President Biden recently announced he will sell record amounts of US oil from the Strategic Petroleum Reserve (SPR) in a misguided (in my opinion) effort to bring down oil prices, which have risen to above $100 per barrel over the last year.
On March 31, the Biden administration announced the largest release of oil reserves from the SPR in history –up to one million barrels a day for six months — in response to rising energy prices exacerbated by Russia’s war with Ukraine, among other things.
“The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time,” the White House admitted when making the announcement. The purpose, they said, is to bring down the soaring price of gasoline.
“This record release will provide a historic amount of supply to serve as bridge until the end of the year when domestic production ramps up.” What they do not say is the Biden administration sharply restricted oil and gas exploration and drilling on his first day in office, which was a mistake, and now they want to tap the SPR to artificially lower oil prices ahead of the midterm elections.
This raises two primary questions: Will it work? And Is it a good idea? Very likely the answers are NO and NO. I’ll explain why below. But first, let’s look at the Strategic Petroleum Reserve, why it was created, how it’s supposed to work and why it was never intended to control oil and gasoline prices.
Established in the aftermath of the 1973-74 Arab oil embargo, the SPR was put in place to counter a disruption in commercial oil supplies which could threaten the U.S. economy.
The SPR is a collection of 60 underground salt caverns where millions of gallons of crude oil are stored. Known as the largest supply of emergency crude oil in the world, the federally owned facilities are managed by the US Department of Energy. Whoever is the current US president can decide to tap the reserve, but only under a set list of parameters.
The massive underground salt caverns used to store the nation’s reserve oil are found at four different sites along the coastlines of Louisiana and Texas. The four sites vary in size and together can hold 714 million barrels of crude, although the SPR is rarely completely full.
Drawdowns of the SPR have been relatively rare in its 45-year history. Before Mr. Biden tapped the reserve in 2021 and this year, previous American presidents had ordered just three emergency drawdowns, according to the Energy Department. During a drawdown, the US selects an amount of crude oil to sell, then auctions it off to the highest bidder — typically an oil company.
It’s more common for the government to release oil from the SPR under exchange agreements, which effectively act like a loan. More than a dozen such exchanges have taken place, usually after hurricanes. In 2000, former President Bill Clinton released 30 million barrels to combat a rise in heating oil prices — a move that was criticized at the time as a political ploy.
Now back to my two questions raised above regarding raiding the SPR. The first is: Will it work to lower oil and gasoline prices? The short answer is: Yes, but not by much and only temporarily. It is not unusual for gas prices to be at new highs just weeks after the drawdown. In short, tapping the SPR is not usually a good idea, and everyone in Washington knows it.
For example, on June 23, 2011, President Obama announced a 30 million barrel release from the SPR at a time when the average US gas price was $3.60 a gallon. The price of gasoline declined by about 2% over the next two weeks following the SPR release announcement, but by July 8, 2011, just over two weeks later, the price had again reached $3.61 per gallon, approximately the same level as before the release.
The answer to my second question above: Is it a good idea to raid the SPR should be obvious. No it isn’t. Now some will argue it’s no big deal because we can easily replace the oil we temporarily remove from the SPR. This much is true. But the real question is: At what cost?
Keep in mind that the oil in the SPR was purchased over many years since its creation in 1975. Over most of that time, crude oil prices were much lower than they are today. The WTI crude price this week is around $103 per barrel. As you can see, crude prices have been much lower than that over the last 40 or so years.
The point here is, while it will be no problem to replace the 180 million or so barrels President Biden wants to sell, the cost of that crude oil will be much, much higher than the original cost which was paid over the years.
Bottom line: Raiding the SPR is a bad idea all the way around. Biden and his cronies know this; they apparently just don’t care.
I’d agree that it won’t do much to lower oil prices, but your argument “the cost of that crude oil will be much, much higher than the original cost which was paid over the years” is utterly absurd.
The government does not release the oil for free, it sells it at the going rate of $100+/barrel. So when the oil is replenished, oil will very likely be lower in price, because a price spike or national emergency is typically a short term problem.