Effects of Strategic Petroleum Reserve Sales
September 18, 2012
As we mentioned in our August 23rd blog, last month the Obama Administration stated that they were considering a sale from the Strategic Petroleum Reserve (SPR) in the event of a crude oil price spike or supply interruption. Currently the SPR contains 694.9 million barrels of crude oil, twice the amount of commercial crude oil stored in the U.S. The 727 million barrel capacity crude oil reserve located in the U.S. Gulf Coast was created in the aftermath of the Middle East Oil Embargo to provide the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy. It is also the critical component for the U.S. to meet its International Energy Agency obligation to maintain emergency oil stocks, and it provides a national defense fule reserve. SPR stocks can be released either by an exchange, in which stocks are replaced within a specific time, or in sales where stocks are auctioned off in a competitive bidding process. Sales from the reserve have been authorized three times. The first sale in 1991 was authorized at the outset of the first Gulf War. In 2005, a sale was authorized in response to supply disruptions caused by Hurricane Katrina. The last sale was authorized last summer in a coordinated effort with the International Energy Agency in response to global disruptions in crude supply cuased by unrest in Libya and other nations in the Middle East. Each sale has been controversial and their positive effects on crude oil and retail gasoline prices have been questionable.
The 1991 release was the first time SPR stocks were auctioned off for sale. In the run-up to the furst Gulf War, the prospect of a world-wide crude oil shortfall sent crude oil and gasoline prices up. The SPR sale was announced on January 17, 1991 as crude oil prices fell. But the price drop is not attributed to the increase in crude oil supply from the reserve, but to the optimistic reports about the crippling of Iraqi air power and the diminished jeopardy to world oil supply. The price of West Texas Intermediate crude oil was higher than normal before the beginning of the war. Prices spiked to $32 per barrel as air strikes on Bghdad began on January 16, 1991. When the SPR sales announcement was made, prices dropped off $21 per barrel and remained fairly level through the end of February and the end of the war, around $20 per barrel. Average retail gasoline prices were around $1.34 per gallon in the month before the war. Prices dropped on January 21, 1991 to $1.19 per gallon and continued to fall, leveling out to around $1.05 per gallon at the end of March as the war came to a close.
In 2005 Hurricane Katrina struck the Gulf Coast causing massive damage to crude oil production facilities, terminals, pipelines and refineries. Supply levels of gasoline and other refined products were impacted and retail gasoline prices spiked. The price of WTI averaged $64 per barrel the weeks leading up to Hurricane Katrina. But because the SPR, pipelines and refineries were all affected by the storm, the release of unfinished crude oil into the market had little impact on prices. On August 29, 2005 when Katrina made landfall in Louisiana, WTI hit $67 per barrel. On September 6, 2005 when the sale was announced, WTI fell to just under $66 per barrel. By October prices for WTI averaged $62 per barrel. Average retail gasoline prices were around $2.45 per gallon in the weeks before Hurricane Katrina. Prices spiked on the week of September 5th to $3.07 per gallon. The SPR sale was announced on September 6, 2005. Prices began to drop the next week and returned to around $2.50 per gallon by the end of October.
2011 IEA Coordinated Release
The 2011 SPR sale was not a rapid response to an urgent situation like the Hurricane Katrina sale, but a delayed response to the disruption of Libyan crude oil supply during the Arab Spring uprisings that occurred in that country. This coordinated effort released 60 million barrels of crude oil onto the world market (30 million barrels from the U.S. and 30 million barrels from the 29 nations that make up the rest of the IEA). It is not clear that this sale had any serious effect on crude or gasoline prices.
In the months between the start of protests in Libya and the SPR Sales Announcement we see the effects of a highly integrated global crude oil market. WTI prices rose through the beginning of 2011 and the Arab Spring to a high of $112 per barrel on April 28, 2011. On May 2nd, the day Osama Bin Laden was killed, prices dropped precipitously. The SPR sale was announced on June 24, 2011 when prices dropped to $91 per barrel. Prices rebounded pretty quickly and by mid-July were at $97 per barrel. Average retail gasoline prices rose precipitously from the beginning of 2011 around $3.14 per gallon when protests in Libya began in mid February to a high of $3.96 per gallon by mid May. The week of the announced SPR sale prices dropped to $3.65 per gallon. By the end of July prices hovered around $3.70 per gallon.
Saving up over 700 million barrels of crude oil for a rainy day, or a few hurricanes is a good idea, and having that reserve is comforting. But using that reserve strategically is the key. The SPR was conceived to thwart crude oil supply disruptions in an emergency. In the 30 years since it’s inception, financial markets have grown to have as much of an impact on crude oil and therefore gasoline prices as supply and demand fundamentals. The reserve sale in the aftermath of Hurricane Katrina was ineffective because the infrastructure to refine and deliver the crude oil was knocked out during the storm. The 2011 sale was confounding because it seemed more to do with discouraging a market bubble than with relieving supply disruptions. Strengthening and diversifying the U.S. energy infrastructure is a better long-term strategy to mitigating supply disruptions and price spikes.
*Crude Oil and Gasoline Prices based on EIA data.