

The OPEC+ countries produced an average 49 mb/d of crude oil, including natural gas liquids, in 2021, or just over half of global supply, according to IEA data. Production from the group is expected to rise by around 1.2 mb/d by September when all restrictions are due to end. A further 1.7 mb/d is expected to come from non-OPEC producers, with the United States accounting for one-third of the total, but it will take time to reach markets, the IEA noted in its monthly report. The IEA still expects a supply deficit of 700,000 b/d in the second quarter of 2022 despite a downward revision to its demand forecast for the full year by 1 mb/d, citing lower global gross domestic product growth and oil demand.

With OPEC+ continuing to withhold barrels, the adjustment has come from strategic stocks and has brought about a change in market dynamics with the United States again on the ascendant as the producer of last resort, supplanting Saudi Arabia, which has traditionally acted as the unofficial swing producer in times of crisis.

“In the absence of a faster ramp up in production, oil stocks will have to balance the market in the coming months,” the IEA said in its March report. The latest action by the United States and other IEA members came as oil inventories were already at low levels. At the end of January, inventories held by OECD countries were 335 million barrels below their five-year average and at eight-year lows. The U.S. Strategic Petroleum Reserve stood at 568 million barrels as of March 25, according to the U.S. Energy Information Administration. This puts it at a 20-year low, and the latest release will deplete stocks further to 385 million barrels, the lowest since the mid-1980s.

Oil prices, which in early April climbed to within a few cents of $140 per oil barrel, fell immediately after Biden’s announcement to trade below $100/bbl, but the respite was brief. Prices have crept back up, and global benchmark Brent crude oil futures were trading at around $110/bbl late on April 5 in a highly volatile market that has seen swings of $10/bbl in a single day. The United States’ Strategic Petroleum Reserve release, the second this year, can only serve as a temporary fix. Years of underinvestment, a deadly pandemic, and the climate agenda have wreaked havoc with an oil and gas industry ill-prepared to cope with a crisis of this magnitude.

The same countries that have vowed to phase out fossil fuels in favor of renewable and clean energy are now clamoring for more oil and gas and coming up empty. The war in Ukraine has brought about a change of direction and exposed the vulnerabilities of an energy world in transition. At the same time, it might prove a watershed moment as the same countries that have taken Russian oil and gas supplies for granted seem determined to end their reliance on Russia for their energy supplies, and this may accelerate the transition to cleaner fuels.