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Rakesh Upadhyay

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Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Does The U.S. Really Need A Strategic Petroleum Reserve?

Storage

With oil prices below $50 per barrel and advances in U.S. shale oil drilling transforming the U.S. into one of the top oil producers in the world, has the Strategic Petroleum Reserve (SPR) lost its relevance, as some experts believe?

The global head of energy analysis for Oil Price Information Service, Tom Kloza, said, “You might as well be wearing bell-bottoms as having 690 million barrels in storage,” reports NPR.

Mr. Kloza believes that half of the SPR should be sold off. There are a number of other experts who believe that the SPR should be completely done away with, whereas, others are certain that the SPR is still as important as it was in 1975, when it was created.

Currently, the SPR holds 695.1 million barrels of oil. It requires a $226 million budget allocation and 126 federal employees to keep the program going. On top of that, the infrastructure needs maintenance, and the Obama administration has asked the Congress to assign $375.4 million to that end.

At current prices, the SPR is worth close to $34 billion.

The net imports by the U.S. in 2015 was 4.6 million barrels per day, according to the U.S. Energy Information Administration. Hence, with 695.1 million barrels of SPR, the U.S. can sustain itself for 151 days without any imports. This gives the U.S. an upper hand in its foreign policy with the middle east and Russia. Related: OPEC’s Pain Is Only Getting Worse As Revenues Continue To Fall

It is also important to note that the SPR is not meant to manipulate the price of oil. Martin Young, head of the Emergency Policy Division of The International Energy Agency (IEA), says: “The oil stocks are not there for price management as such,” he explains, “they’re there to correct a shortage in the market because of a supply disruption,” reports the BBC.

The recent outages in Canada and other places serve as examples of how a surplus market can shift into a deficit within a short span of time. The supply disruptions need not be too large, removing only 3.5 million barrels of oil from the market. Meanwhile, oil prices, which were looming below $40 per barrel, have since reached close to $50 per barrel.

This shows that the oil markets are in a delicate balance. Even small amounts of disruptions can lead to a large amount of price appreciation.

Though the meeting between the OPEC and Russia in Doha did not yield any results, the risk of a manipulation by the larger cartel is real. The recent Saudi Arabian threat of liquidating $750 billion of U.S. assets cannot be taken lightly.

Actions such as the Arab Spring can seriously affect the world’s oil production and lead to a sharp spike in prices. Hence it is important that the U.S. maintains the SPR at current levels, though its use should be limited for emergency purposes only.

By Rakesh Upadhyay for Oilprice.com

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  • HocusLocus on July 09 2016 said:
    Stupid is winning.

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