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The Strategic Petroleum Reserve Is Slowly Dying

Petroleum

Forty years ago, in the wake of the Arab oil embargo that made the United States acutely aware of just how dependent its economy was on imported crude, the government set up the Strategic Petroleum Reserve in a bid to make sure there were no repeats of the painful shortages the embargo caused.

Now, there are about 700 million barrels in the SPR. The U.S. is producing 9.42 million barrels daily, as of the week ending August 4th, a figure that is set to continue rising as shale producers keep on pumping more. Imports as of last week averaged 7.8 million barrels daily, with the four-week average at 8 million bpd. This means that the SPR holds crude oil equal to 40 days of local production plus imports.

How likely is an event that might require such a reversal to be put into play?

According to legislators, and to the White House, not very.

Dallas News author Tom Benning quotes one House representative, Joe Barton, as saying that at current production rates and the upward trend, the U.S. simply doesn’t need all that oil sitting in underground caverns in Louisiana and Texas.

Yet, prices are not high enough for lucrative selling, Barton said.

Trump obviously shares the opinion that the country doesn’t need so much oil--not at current production rates and falling imports. Yet, opponents of the idea to sell half of the reserve argue that what is true today might not be true a decade from now.

There are no guarantees the boom in oil production we are witnessing right now will keep its pace in the future, so it would be best to leave the SPR alone, which is what Congress is doing, to a certain extent.

There is more than one reason for leaving the SPR as it is, Dallas News’ Benning suggests, quoting government officials including the former head of the Energy Information Administration (EIA). In the last few years, the SPR has turned into what the EIA’s former head calls a piggy bank. Legislators have been selling portions of the reserve to plug budget holes and reduce deficits, and also for backing new bills. This has sparked a dispute on the actual purpose of the SPR.

Related: Barclays: Oil Prices To Drop This Quarter

In the meantime, the Department of Energy is selling oil.

So far this year, there have been a couple of SPR auctions, to the tune of 17 million barrels, and another one is scheduled for later this month.

Under a 2016 law, the Department of Energy may sell 25 million barrels of crude from the reserve over three consecutive years, beginning in 2017. The next auction will involve 14 million barrels.

Originally, the strings of the strategic oil purse were held tightly, allowing for sales either in case of a severe supply shortage—for instance if hurricanes damage oil transport infrastructure—or as part of U.S. obligations under the international energy program, according to legislation cited on the DoE website. Yet this legislation has been amended by newer acts that have turned the SPR into a piggy bank – a signal of the changing role of the reserve.

Piggy banks are a good thing to have, especially if you when faced with deficit. That’s why Congress has authorized the sale of a total of 190 million barrels from the reserve by 2025. Tellingly, no replacement of this crude has been envisaged in the relevant legislation.

So, it seems that Congress is doing the same thing that Trump wants: It’s just doing it at a slower pace, and a quieter one.

Slow may be better in the current price environment, with WTI still below US$50 per barrel and global inventories still above the five-year average.

By Irina Slav for Oilprice.com

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Leave a comment
  • Danny Hangartner on August 16 2017 said:
    Maybe, this oil is what President Trump was talking about when he mentioned that he was going to put the money in the people's hands instead of politicians lining their pockets.
  • Jose Scot on August 17 2017 said:
    Shale oil was our strategic petroleum reserve but we decided that the future of the US is less important than the present.

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