Just how much “reserve” does the SPR have and what’s it for?
Link to article: https://stillwaterassociates.com/just-how-much-reserve-does-the-spr-have-and-whats-it-for/
February 4, 2023
By Allison Bergquist
You may have seen a lot of news lately about fuel prices and the Strategic Petroleum Reserve (SPR). Here, we take a look at the origins of the SPR, the purpose of it and some of the potential challenges moving forward.
Another 70s Throwback
Following the 1973 oil embargo, President Ford signed the Energy Policy and Conservation Act of 1975, and the Strategic Petroleum Reserve (SPR) was born. The stated purpose of the SPR is to reduce the impact of disruptions in supply of petroleum products. Four underground salt caverns in Texas and Louisiana along the U.S. Gulf Coast combine to enable storage of up to 714 million barrels of crude oil.
The U.S. is not the only country with a reserve of crude oil. The International Energy Agency was formed in 1974 as another outcome of the oil embargo. Each of the 17 founding countries (now up to 30+) agreed to hold oil stocks equivalent to at least 90 days of net oil imports, in accordance with the International Energy Program (IEP). Per the IEP, members can hold their emergency stocks as industry stocks, government stocks, and agency stocks.
In North America, the U.S. is the only country with a stock requirement, as Canada and Mexico are both net exporters. No South American countries have joined IEA. In the Asia Pacific region, Australia, Japan, Korea, and New Zealand are all members, each with domestic laws that define stockholding obligations, guidance on stockpiling locations, mechanisms to address an emergency, limits to the response, and monitoring methods. Europe has the broadest membership in IEA, with 24 member countries. In addition to member domestic laws, the 2009 EU Oil Stocks Directive (2009/119/EC) aligns with the IEP 90-day commitment and applies to each EU member state. The EU emergency oil stocks were leveraged during 2022 and are expected to help Europe withstand the new sanctions against Russia that start February 5th. Given Russian’s invasion of Ukraine last year, and Germany’s resulting natural gas shortages, it is important to note that the IEP and SPR-like policies are targeted towards stockpiling oil, not gas. Only in recent years have natural gas and LNG become an increasing portion of the global energy mix and this is the first major natural gas-related crisis.
How Much “Extra” Does the SPR Have?
The SPR’s 714 MB capacity has the potential to provide significant buffer to release reserves while still meeting the IEP commitment of holding 90 days of stock. Based on current net crude imports of 1-2 million barrels per day (MBD), the SPR needs to maintain approximately 180 MB to have 90 days of reserves. On August 31, 2022, the SPR held about 445 MB of crude oil and previously held its highest inventory of 726.6 MB on December 27, 2009. As of January 27th, the SPR had an inventory of 371.6 MB. (check current inventory at this site)
Reserve Releases Have Helped in the Past…
Since creation, the IEA has taken collective action, in which the U.S. participated via SPR releases, for emergencies such as Operation DESERT STORM (1991), Hurricane Katrina (2005) and the Libyan Civil War (2011). During those events, the SPR was drawn down by 17.3 MB, 11 MB, and 30 MB, respectively.
2022 was the Largest Release Ever
In response to Russia’s invasion of Ukraine on February 21, 2022, President Biden authorized a drawdown of the SPR on March 1, 2022. By the end of March, U.S. pump prices for gasoline had increased from an average $3.53/gal to $4.23/gal, and President Biden’s authorized sale of 180 MB of crude from the SPR was recast to help ease the higher retail gas prices (“Putin’s Price Hike”). The Administration’s stated expectation was that the increased supply provided by SPR sales over a 6-month period would decrease pump prices and provide a 6-month bridge for domestic production to increase to maintain the higher level of supply moving forward. Pump prices peaked at around $5.00/gal in mid-June and steadily lowered to $3.09/gal by late December 2022, at which point the SPR had roughly 372 MB, the lowest level in 39 years. While the SPR releases were not the only tool leveraged by the Biden Administration that impacted pump prices (e.g., summer RVP waivers) and correlation does not equal causation, one would be hard pressed not to find some validity to the assertion that SPR releases helped lower pump prices.
…And Now The Other Shoe Drops
While American consumers may appreciate the lower pump prices, that’s not the end of the story. The Biden Administration now faces the task of refilling the SPR. Meeting the IEP commitment is far from the only reason to leverage the SPR caverns. The SPR provides energy security and flexibility to respond to various crises, from natural disasters to military conflicts.
The difference between SPR storage capacity and IEP requirements raises many energy policy questions. In 2019, the Congressional Research Service highlighted that Congress has passed legislation since 2015 to mandate sale of >250 MB of SPR oil to fund a variety of government activities. Congress previously mandated the sale of 147 MB from the SPR for fiscal years 2024-2027, but the December 2022 funding bill sought to cancel those sales. These mandated sales are different from the emergency releases authorized during times of crisis.
Back in October 2022, DOE finalized a rule and President Biden announced the intent to repurchase crude for the SPR when WTI prices are at or below $67-$72 per barrel. The purchases would be made at a fixed price, and the new rule allows for a fixed future price, which regulators hope will encourage more production. Industry responded skeptically to the plan, specifically the hope for increased production, following the last couple of years of pressure from investors to curb spending and shift to non-fossil activities in support of the energy transition. Though WTI has not been below $72/barrel in over a year, it has been coming down steadily for the last six months, as SPR volumes were released. The double-edged sword with SPR releases is the increased supply lowers cost per barrel, but if supply tightens as SPR releases stop, WTI prices may remain above DOE’s purchase window. When dealing with a volatile commodity like oil, producers may be hesitant to commit to DOE’s future fixed price if they expect the market will return higher profits. At this point, DOE plans to conduct a 3 MB pilot test purchase (of U.S. produced sour crude oil) using the new system and we will be watching to see how industry responds. The delivery window is February 1 to February 28, 2023.