Commentary On The SPR -- April 22, 2024

Locator: 47056SPR.

I can't recall if I've ever posted my thoughts on the SPR. I've thought about it often since around 2018 or thereabouts. Before Covid. 

I've long questioned the need for an SPR. One of my pet peeves: the memes about depleting the SPR. There's a reason CBNC seldom even mentions the SPR except as a political / headline interest when the president makes an announcement.

So, with that, a deep dive, but only two links. That's all I have time for and about as interested as I am in this subject. The first link, from 2009, is a very, very old document and may not have much relevance today but it does provide a nice historical perspective.

This paragraph was particularly noteworthy, and the reason I posted this link.

The meaning of a “severe energy supply interruption” has been controversial. EPCA intended use of the SPR only to ameliorate discernible physical shortages of crude oil.

However, the American Clean Energy Leadership Act of 2009 (S. 1462), reported in the Senate, would require that the SPR include 30 million barrels of refined product; would transfer authority for a drawdown from the President to the Secretary of Energy; and would amend the drawdown authority to permit drawdown and sale in the event of a “severe energy market supply interruption” that has caused, or is expected to cause, “a severe increase” in prices.

This language is a significant departure from existing authorities which predicate drawdown disruptions in supply, and discourages use of the SPR to address high prices, per se.

However, the was never even voted upon in the US Senate. From wiki:

The second link is from earlier this year.

Whether or not language regarding the SPR and managing the price of gasoline has ever been codified (I don't know), the current president if very clear about this.

The largest series of oil releases from the SPR, by far, has been in response to the oil price hikes in the wake of the Russian invasion of Ukraine, which began in February 2022 (Neely, 2022). On March 1, 2022, the International Energy Agency coordinated an international release that included 30 million barrels from the U.S. SPR. In the following 8 months, President Biden ordered the release of an additional 340 million barrels of oil. The 370 million barrels in these invasion-of-Ukraine SPR releases was 64 percent of the SPR stock on February 25, 2024, and greater than the combined total of all other releases since 1985.

The Biden administration argued that the releases substantially lowered gasoline prices, and it is very likely that any supply increase lowers prices to some extent. To put the drawdowns in context, however, the U.S. Energy Information Agency reports worldwide production and consumption of about 97.3 million barrels of oil per day, of which the U.S. consumed about 20.3 million barrels. Therefore, the 370 million barrels released over 8 months amounted to about 1.6% of world oil production during that time.

The president is certainly acting in line with the DOE's articulation of the purpose of the SPR.

This raises the issue of the best purpose for a strategic reserve of any sort. On the one hand, the government could act as a private long-term speculator, keeping a strategic reserve that can be drawn upon when prices are high and refilled when prices are low. Such a strategy would tend to make money and stabilize market prices. In fact, Milton Friedman argued that profitability was a good measure of whether a trading strategy stabilized or destabilized asset prices. The Department of Energy describes the purpose of the SPR in this way, saying that it is "used to alleviate the market impacts of both domestic and international disruptions" (Department of Energy, 2024).

Be that as it may, a few things:

• the SPR, as originally intended, no longer matters;
• the SPR provides a great political asset for any president;
• the SPR has "no" effect -- other than possibly a short-term psychological effect -- in affecting the price of gasoline.

The price of gasoline is:

• to some extent local; there is no "real" national price;
  
• a political talking point;
• determined by so many other factors, that for all intents and purposes, the SPR is irrelevant

Fact:

• the price of gasoline is affected much more by government policies and regulations than the status of the SPR (exhibit A: California)
• release the entirety of the SPR and the price of gasoline is unlikely to change significantly in California
• California would not have the refineries to manage all that oil and the state doesn't have the resources to absorb the refined product even if refiners outside California could provide it

The US is approaching 5 million bopd in crude oil exports. It would be interesting to know what would be required to push US exports to 5 million bopd on an on-going basis.

Arithmetic: 5 x 30 = 150 million bbls / month.

Here is the history of the SPR drawdowns since 2015. Compare each draw with 150 million bbls / month that is currently being exported and then consider that if pushed to shove, the US could easily add another three million bopd production more than it currently produces (90 million bbls / month).

Stop exports today and in less than a week the amount not exported would surpass every SPR withdrawal since 2015 except one. This needs to be fact-checked. I must be missing something.

If my arithmetic is wrong, this is from the link above regarding Biden's announced releases in the past eight months: the 370 million barrels released over 8 months amounted to about 1.6% of world oil production during that time.

The world would not miss that US oil: the Mideast could easily replace it. 

Anyway, gotta stop here. In a long note like this there will be content and typographical errors. If this matters to you, go to the linked sources.

Is there enough pipeline capacity and shipping capacity to handle that much more crude oil for export? One may want to check the most recent Bloomberg report regarding EPD's new deepwater export terminal. I think the story came out yesterday. I'm not going to post it or link it for now. 

Bottom line: the SPR is nothing more than a political "asset" for the president. It's not going to go anywhere any time soon. But, as originally intended, the SPR no longer matters.

This matters not at all, but for the record: which presidents filled and depleted (used loosely) the SPR?