By John Kemp, Reuters energy commentator and reporter
The White House is reviewing its policy options to reduce the price of gasoline at the pump and expects to make an announcement in the next few days, the secretary of energy said in a television interview on Monday. Senior administration officials have repeatedly blamed OPEC+ for the rise in oil prices, which they say is boosting inflation and threatening the global economic recovery after last year’s pandemic.
Speculation is growing the administration could order the release of crude from the Strategic Petroleum Reserve (SPR) to lower oil prices after OPEC+ last week rejected calls to accelerate its output increases.
In political terms, releasing oil from the SPR would demonstrate the administration’s concern about rising oil prices and the impact on the cost of living for households and businesses. But in practical terms, it is unclear whether a release would have much impact on prices beyond the very short term because the volume of extra oil that could be made available would be too small (see "SPR Sale Would Release Only 60MM Barrels; Will Bring Even Higher Oil Prices: Goldman").
The SPR was created to hold up to 1 billion barrels of petroleum by the Energy Policy and Conservation Act of 1975 (Public Law 94-163) in response to the Arab oil embargo of 1973/74.
“Congress finds that the storage of substantial quantities of petroleum products will diminish the vulnerability of the United States to the effects of a severe energy supply interruption, and provide limited protection from the short-term, consequences of interruptions in supplies of petroleum products”, according to section 151 of the act.
The SPR is part of a network of emergency reserves maintained by International Energy Agency (IEA) member countries, under the Agreement on an International Energy Program of 1974.
IEA members agreed to maintain emergency stocks equivalent to at least 90 days of net imports as part of their response to the first oil shock, but the practice of holding emergency reserves dates back much further.
Britain’s oil companies agreed to raise stocks to the equivalent of 3 months peace-time consumption in 1936 as part of planning for the Second World War (“Oil: a study in wartime policy and administration”, Payton-Smith, 1971).
In the United States, the president is only permitted to order a drawdown from the reserve if he has determined it is required by “a severe energy supply interruption” or by international obligations under the IEA system.
The president must determine that an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration (U.S. Code Title 42 Section 6241(d)(2)(A)).
The president must also determine that a severe increase in the price of petroleum products has resulted from such emergency situation (42 USC 6241(d)(2)(B)) and that such price increase is likely to cause a major adverse impact on the national economy (42 USC 6241(d)(2)(C)).
In the circumstances which do not reach threshold of a severe energy supply interruption, the president may order a more limited release of up to 30 million barrels spread over no more than 60 days.
The president must determine a situation exists that “constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration” (42 USC 6241(h)(1)(A)).
He must also determine that “action taken under this subsection would assist directly and significantly in preventing or reducing the adverse impact of such shortage” (42 USC 6241(h)(1)(B)).
At international level, the IEA’s emergency reserves and programmes for reducing demand can be activated “whenever the group as a whole or any participating country sustains or can reasonably be expected to sustain a reduction in its oil supplies” (Agreement on an International Energy Program, Article 12).
The purpose is to develop “common effective measures to meet oil supply emergencies by developing an emergency self-sufficiency in oil supplies, restraining demand and allocating available oil among their countries on an equitable basis,” according to the agreement’s preamble.
Severe Energy Shortage
The legislative language establishing both the SPR and the IEA emergency reserves system makes clear the intent was to tackle physical energy shortages rather than simply a rise in prices.
Rising prices may be one of the harmful consequences of an energy shortage, with an adverse impact on the economy, but they were not the purpose for establishing emergency reserves.
Releasing SPR and IEA reserves makes sense when dealing with disruptions to supply as a result of extreme weather events (e.g. hurricanes); major oilfield or pipeline accidents; disruptions to major sea lanes of communication (e.g. the straits of Hormuz and Malacca and the Suez Canal); and embargoes (such as the Arab oil embargo).
Releasing reserves is also appropriate for maintaining adequate fuel supplies for both military and civilian users during extended military operations (e.g. conflict in the Persian Gulf or between the United States and China).
Finally, releasing reserves can provide mutual assistance to other countries which are themselves affected by extreme weather events, accidents, disruptions and embargoes.
In all these circumstances, the purpose of the stock release is to buy time for damaged infrastructure to be repaired or for diplomatic and military action to resolve embargoes, blockades and other political supply disruptions.
But stock releases were never envisaged and are not likely to be effective in countering OPEC+ production policies in the medium or long-term (https://tmsnrt.rs/31Egjfj).
Stocks versus Flows
The SPR and IEA emergency reserves are stocks while OPEC+ production policy affects a flow. Using stocks to try to counter flows is unlikely to be sustained or effective in anything other than the short term.
The SPR holds 613 million barrels of crude while other IEA members hold emergency reserves of about another 900 million barrels. OPEC+ countries account for more than 40 million barrels per day (bpd) of output.
If the U.S. president directed the release of 30 million barrels from the SPR under his more limited authority, it would be equivalent to increasing global supply by 82,000 bpd on a full-year basis, which is not significant.
If the United States was able to prevail on other IEA members to take part in a coordinated release, which is far from certain, the total volume might increase to 60 million barrels or 164,000 bpd on a full-year basis.
These stock release volumes would be very small compared with the increases of 400,000 bpd each month that OPEC+ has already announced, so the price impact would probably be limited.
The United States and other IEA members would have to release very large volumes of crude and products from stocks to have an enduring impact on the level of prices.
But the legal authority for large increases in excess of 30 million barrels by the United States and the same again by other IEA members is unclear and there may not be much enthusiasm across the membership as a whole.
Shock and Awe?
SPR and other emergency releases may be able to alter both spot prices and calendar spreads in the short term, but the impact is likely to be maximised if the release is unusually large and/or unexpected.
The White House has lost the element of surprise by repeatedly floating the idea of an SPR release several weeks in advance, which means it might need to go for a larger increase to create the necessary “shock and awe”.
More generally, an SPR release, unless very large and coordinated with other IEA members, is unlikely to have much sustained impact on its own on the production-consumption balance, level of inventories, prices or spreads.
To have a significant and lasting impact, the administration would need to combine the release with domestic policy measures to increase U.S. oil output, as well as diplomatic measures to persuade or coerce OPEC+ members to raise their own production faster.
The Strategic Petroleum Reserve: Background, Authorities, and Considerations (Congressional Research Service, 2020)
- Depleted U.S. oil inventories leave market vulnerable to shocks (Reuters, Nov. 4)
- Rising oil prices are fuelling expected inflation (Reuters, Nov. 3)
- Rally in U.S. oil futures fuelled by Cushing stock draws (Reuters, Oct. 28)
- OPEC+ comfortable with rising price trend (Reuters, Oct. 26)