The US draws highest oil amount from strategic reserve

President Joe Biden has last week ordered a release of oil from its Strategic Petroleum Reserve (SPR), as part of a coordinated effort with five other countries to curb surging energy costs. The US plans to tap 50 million barrels of crude oil in the coming months, while the other nations – the UK, India, Japan, Korea and China – are said to be releasing about 11 million barrels in total.

Oil tumbled by more than 10 per cent on Friday on concerns a global supply surplus could swell in the first quarter of 2022 and as the prospects of the freshly named Omicron variant of Covid, spooked investors. Following the release of the strategic oil reserves, OPEC’s Economic Commission Board announced that it now expects a 400,000 barrel-per-day (bpd) surplus in December, expanding to 2.3 million bpd in January and 37 bpd in February.

The US Congress created the Strategic Petroleum Reserve as part of the Energy Policy and Conservation Act of 1975 in response to a global oil crisis. Arab oil-exporting states led by Saudi Arabia had cut supply to the world market because of Western support for Israel in the 1973 Yom Kippur War. Oil prices quadrupled in response, resulting in major economic damage to the US and other countries.

The oil crisis caused the US, Japan and 15 other advanced countries to form the International Energy Agency (IEA) in 1974 to recommend policies that would forestall such events in the future. One of the agency’s key ideas was to create emergency petroleum reserves that cold be drawn on in case of a severe supply disruption.

The Energy Policy and Conseration Act originally stipulated the reserve should hold up to one billion barrels of crude and refined petroleum products. Though it has never reached that size, the US reserve is the largest in the world, with a maximum volume of 713.5 million barrels. It currently holds a little over 600 million barrels of crude oil down from its peak in 2010.

In the 1975 act, Congress specified that the reserve was intended to prevent “severe supply interruptions” – that is, actual oil shortages. Over time, as the oil market has changed, Congress expanded the list of reasons for which the SPR could be tapped, such as domestic supply interruptions due to extreme weather. Before the latest drawdown, more than 230 million barrels of crude oil had been released since the reserve’s creation. The amount of the November 2021 release, 50 million barrels, is the largest so far.

There have only been three emergency release in the reserve’s history. The first was in 1991 after Iraq invaded Kuwait the year before, which resulted in a sharp drop in oil supply to the world market. At that time, the US released 33.75 million barrels. The second release, of 30 million barrels, came in 2005 after Hurricanes Rita and Katrina knocked out Gulf of Mexico production, which then comprised about 25 per cent of US domestic supply. The third was a coordinated release by the International Energy Agency in 2011 as a result of supply disruptions from several oil-producing countries including Libya, then facing civil unrest during the Arab Spring. In all, the IEA coordinated a release of 60 million barrels of crude, half of which came from the US.

In addition, there have been 11 planned sales of oil from the reserve, mainly to generate federal revenue. One of these – in parituclar the 1996-1997 sale to reduce the federal budget deficit – seemed to serve political ends rather than supply-related one. Biden’s decision to tap the reserve was similarly seen as political by Republicans because there’s no emergency shortage of supply. The White House said part of the release is an acceleration of planned sales approved by Congress, while the rest is an exchange that will return to the reserve over time.

Given the US is today a net petroleum exporter, the Strategic Petroleum Reserve has entered a new era. Some of its original rationale and function – to be used in emergencies to ensure the US has a steady supply of oil – are gone. Moreover, efforts to reduce global carbon emissions and the use of oil – for example, with more electric cars on the road – will likely only reduce the need for such a reserve. Indeed, Congress has recognized the reality that oil exports have been declining. It mandated annual sales form the reserve beginning in 2017 and extending through 2028 – for a total of 271 million barrels.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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