Strategic Petroleum Reserve: DOE continues to show no intention of refilling it

ED IRELAND JUL 14

Strategic Petroleum Reserve: DOE continues to show no intention of refilling it

DOE makes small purchases to avoid criticism, while Congress uses the SPR as a piggy bank.

ED IRELAND

JUL 14

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On July 7, 2023, the U.S. Department of Energy announced its intention to purchase crude oil to replenish the SPR:

WASHINGTON, D.C. — Today, the U.S. Department of Energy’s (DOE) Office of Petroleum Reserves announced that it plans to purchase about 6 million barrels of oil for the Strategic Petroleum Reserve (SPR), with receipts scheduled for October and November 2023. This purchase is in continuation of the Biden-Harris Administration’s replenishment plan and is the third solicitation that DOE has issued this year to repurchase oil for the SPR. DOE will pursue additional repurchase opportunities as market conditions allow. Today’s solicitation is for crude oil for delivery to the Big Hill SPR site. Bids for this solicitation must be received by DOE no later than 10:00 a.m. Central Time on July 19, 2023.

The Biden Administration sold 266 million barrels of crude oil out of the SPR, the largest drawdown in the history of the SPR, leaving the SPR at its lowest level since 1983. The drawdown was for the political purpose of pushing down gasoline prices before the mid-term elections. They bought 3 million barrels and now are taking bids to possibly buy 6 million barrels. They may buy 6 million barrels, but they may reject all bids and buy nothing.

DOE had pledged to begin refilling the SPR when crude oil futures fell to $67-$72 per barrel, but when that price level occurred in March of this year, they did nothing. With West Texas Intermediate closing at $75.85 per barrel on July 12, 2023, it is doubtful that DOE will buy any crude oil anytime soon.

DOE is clearly signaling that they are not really interested in refilling the SPR. The SPR is nothing more than a political football to this and previous administrations.

Background

The SPR was established in December 1975 after the 1973 OPEC oil embargo. The law establishing the SPR said it was designed “to reduce the impact of severe energy supply interruptions” such as that caused by the embargo. Here is a brief history of the SPR:

The U.S. government began to fill the reserve in the late 1970s. At its high point in 2010, the level reached 727 million barrels. At present, it stands at 347 million barrels, the lowest level since August 1983.

President Reagan made it a priority to fill the SPR. During his first term, he added 343 million barrels to the SPR, with another 109 million barrels added during his second term. By the time President Reagan left office, the SPR level had reached 560 million barrels. No other president would come close to the 452 million barrels that were added during President Reagan’s two terms.

The fill rate declined considerably during the term of President George H. W. Bush, with only another 15 million barrels being added by the time President Clinton took office. This was partly due to the first substantial release from the SPR during Operation Desert Storm.

President Clinton would be the first President to aggressively use the SPR to attempt to fight high gasoline prices. Politicians would begin to make a habit of calling for SPR releases ahead of elections, because high gasoline prices get politicians thrown out of office. During President Clinton’s first term, the SPR was depleted by 9 million barrels, and another 25 million barrels were sold from the SPR during his second term.

Following the terrorist attacks of September 11, 2001, President George W. Bush announced that the SPR would be filled to its capacity. President Bush would add 135 million barrels to the SPR during his first term, and another 26 million barrels during his second term. By the time Barack Obama was inaugurated, the SPR level would be at 702 million barrels.

During President Obama’s first term, the SPR was depleted by 7 million barrels. But from its peak, the SPR was reduced by more than 30 million barrels by the end of Obama’s first term. President Obama’s second term saw less activity in the SPR, with the level decreasing by only another 200,000 barrels.

President Donald Trump inherited an SPR with a level of 695 million barrels. For each of his first three years in office, the level of the SPR declined. By the end of 2019, the level had fallen by 60 million barrels to 635 million barrels.

President Joe Biden inherited an SPR holding 638 million barrels. However, first in response to rising gasoline prices and then as a result of Russia’s invasion of Ukraine, President Biden announced the most aggressive SPR drawdown in history. During his first two years in office, the SPR was drawn down by 266 million barrels. So far, in 2023, another 25 million barrels have been sold from the SPR.

Thus, President Reagan was the champion of SPR fills, and President Biden was the champion of SPR depletions. Overall, with the exception of President Trump, Republicans have increased SPR levels during their terms. Democrats, with the exception of President Carter, have decreased SPR levels.

The SPR has also been used as a political spending tool. Past Presidents and Congress has sold forward SPR reserves as a “paid for” to help offset the cost of spending bills. Two recent congressional acts collectively call for the sale of 107 million barrels of crude oil in F.Y. 2022 through F.Y. 2027:

• The Bipartisan Budget Act of 2018, enacted in February 2018, calls for the sale of 30 million barrels over the four years of F.Y. 2022 through F.Y. 2025, 35 million barrels in F.Y. 2026, and 35 million barrels in F.Y. 2027.

• The Tax Cuts and Jobs Act of 2017, enacted in December 2017, calls for selling 7 million barrels over the two years of F.Y. 2020 through F.Y. 2027.

To sum it up

A few months ago, Energy Secretary Granholm said: “We will begin that process (refilling) this year, but to refill the full amount is impossible.” She is right about that. It is impossible to refill the SPR if DOE only makes occasional minuscule crude oil purchases.

The excuse DOE makes for its inaction is they are trying to save taxpayer money. They brag about how they are attempting to play the crude oil market by patiently waiting until the price of crude falls:

The Administration’s replenishment strategy has secured a good deal for the American taxpayer. During the first two solicitations, for a total of 6.3 million barrels, the average price paid was $72.67 per barrel – much lower than the average of about $95 per barrel that SPR crude was sold for in 2022.

Obviously, DOE could care less about taxpayer money. If DOE were serious about refilling the SPR, they would already have done it.

DOE, the administration, and Congress have shown little interest in the SPR. Congress has passed bill after bill that treats the SPR as a piggy bank and could order DOE to refill it, but they have not done so.

While the U.S. is the world’s largest producer of crude oil, we still need to import high-sulfur heavy crude oil for our 1970-era refineries. If a war were to break out, say China invading Taiwan, international crude oil trade would be disrupted, so the U.S. does need to have SPR reserves of heavy crude oil available.

Let’s hope the U.S. doesn’t need to tap the SPR anytime soon. Unfortunately, hope is not a good plan for domestic energy security