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The U.S. Prepares To Sell Off Its Oil Reserves

Offshore Oil

The U.S. is beginning to wind down one of the core energy security policies of the past half century as the boom in domestic drilling eases concerns about supply.

(Click to enlarge)

The U.S. Department of Energy could begin to sell off some of its strategic petroleum reserve (SPR) as soon as January, the beginning of a multi-year process to shrink the nation’s stockpile of oil. Congress has authorized DOE to sell off $375.4 million worth of oil in its recent budget resolution. The DOE said that such a sale could be held in January 2017.

To be sure, part of the motivation to sell crude is to finance upkeep for the SPR itself. The reserves are held in salt caverns in Louisiana and Texas, setup decades ago in the aftermath of the Arab Oil Embargo in 1973. The SPR system can hold more than 700 million barrels of oil, the largest strategic stockpile in the world. The idea is that the SPR holds 90 days’ worth of oil supplies, which could be released in the event of a global outage. A release has only occurred a handful of times, such as the Persian Gulf War, Hurricane Katrina and the Arab Spring.

Some of the storage systems are rusting and corroding after decades of use. In September, the DOE issued a report to Congress, which came to a dire conclusion about the condition of the reserve. “This equipment today is near, at, or beyond the end of its design life,” the report said. The sale "will allow the Department to take necessary steps to increase the integrity and extend the life” of the reserve, a DOE spokesperson said in December after the budget resolution was passed.

Related: The U.S. Oil Rig Count Hits Its Highest Level Since January

It is hard to overstate the significance of the SPR to U.S. energy policy. In fact, some analysts would argue the U.S. does not really have a comprehensive energy security policy. There is no coherent theory, policy or philosophy driving U.S. energy security concerns, other than the U.S. military policing the world to ensure the security of supply, a mission that has governed American actions abroad since the Carter administration at least.

The one cornerstone of energy security policy has been the SPR. As long as the U.S. had 3 months’ worth of supply, it could weather unexpected disruptions. The International Energy Agency was setup in the 1970s as well, and participating members – in addition to the U.S., the group includes Europe, Japan, Korea, Australia and New Zealand – also have pledged to hold a 90-day supply.

But U.S. policymakers no longer view the SPR is all that important. Even the more hawkish members of Congress have been lulled into a sense of security from the surge in U.S. oil production and the resulting crash in oil prices. The world is awash in oil, so why does the U.S. need to stockpile such a massive volume of oil at great expense? The ostensible reason of selling off oil from the SPR is to finance its maintenance to ensure its existence over the long-term, but if the Congress still truly believed in the importance of the SPR, they would have found funding elsewhere instead of reducing the stockpile.

Indeed, some of the proceeds from the sale of oil will go towards other uses beyond paying for repairs, namely, the U.S. treasury, which belies the notion that the sales are simply for upkeep. The sales are only occurring because U.S. policymakers are no longer concerned about the security of oil supply for the U.S. economy.

Various pieces of legislation have put the U.S. on a path to sell off 190 million barrels of oil from the stockpile gradually over the next decade. The sales are slated to take in $2 billion by 2020 to finance maintenance.

Related: The Arctic Drilling Ban: Much Ado About Nothing?

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Beyond the question about the SPR’s relevance to U.S. energy security, a few other issues come to mind. First, the sale of oil from the SPR will occur at a moment of unusually low oil prices. The government could have taken twice as much revenue if it had sold the oil a few years ago instead of today when WTI trades for $50 per barrel. In the event that the U.S. decides to replenish the stockpile at some future moment, it will probably do so in a higher price environment. Selling low and buying high, any investor will tell you, is not a wise strategy.

A more immediate question is how the SPR sales will affect global supplies today. The release of oil will occur in already oversupplied market, and while the volumes are not huge, they will add pressure to prices. "Given stretched bullish positioning and the toppy state of inventories at Cushing, the sales of SPR oil could temporarily curb incentives for barrels in Cushing to flow to the U.S. Gulf Coast," Barclays analysts recently said. The oil could reach the market in March or April, just "as refineries exit their turnabouts, but that could still steepen the WTI contango," the Barclays analysts added.

“The DOE could not have picked a worse time to test the market,” said Bob van der Valk, senior editor at The Bakken Oil Business Journal, according to MarketWatch.com

By Nick Cunningham of Oilprice.com 

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  • Robert Spoley on December 27 2016 said:
    The ban on offshore drilling by Mr. Obama was because that would help the environment. Yeah. Right. Russia, Canada, Norway and Denmark (they own Greenland) control the vast majority of the Artic. He knows this. So he made the ban for some other reason. Canada has production off its East Coast. We have production off shore in about 1/2 of our share of the GOM. That fact sorta, kinda precludes the fact that there is additional production to be found on the rest of the coast between those two points. He only made the ban on the Atlantic from about Baltimore to the Canadian border. The rest is fair game? This ban is for political reasons only, and is designed to hurt the U.S. only. T
    he rest of the planet will do its' thing regardless of what Mr. Obama says or does and that is why Christmas was so very good this year. He'll be gone in less than 30 days so he can run for the Senate later.
  • Mark Ballard on December 27 2016 said:
    @GREGORY FOREMAN
    +1

    Absolutely moronic. The better approach is clearly to buy oil while cheap and release while expensive. The SPR has been on the (nearly) opposite track. Incredible waste of taxpayer money. It would be an interesting piece of investigative journalism to see the amounts purchased at what price.

    Using "upkeep" as an excuse for the sales is an affront to our sense of logic and proper judgement. Run it the way Foreman & I suggest and upkeep is self-sustaining.
  • Eric Smith on December 27 2016 said:
    Two points to make.
    1) They are selling light sweet oil because that is what he now produce in abundance. However, they should be buying heavy sour crude with the proceeds as we are now importing more of that variety than before the shale oil boom.
    2) The SPR storage sites are filled and emptied by pumping fresh water in or out. When they use fresh water, they melt more salt, changing the volume of the cavern. Ultimately, two adjacent storage caverns will become one. That's not good. They can delay the problem by using brine, but that would require spending capital they don't have for deep saline wells or for a brine storage cavern. The only caverns that operate with brine are those supporting LOOP, but they were designed around brine to begin with.
    Some folks believe that the SPR caverns were built with this fresh water "poison pill" to keep the government from manipulating crude prices by limiting their ability to change inventories. More likely, they simply lacked the capital to do it right.
  • GREGORY FOREMAN on December 26 2016 said:
    Yes indeed, leave it up to the government to add to screwing up an already screwed up market. The logical course of action the government "should have followed" would have been the purchasing oil when the price was depressed then selling the oil when the price increased. Such a "strategy" would have not necessitated an increase STP's capacity, would have contributed to the stabilization of the domestic oil market(by taking additional supply off the market) and have provided an investment source of revenue for the US treasury. Of course, if "should a, would a, could a" where dollars and cents we'd all be billionaires.
    When the US government is ran by a collective of "green jeans" advocates, common sense is a very rare "commodity".
  • johnsmart on December 26 2016 said:
    China continues to increase their SPR capacity at an aggressive pace. This should signal to US lawmakers that now is not the time to wind down national SPR levels, especially as the article pointed out; at $50 barrel. I'm sure the US could find a few hundred million somewhere else and don't need to sell oil to make repairs/upgrades.

    Either way, if something were to happen, the US will need every barrel it has.
    China knows this, why doesn't the US.
  • GregS on December 25 2016 said:
    That should be "The U.S. Prepares To Sell OFF Its Oil Reserves"

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