Release and refill the Strategic Petroleum Reserve

Release and refill the Strategic Petroleum Reserve

The term “historical” is often thrown casually in financial markets, whether in reference to historical interest rate hikes, historical inflation, or historical yield curve movements. However, sometimes, things happen that actually deserve to be called “historic.”

In November 2021, President Joe Biden ordered the release of surplus 50 million barrels of crude oil from the Strategic Petroleum Reserve (SPR). Then in late March 2022, he followed this up by releasing 1 million barrels per day until a total of 180 million barrels was sent to the general market. This release schedule was “historic” both in terms of size and speed.

The Strategic Petroleum Reserve was established in 1974 to protect the national energy security of the United States against potential events such as the 1973 Middle East oil embargo when some oil-producing countries temporarily halted shipments of crude oil to the United States and several other countries as a form of protest. The ban caused pump prices to rise and gas stations to run out of fuel. The era was marked by images of long queues of cars waiting to refuel and gas stations that had no gasoline for sale.

The Strategic Petroleum Reserve, or SPR, is a complex of four emergency oil storage sites in deep underground storage caves created in salt domes along the Gulf of Texas and Louisiana coasts. Although the idea of โ€‹โ€‹emergency oil storage arose as early as 1944, the 1973-1974 oil embargo necessitated stimulating the creation of the Strategic Petroleum Reserve, which was included in the Energy Policy and Conservation Act signed by President Ford in late 1975. .

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The SPR was not technically designed to help the United States government manage the price consumers pay for gasoline at the pump, but it has been used in this way by multiple departments. Whether it works or not is another question.

According to a study conducted at the Treasury by Assistant Secretary of the Treasury for Economic Policy Benjamin Harris and Deputy Assistant Secretary for Climate and Energy Economics Catherine Wolfram, Biden’s massive launch of the Strategic Petroleum Reserve “cut the price of gasoline by 17 cents to 42 cents per gallon, with an alternative approach suggesting a point estimate 38 cents a gallon.”

The question now becomes: โ€œIs freeing up emergency oil reserves when there are no shortages of fuel or lines at the gas station worth what might happen next?โ€

According to the US Energy Information Administration, strategic petroleum reserves have fallen to their lowest level since 1985. Stocks have fallen to just under 445 million barrels from pre-release levels of just over 612 million.

This is a depletion of about 27% of our crude oil stocks in a very short time, and given the current geopolitical tensions, the SPR must be replenished. The Strategic Petroleum Reserve was built to alleviate the shortage of domestic supplies. In May 2022, the Energy Department issued a purchase plan to refill the Strategic Petroleum Reserve, but it represented only about 60 million barrels, and stated that it would be purchased “next year” at lower prices. The Department of Energy indicated that it was intended to encourage US drillers to boost activity now and “lower prices by ensuring this demand in the future at a time when market participants expect crude oil prices to be significantly lower than they are today.”

This buying scheme essentially introduces the buyer to the market at low levels, and the buyer is the US government, likely to keep crude oil prices higher than they would be without this buyer. Worse yet, if an external shock occurs and crude oil supplies are cut off, prices may not fall. The DOE may have to buy at any market price at that time, or it may delay purchases altogether. Required bids are taken from producers well before actual transaction dates, so pricing and timing can cause fluctuations on their own from a hedging perspective. Replenishing the SPR to such a large extent, whatever the timing, could affect an artificial ground in the crude oil market.

There are many other concerns regarding the full operations of such a large and fast release, but make no mistake, it was truly “historic”. It may also be refilling the Strategic Petroleum Reserve.

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