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The American Strategic Petroleum Reserve drawdown plan

By Sunny Atumah

The United States Department of Energy, DOE bids for companies to purchase seven million barrels of crude oil from the Strategic Petroleum Reserve, SPR closed last Wednesday, March 21, 2018. Successful offers would be declared on April 6, 2018 to lift fuel from three SPR sites in Bryan Mound, south of Houston, Big Hill in Texas and West Hackberry in Louisiana.

Why was the SPR created and who benefits in the policy of using it to fund American budget? The SPR was created after the Arab oil embargo from October 1973 to November 1974, which sent prices through the roof and forced Americans to ration gasoline. The United States and other members of the International Energy Agency, IEA  agreed in 1974 to keep a 90-day supply of oil imports on hand (in government and private stocks) to make it easier to weather unexpected disruptions. The SPR is an insurance policy for the U.S. energy sector and economy from threats of embargo from foreign nations, natural disasters, and unexpected and drastic changes in the market.

Oil Pipe

The Strategic Petroleum Reserve is a U.S. Government complex of four sites with deep underground storage caverns created in salt domes along the Texas and Louisiana Gulf Coasts.The 60 storage caverns, the largest in the world have a capacity of 727 million barrels to store emergency supplies of crude oil owned by the U.S. Government. The strategic reserve is to protect U.S. consumers from global supply shocks. The United States crude oil stockpile which had grown to about 700 million barrels is enough to offset production equivalent of 143 days of import protection (based on 2016 net petroleum imports). The U.S. government began stockpiling of oil on July 21, 1977 with 412,000 barrels of Saudi Arabian light crude.

Many have criticized the continued storage of crude in reserves since the United States has become less dependent on foreign oil.  About US$25.7 billion have been spent on the SPR four complex sites maintenance (US$20.7 billion for crude oil and US$5 billion for facilities).  Legislation in Section 404 of the Bipartisan Budget Act of 2015 authorized the Secretary of Energy to draw down and sell up to US$2 billion of Strategic Petroleum Reserve crude oil, for fiscal years 2017 through 2020. The Energy Department last year kicked off the $2 billion, multiyear effort to upgrade the reserve and improve its ability to distribute oil during an emergency.

President Donald Trump considered selling half the U.S. Strategic Petroleum Reserve in the 2018 budget proposal of May 23, 2017 to raise billions of dollars to help tackle deficits. It sparked off fierce debate in Congress with opposition from some Trump’s fellow Republicans including Chairman of the Senate Energy and Natural Resources Committee,  Senators Lisa Murkowski, and Senators John Hoeven. They argued that it would hurt American (shale) drillers because it would bring prices of crude down. Again they say the reserve is needed for emergencies, such as major storms and outages in oil producing countries. The American minimum threshold requirement of the IEA is 450 million barrels of oil.

The SPR is a valuable foreign policy tool, offering the United States and its allies insulation from foreign threats to withhold oil supplies as a means of political ransom, so reducing the SPR stocks weakens that tool. The resistance to using the SPR as a convenient way to raise money (for causes like infrastructure or medical research) is for Americans to decipher. On February 9, 2018, a Continuing Resolution was passed that included a provision to allow DOE to sell up to $350 million worth of crude oil from the SPR, to carry out the SPR Life Extension Phase II project—a component of the SPR modernization programme. The proceeds from this sale will be deposited into DOE’s Energy Security and Infrastructure Modernization Fund during fiscal year 2018.

In a recent analysis by Matt Chester, an energy analyst writing in Chester Energy and Policy, an unwritten and bipartisan rule was that the SPR was not to be used to fund political measures. It has become an issue for Congress that had faced the perennial opposition to raising taxes and the need for new sources of income. While selling SPR oil to raise funds is legislatively permitted, the sale of 100 million barrels (15 percent of the balance of the SPR) is believed to be the biggest non-emergency sale in history.  The immediate side effect of selling such a large amount of SPR oil would be to reduce the price of oil and harm U.S. oil producers as a result.

Also market expectations about lower prices tomorrow can cause lower prices today. Also market expectations about higher prices tomorrow can spark higher prices today. More U.S. oil hitting the market, even if staggered over time, would just add more barrels to an already overloaded market, potentially making life tougher for big oil producers. Emptying the SPR will be just one more thing problem for the Organization of the Petroleum Exporting Countries, OPEC to discuss extended production cuts to shore up prices.

 


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