180 Million Barrels Of Crude May Never Be Returned to the Strategic Petroleum Reserve

Yves here. This Strategic Petroleum Reserve fiasco demonstrates that wishful thinking is not a strategy. But PowerPoint lovers believe otherwise.

Keep in mind the 180 million barrels that may never be replenished are the total released by the Biden Administration to lower gas prices for the sole purpose of boosting Democratic party prospects at the midterms.

By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice

  • The Department of Energy rejected a bid for 3 million barrels to refill the Strategic Petroleum Reserve last week.
  • Crude quality complicates the problem of refilling the Strategic Petroleum Reserve.
  • The U.S. Department of Energy may not have sufficient budget to refill the petroleum reserve.

Earlier this week, the Biden administration rejected the first bids from companies offering to sell crude oil into the strategic petroleum reserve of the country. The tender followed a record release of 180 million barrels throughout 2022. And that 180 million barrels may never be returned to the Strategic Petroleum Reserve. “DOE will only select bids that meet the required crude specifications and that are at a price that is a good deal for taxpayers,” the Department of Energy said in a statement following the failed tender, which invited bids for a modest 3 million barrels. And this statement reflects what many feared last year when President Biden first said the administration would sell oil from the Strategic Petroleum Reserve to lower gasoline prices.

First, there is the crude specifications issue. When the administration was releasing crude from the Strategic Petroleum Reserve, there wasn’t any mention of specifications. The only important thing was the volume. At the time, critics noted that the SPR contains mostly light, sweet crude, and the release of 180 million barrels of that variety won’t make much of a difference in gasoline prices because U.S. gasoline is made by blending light with heavy crude.

Yet the oil market moves in strange ways, and sometimes it’s enough to release several million barrels into the market to convince traders there’s plenty more where these came from. Fuel prices in the U.S. fell, especially as the release coincided with persistent inflation that shrank consumption.

Second, however, comes the issue of price. The Department of Energy had said at the end of last year it would only start buying oil for the SPR once the price of WTI falls to around $67-70 per barrel. Right now, WTI is trading at around $75. Yet this price appears to be insufficiently low for the DoE. And this is a problem because the total release from the Strategic Petroleum Reserve was not the original 180 million barrels, but more than 220 million barrels of crude.

This is problematic for more than one reason. First, because the Strategic Petroleum Reserve is at the lowest level since the early 1980s and, as some analysts have pointed out, it is a strategic reserve, meant to be there for times of emergency. So, if an emergency does occur, strategic oil reserves would be lower than they should be.

The second reason this is problematic is that what the administration hoped to achieve with its offers to buy crude for the Strategic Petroleum Reserve was not just replenishing the reserve but motivating higher oil production from local companies. And local companies appear to remain unmotivated to do that.

Production is already getting costlier for most oil companies in the U.S., according to industry executives. Even though there is optimism in the oil patch, according to the latest Dallas Fed energy survey, it is moderate and guarded, and nobody is in a rush to boost production at current oil prices. It can’t have come as a surprise: U.S. oil producers were not boosting production when prices were significantly higher, either.

A bigger problem, however, is whether the Department of Energy can afford to refill the SPR, as Wall Street Journal’s Jinjoo Lee suggested in a recent article. And the answer to this question may well be “No.”

Lee reports that the sale of 180 million barrels of crude from the SPR last year probably generated some $17.3 billion in proceeds at an average price of $96 per barrel. But of this $17.3 billion, $12.5 billion was set aside for use by Congress in the latest spending bill to fill the gap left by the cancellation of previously scheduled SPR sales for the period 2024 to 2027, according to ClearView Energy Partners.

This leaves the DoE with $4.8 billion to spend on replenishing the SPR, and, according to Lee, this could only buy 70 million barrels at WTI prices of $70 per barrel. This is less than half of what was released last year.

Yet even if WTI does fall to $70 and the DoE begins buying crude, sooner or later, this very fact of buying crude for the Strategic Petroleum Reserve might push prices higher, further reducing the purchasing power of the administration.

What this suggests is that refilling the strategic petroleum reserve will be a lot more challenging than tapping it to reduce prices at the pump. Some analysts have argued that the SPR is irrelevant, anyway, in this day and age. Others have repeatedly noted that it is called strategic for a reason—and it is a very good reason.

Whether it is relevant or not, the Strategic Petroleum Reserve will remain at lower than normal levels for quite a while, potentially. That won’t be only because of the unappealing offers the DoE is making producers but because exports of both crude and fuels to Europe are going strong and about to get stronger after February 5, when the EU embargo on Russian fuels kicks in.

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21 comments

  1. Pat

    Well there’s a shocker.
    Not.

    More “fun” might be outlining the implications of what else this could indicate to have escaped the norms beyond refilling the Reserve.

    Reply
    1. tegnost

      The reserve is only “strategic” in the political sense.
      if demand collapses, the reserve can be filled, giving a socialist boost to the oil industry, if prices rise due to political malfeasance or to achieve some political goal (ummmm, …you guess) you can draw it down to keep the plebes from reducing consumption and thereby stabilizing the profits of the oil industry as well as small time retailers like amazon and best buy (/s)
      Don’t worry, Larry Summers is on it.

      Reply
    2. Louis Fyne

      no SPR = the “just-in-time” model, which obviously has its own pros-cons.

      And there is a geological component….the oil is stored in hollowed out salt domes. Keeping the salt domes under-filled beyond a certain point threatens the integrity of the domes

      Reply
  2. Patrick M P Donnelly

    Valuable things being sold off. Lot’s of scope for ‘dropsy’ there?

    The EPR was created for a purpose. Given recent events and the ending of the Great Inflation since 1971, it would seem prudent to add to the SPR as disruption, the Schumpeterian phase, is next and current. Unless it is part of the engineered collpases required for an economic and financial reset? That would mean further releases. Allowing the market to run … this has implications.

    It has been said that one aim of the WEF is to equalize economies. For the very wealthy, that may be very …. disruptive.

    I fail to see how ‘conspicuous waste’, sorry Mr Veblen, caused by destruction can help poorer economies equalize, but then I am not an economist. I suppose it might destroy financial piracy of various sorts?

    Reply
  3. Tom Doak

    If they sold those barrels at $96 and could buy them back today at $75, and they can’t sell that as a win, then I must not understand who is their target audience.

    Reply
    1. Paris

      Maybe it’s a steal, as they say, but when you don’t have money you don’t have money. As simple as that. The Bidencrats are waiting for the Depr oops Recession.

      Reply
  4. spud

    i predicted this just a few days ago. this is a twofer in the minds of the free trading neo-liberals. they can spend the money instead on re-enforcing(war)on those nations that seek sovereignty, and getting rid of a bunch of deplorable maga types that must be used filling, and maintaining the reserves.

    its a win win!

    Reply
  5. Adrian Port

    My understanding – and correct me if I’m over simplifying the issue – is that a “strategic” reserve should protect you through hard times and be restored in good times. So US has released volumes to control prices on a crazy market and will not replenish those reserves until the crisis is not finished. So, where is the issue? Isn’t this moment difficult enough to make good use of a “reserve”? Do anybody considers the current moment right to buy from OPEC and friends? Of course, these questions are not for Russians and their friends, they may have a different opinion.

    Reply
    1. tegnost

      is that a “strategic” reserve should protect you through hard times and be restored in good times.
      hard times and good times are relative, hard times for who?
      Crashing demand lowers prices……at the expense of citizens (what is that word? Citizens? I thought hey were consumers?)
      This will allow replenishing reserves on the cheap…
      from 1/8 links…
      https://twitter.com/davidrkadler/status/1611431708775092250?

      these questions are not for Russians and their friends

      I’m thinking something along the lines of better to be silent and be thought a fool, than speak and remove all doubt…

      Reply
    2. tevhatch

      If Biden starts hot war with Russia and China, then you can safely bet at any odds the reserve will never be refilled, but don’t count on collecting your winnings.

      Reply
  6. All Ice

    I may be a bit dense, but I do not understand the purpose of the strategic oil reserve any more when the US produces over 12 million barrels of oil per day, 1/15th of the 180 deficit daily. https://www.reuters.com/business/energy/us-monthly-oil-output-climbs-pre-pandemic-highs-2022-10-31/

    If there is ever a real strategic need, the government does have the power to put a damper on consumer use and divert it to the government’s strategic need and pay for it.

    Reply
    1. Altandmain

      Supply chain disruptions, whether due to pandemics, natural disasters that shut down a significant amount of the infrastructure, or insane American foreign policy are all risks.

      Having a inventory of oil can buy a short amount of time. Halting consumer use isn’t as easy it seems. Oil is used in agriculture and pretty much every industrial process.

      Reply
  7. tevhatch

    Canada has a strategic maple syrup reserve, turns out the warehouse workers were filling the storage with water and selling out the back for years, and only got caught when they got so lazy they stopped filling the storage with water. Makes one wonder what exactly is in all of the reserves, a fictional selling or buying might serve the function of signaling to speculators while allowing a lot of graft.

    Reply
  8. Paul Collis

    One good thing, maybe the only good thing Trump did was fill the strategic reserve to allow this to happen.

    Now, the problem is this, the name, Strategic Reserve. The two words define its use.
    Political posturing and ego inflation do not fall under this heading.
    It’s there for a rainy day. À apocalyptic event. A war, a meteor strike, something that had strategic importance.
    Biden will disappear in to the annuals of irrelevant also ran Presidents.
    My gut tells me he is not long for this world and we will see an acting Female President by default.

    Reply
  9. Jeremy Grimm

    Many of the comments seem to ask: What does ‘strategic’ mean when discussing the Strategic Petroleum Reserve? Maybe the question which should be asked is whether the Strategic Petroleum Reserve is intended to work as a tool that can be used to keep gasoline prices down as the u.s. headed into close elections.

    I tend to relate the term ‘strategic’ to military needs. The size of the reserve compared with the rate that the u.s. economy consumes and exports petroleum suggests — to me — a military intent for the Strategic Petroleum Reserve. If the reserve were intended to carry the u.s. economy through hard times, it seems a little small and the amount of exporting allowed for even the diesel light, light-crude seems odd if the u.s. were facing a ‘strategic’ economic crisis. Given the enormous amounts of fuel modern u.s. Armored Vehicles consume, I wonder whether the Strategic Petroleum Reserve is adequate for supporting truly strategic, truly National Defense needs … and the Biden u.s. government appears to be making little effort to replenish those reserves.

    Reply
  10. Biklett

    I’m sure Venezuela would be glad to refill the Reserve with cheaper heavy crude if given a long-term contract.

    Reply
    1. tevhatch

      but they can’t, at any money until they are brought back into production by supply of equipment, thinning agents etc. I commented earlier this month that USA blocked shipment of thinning agents from Iran at the same moment USA was trying to negotiate supply. Can I spell stupid? Why, yes I can: “W A S H I N G T O N”

      Reply

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