ive here. This SPR fiasco shows that wishful thinking is not a strategy. But PowerPoint fans think otherwise.
Keep in mind that 180 million barrels may never be renewed is the total that the Biden administration issued to lower gas prices for the sole purpose of boosting the Democratic Party’s midterm prospects.
By Irina Slav, a writer for Oilprice.com with over ten years of experience writing about the oil and gas industry. Originally published in OilPrice
- Last week, the Energy Ministry rejected an offer to buy 3 million barrels to refill the Strategic Petroleum Reserve.
- Crude quality complicates the problem of refilling the Strategic Petroleum Reserve.
- The US Department of Energy may not have enough budget to replenish petroleum reserves.
Earlier this week, the Biden administration rejected the first bids from companies offering to sell crude oil in the country’s Strategic Petroleum Reserve. The tender followed a record issuance of 180 million barrels throughout 2022. 180 million barrels may not be returned to the Strategic Petroleum Reserve. “The DOE will only select bids that meet the required crude specifications and at a price that is a good deal for the taxpayer,” the Energy Department said in a statement following the failed tender, which called for modest bids of 3 million barrels. This statement reflects what many feared last year when President Biden said for the first time that the administration would sell oil from the Strategic Petroleum Reserve to bring down gasoline prices.
First, there is the issue of raw specs. When the administration was releasing crude oil from the Strategic Petroleum Reserve, there was no mention of the specification. The only important thing was the size. At the time, critics noted that the SPR contained mostly light and sweet crude, and that firing 180 million barrels of this grade wouldn’t make much difference to gasoline prices because American gasoline is made by blending light with heavy crude.
However, the oil market moves in strange ways, and sometimes that is enough to launch several million barrels of oil into the market to convince traders that there is plenty to come from. Fuel prices fell in the US, especially since the release coincided with persistent inflation that reduced consumption.
Secondly, comes the price issue. The Department of Energy had said at the end of last year that it would not start buying oil for the Strategic Reserve until after the price of WTI fell to around $67-70 a barrel. Right now, WTI is trading at around $75. However, it seems that this price is not low enough for the DOE. 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 a problem for more than one reason. First, because the Strategic Petroleum Reserve is at its lowest level since the early 1980s and, as some analysts have pointed out, is strategic Reserve, meant to be there in times of emergency. Therefore, in the event of an emergency, the Strategic Oil Reserve would be less than it should be.
The second reason this is problematic is that what the administration hopes to achieve with its offers to purchase crude oil for the SPR is not simply replenishing the reserves but stimulating increased oil production from domestic companies. It seems that local companies still lack the incentive to do so.
Production is already becoming more expensive for most US oil companies, according to industry executives. Although there is optimism in the oil patch, according to the latest Dallas Fed Energy Survey, it is moderate and cautious, and no one is in a rush to ramp up production at current oil prices. It can’t be surprising: US oil producers weren’t raising production when prices were significantly higher, either.
The bigger problem, however, is whether the DOE will be able to refill the Strategic Petroleum Reserve, as the Wall Street Journal’s Jingu Lee suggested in a recent article. And the answer to this question may be “no”.
Lee reports that the sale of 180 million barrels of crude oil from the Strategic Petroleum Reserve last year generated revenues of about $17.3 billion at an average price of $96 per barrel. But of that $17.3 billion, $12.5 billion has been earmarked for use by Congress in the latest spending bill to fill the gap left by the cancellation of previously scheduled SPR sales for 2024 to 2027, according to ClearView Energy Partners.
That leaves the Energy Department with $4.8 billion to spend on replenishing the Strategic Petroleum Reserve, and according to Lee, this could only buy 70 million barrels at WTI prices of $70 a barrel. That’s less than half of what was released last year.
However, even if WTI drops to $70 and the DOE starts buying crude, sooner or later the fact of buying SPR crude could push prices higher, reducing the purchasing power of the department.
What this indicates is that refilling the SPR will be more difficult than exploiting it to lower prices at the pump. Some analysts have argued that the Strategic Petroleum Reserve is irrelevant, anyway, in this day and age. Others have repeatedly noted that it’s called a strategist for a reason — and a very good reason.
Fit or not, the SPR will remain at below-normal levels for a long time, most likely. This will not only be because of the Energy Department’s unattractive offers to producers, but because exports of both crude oil and fuel to Europe are getting stronger and will only get stronger after February 5, when the EU embargo on Russian fuel kicks in.