Making Sense of The Mysterious Strategic Petroleum Reserve

At a Glance

  • Historically, the reserve is used in emergency cases, but could it be tapped to push down oil prices?

On August 20, The U.S. Department of Energy’s Office of Fossil Energy (FE) announced a “Notice of Sale” for crude oil from the Strategic Petroleum Reserve (SPR). The total sale or release was announced at 25 million barrels over the next three consecutive years. The Fossil Energy office will sell 11 million barrels in 2018, 5 million in 2019 and the balance in 2020.

Decisions to withdraw crude oil from the U.S. SPR are made by the President. They happen infrequently, but they generally are not politically motivated. They are structural and financial decisions based on things like diminishing storage capacity, and funding for the FE office itself. Normal sales from the SPR, as the August sale is assumed to be, are made to the President by the FE and approved as a formality. There have been however, three Presidentially-directed emergency releases.

Emergency Releases

In 1991, at the beginning of Operation Desert Storm, an emergency sale of SPR crude oil was announced the day the war began to assure that global supply of crude oil was adequate. In a concerted effort with its allies, the U.S. released 17.3 million barrels.

The second was in September 2005 after Hurricane Katrina devastated the oil production, distribution, and refining industries in the Gulf. In total, 20.8 million barrels were released.  The third time was in June 2011 when the United States and its partners in the International Energy Agency announced the release of 60 million barrels in response to crude oil supply disruptions in Libya and other countries.  The U.S. obligation was 30 million barrels, and 30.6 million barrels was delivered by August 2011.

Most other instances of barrel releases have been loans or exchanges to private sector firms, such as during hurricanes Ivan and Katrina. Exchanges involve short-term loans of product to be reimbursed to the SPR, so there is no diminution of the SPR and no increase in global supply, net-net.

The SPR and Oil Prices

Today, supply is abundant and even the Iranian sanctions are not expected to delete global supply by much.

OPEC and larger producing non-OPEC countries have recently referenced further production cuts to try and slow the recent decline in the price of crude. Given the current climate, could the SPR be used to push back against a rise in prices?  

That’s probably not likely.  According to the U.S. Energy Information Administration (EIA) the U.S. consumed an average of 19.96 million barrels per day (bpd) in 2018. Since 1998, the low consumption number has been 18.49 million bpd with the high consumption level being 20.80. The U.S. economy is not slowing currently.  But, even using the lowest consumption levels in the last 20 years, the entire SPR only holds just over a 35-day supply of crude oil at 653.3 million barrels.

In today’s environment, there could be no valid argument for a supply emergency given that supplies are still increasing, and demand has plateaued globally.

How Likely Is a Release?

The bottom line is, emergency releases from the SPR are rare. However, a release of crude oil from the SPR could happen if OPEC and non-OPEC oil producing nations decide to cut production with the stated aim of raising prices, which they may call “stabilizing”. If that happens, prices are likely to fall.  How much and how fast would depend on the size and speed of the release and the price of oil at the time.

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