The U.S. SPR is currently at a multi-decade low.
Replenishing 300 million barrels at a cost of even $70 per barrel would cost $21 billion for the oil alone.
The United States needs the SPR as a safety net less than it did in the ‘70s.
With the amount of crude oil in the U.S. Strategic Petroleum Reserve now at multi-decade lows, the prospect of replenishing the reserves could be an arduous task according to some, and a cinch to others.
The SPR isn’t empty, contrary to the hyperbolic headlines that have casually misrepresented the current state of the nation’s emergency oil stockpiles. But it is fair to say that the amount of crude oil in the emergency stockpiles is the lowest it’s been in decades and decades - since 1983 to be precise - and it could take decades to put it all back.
Taken by itself without further context, the current inventory levels and the possibility that it might not be a simple task to purchase hundreds of millions of barrels of oil to replenish it has caused some consternation among those within the oil industry - and without. In fact, it has been especially irksome to many outside the oil industry, who are concerned that without a fully stocked SPR, America will soon be at the hands of some merciless Middle East oil-rich nation or global supply outage.
[ZH: bear in mind that, in the context of the USA's daily demand, the SPR now has a record low 20-days-worth of supply...]
There are two pieces to this SPR puzzle.
One, is it possible to refill the SPR in short order, and two, does the United States need such a fat SPR anyway.
SPR Has a Refill Problem
Behind some of the SPR angst are difficulties that come with refilling the SPR with such a large amount of crude oil. Last year, the Biden Administration began the process of selling off 180 million barrels of crude oil that was housed in the salt caverns known as the SPR. Additional sales that were already mandated by Congress followed shortly thereafter, bringing the total number of barrels sold from the SPR since President Biden took office to 291 million barrels.
The problem with refilling the SPR to the tune of nearly 300 million barrels is multifaceted.
First, oil prices are still a bit above the level that the Biden Administration said would trigger purchasing action. Most short term forecasts are calling for price hikes instead, so the likelihood of prices falling to those levels soon is not estimated to be a sure thing.
Second, 300 million barrels at a cost of even $70 per barrel would cost $21 billion for the oil alone. Now, the Administration would argue that since it canceled congressionally mandated sales that had called for another 147 million barrels of crude oil to be sold from the SPR, it should be counted that it has already replaced 147 million barrels, leaving only 144 million left to purchase at a minimum cost of $10.8B with $70 oil.
What’s more, that cancellation resulted in Congress taking $12.5 billion away from the DoE that was to be used to repurchase crude oil, leaving it with just $4.3 billion of available cash to buy.
Nevertheless, the Administration is confident that it will refill the SPR, although the anticipated timing of the repurchases depend entirely on who in the Administration is doing the talking.
Next up is the issue of infrastructure and feasibility of filling, withdrawing, refilling, etc. of the SPR. Those salt caverns are made of… well, salt, and according to SPR former project manager William Gibson, who spoke to Bloomberg, they were built—in the ‘70s—with the idea that they would last 25 years. They were also designed to be withdrawn and refilled just five times, lest the salt caverns simply dissolve.
As one former official put it, the caverns were “not really intended for daily ATM-type operations.”
Any buyback program would have to be slow-rolled in order to prevent price spikes—the very thing that triggered SPR sales in the first place. In March, even Energy Secretary Jennifer Granholm said that any repurchase scheme would take years.
Does the U.S. Need it Anyway?
In the other camp are those who argue that the United States might not need this oil anyway. When the SPR was first conceived, the United States had just found itself in an energy crisis, with Middle Eastern oil producers withholding crude oil from the United States, which was itself producing 8.4 million barrels of oil per day, while importing 4.1 million bpd, according to EIA data. Total average U.S. net imports of crude oil and petroleum products was 6.2 million bpd. Having an SPR with a capacity to hold 714 million barrels seemed like a necessary piggy bank should supply shocks reemerge.
Fast forward to today, and the United States’ net imports are -1.3 million bpd, while producing over 12 million bpd. Some would argue that the SPR, while certainly still a handy safety feature for weathering supply shocks like natural disasters, has lost at least some of its climacteric properties.
Still, not all crude oil grades are equal. And while the United States is a net importer of petroleum products, the United States still imports 6.3 million barrels of crude oil every day, and global supply shocks still have the power to put the United States in a tough position, much like the squeeze consumers—and the Biden Administration—felt when demand rushed back quicker than supply post-Covid pandemic.
Does this Administration Really Want It?
Of course, it’s entirely possible that the Biden Administration is less eager to refill the stockpiles than its words would suggest. Last December, the Biden Administration announced plans to make its first repurchase, issuing a solicitation for 3 million barrels of sour crude. Contracts were due to be awarded in January 2023. WTI was trading at $74 at the time. The purchase was ultimately canceled, with the Administration saying that it did not get offers that met its terms for price or quality. The move triggered critics who claimed the Administration was not earnestly looking to replenish what it had sold off.
But in June of this year, the DoE announced that contracts were awarded for the acquisition of 3 million barrels of U.S.-produced crude for the SPR, while announced a solicitation to purchase another 3.1 million barrels in September.
At the rate of 6-9 million barrels per year, however, it would take between 33 and 50 years to replenish the 300 million barrels sold.
The United States needs the SPR as a safety net less than it did in the ‘70s. Crude oil prices might not be low enough ever again to entice the government to purchase. The salt caverns have a limited capacity to accommodate repeated inflows and outflows. Even if the government wishes to replenish in earnest, it will likely take decades to refill.
All these factors point to the likelihood that the SPR will stay empty for decades to come, if not forever.