On the Strategic Petroleum Reserve
Illusory?
The Strategic Petroleum Reserve (SPR) was created in 1975 after the Arab Oil Embargo from 1973 to 1974. About 252 million barrels of sweet crude and 352 million barrels of sour crude have been stored in four subterranean salt domes in 61 caverns on the Texas and Louisiana Gulf Coast. It reached its highest inventory in 2009 at 727 million barrels. Releases occurred after hurricanes Gustav, Ike, and Katrina. Beginning In 2015 Congress ordered scheduled sales of crude to fund the deficit (via the Bipartisan Budget Act of 2015, the Fixing America's Surface Transportation Act (2015), the 21st Century Cures Act (2016), the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018). The SPR contained 350.3 million barrels as of September 3, 2023.
Designed to provide crude oil in the event of another embargo against the United States, the coverage of the SPR is determined by dividing the total SPR inventory by the average oil imports per day.
On average, for the first seven months of 2023, we produced (lower 48 + Alaska) 12,545 MMbpd of crude oil and 6,185 MMbpd of NGLs for a total of 18,729 MMbpd. Over the same period, we imported 8,542 MMbpd and exported 10,083 MMbpd.1 Looking only at imports and ignoring re-direction of exports, the SPR contains enough crude oil to replace imports for 41 days without reducing exports and maintaining consumption at about 20.28 MMbpd. If the SPR were completely full then it could replace our imports for 85 days. This description ignores the mix of products (we import and export a lot of refined product) and geographic demands (a barrel taken from West Coast supply isn’t the same as a replacement barrel on the East Coast).
President Biden has been depleting the SPR prior to elections to gain a political advantage by lowering gasoline prices.
So, what might happen if we had a true emergency that resulted in a cut off of our oil imports and how might that come about? We get about 84% of our imports from non-OPEC sources – 60% of the total comes from Canada and Mexico. It is difficult to see how an economy threatening embargo could materialize. No, the biggest threat to our oil supply is from the Biden administration by the cancellation of existing lease programs, increasing regulatory burdens, more onerous power plant regulations, refusing to lease federal lands, and the embargo of domestic use of petroleum (limits on ICE vehicles, prohibiting natural gas heating and cooking, etc.).
Withdrawals from the SPR are governed, with little to no statutory direction,2 by the Secretary of Energy. That Secretary, Jennifer Granholm, is a climate alarmist and hydrocarbonphobe. Why, pray tell, would Sec. Granholm not determine that a cut off of foreign supply was a wonderful opportunity to force the U.S. to cut back on oil consumption in line with previous Biden administration efforts? She could refuse to draw from the SPR.
Even if she decided to withdraw oil from the SPR, upon whom would she bestow a drawdown from the SPR? A favored NGO? A sale to China? Or using those barrels to buy down the price of gasoline before the next election? Based on this Secretary, there is no certainty that a drawdown would be used to fill the gap created by an embargo or loss of domestic production. The SPR is not something on which we can count. And it’s not just the Biden admistration: Congress has frequently sold SPR barrels for numerous non-emergency reasons.
In short, I’m not too concerned by the administration’s draw down of the SPR; the potential benefit is probably illusory.
Is there anything to be done?
One would think that refineries or utilities would want to maintain a reserve of crude oil to carry them though an unforseen shortage but this is unlikely because:
1. It’s a large investment; today (9/12/23) 1 million barrels of oil will cost about $100 million dollars including transportation and injection costs. Will customers, ratepayers and regulatory agencies see the benefit of such an investment that might never be used?
2. It’s expensive to maintain. It costs something to own a salt cavern, and keep it ready to unload its contents; there’s probably some small risk of formation loss.
3. Privately owned storage facilities are subject to universally rapacious taxing authorities who will impose a tax on the value of the oil, discouraging such storage; of course this could be solved by statutes creating an ad valorem tax exemption on such storage.
The SPR could have been created privately and the preparation for hostile embargoes by foreign countries or by the U.S. government could have been on a far firmer footing.
U.S. Energy Information Administration /Monthly Energy Review August 2023, Tables 3.1 and 3.2.
Sections 3 and 161 of the Energy Policy and Conservation Act, Pub.L. 94-163; §161(d)(1): “Drawdown and sale of petroleum products from the Strategic Petroleum Reserve may not be made unless the President has found drawdown and sale are required by a severe energy supply interruption or by obligations of the United States under the international energy program” ... (d)(2): “ (B) a severe increase in the price of petroleum products has resulted from such emergency situation; and (C) such price increase is likely to cause a major adverse impact on the national economy." President Biden found such an emergency just before the midterm elections in 2022.