The budget deal that the U.S. Congress passed and President Donald Trump signed into law last Friday calls for selling 100 million barrels of the Strategic Petroleum Reserve (SPR) by 2027 to help fund the government.
The sale of 100 million barrels of crude oil in the next decade would represent the largest non-emergency sell-off of strategic oil reserves and would equate to some 15 percent of the current stockpiles in the SPR.
The mandate for the SPR sale has drawn criticism because, some experts say, it would blunt the purpose of the strategic reserve to mitigate major global oil supply disruptions or price shocks. Other critics have said that tapping the emergency oil reserve for non-energy needs of the government is short-sighted, and that the SPR should not be used as a “government ATM.”
The Bipartisan Budget Act of 2018 mandates the Secretary of Energy to draw down and sell from the SPR a total of 30 million barrels of crude oil between fiscal years 2022 and 2025; another 35 million barrels during fiscal year 2026; and additional 35 million barrels in fiscal year 2027. In addition, under a budget deal from 2015, the Secretary of Energy is authorized to draw down up to US$350 million worth of crude oil from the SPR in the 2018 fiscal year to use for modernization of the reserve.
The budget deal also reduces the minimum required level in the reserve under which no drawdowns can be made, to 350 million barrels from 450 million barrels.
According to the Congressional Budget Office, the sale of the 100 million barrels from the SPR would generate US$6.36 billion between 2018 and 2027.
As of February 2, 2018, the SPR held a total of 665.1 million barrels of crude oil, while the current storage capacity is 713.5 million barrels, according to the Department of Energy. The average price paid for oil in the Reserve is $29.70 per barrel. Related: Tesla’s Powerpack: Real Hope Or Mostly Hype?
After the sale authorized last week will be completed by 2027, the SPR would hold 406 million barrels of oil, equal to around 56 percent of its capacity, according to DoE estimates quoted by Platts.
Kevin Book, managing director at ClearView Energy Partners, told Platts that the 100-million-barrel sale was “a resounding declaration of lawmakers’ new perspective on energy security.”
But Book also told Bloomberg that “This is nothing short of liquidation of a safety net.”
Current and past energy officials also criticized the proposal for the largest non-emergency strategic oil sale in U.S. history.
Energy Undersecretary Mark Menezes told Bloomberg in an interview that the SPR was not designed to serve as “a government ATM.”
“My own view is that SPR was put in place as an energy security mechanism to ensure that we had supply,” Menezes noted.
Bob McNally, president of consultancy Rapidan Energy Group and a former senior energy official at the White House under President George W. Bush, told Bloomberg that “Selling the SPR to cover non-energy budget expenses is deeply short-sighted and unwise.” Related: Goldman: Investors Grow Wary Of Another Oil Price Rally
“In 1996 and 1997 we sold SPR barrels to pay for unrelated budget expenses and I was in the White House when we put those barrels back at higher prices starting about five years later, after 9/11,” McNally said.
“Geopolitical risk is alive and well in the oil market, and the SPR is America’s only formal short-term line of defense against oil supply disruptions and price spikes,” Robbie Diamond, president of Securing America’s Future Energy, told Bloomberg.
While the proposed sale of 100 million barrels of the SPR may be a bet on America’s energy independence and security in the next decade, it is also raising concern that it could diminish the U.S. ability to respond to sudden major outages of oil supply as geopolitical woes are back on the oil market.
By Tsvetana Paraskova for Oilprice.com
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