Following a January announcement according to which the DOE planned to sell 8 million barrels of oil from the Strategic Petroleum Reserve, and which some speculated was the reason for the big buildup in crude inventories in the past several weeks, today the U.S. Energy Department said it will sell 10 million barrels of oil from the government's emergency crude reserve in late February.
This represents the second sale of oil from the emergency stash this year: according to Reuters, last month Shell bought 6.2 million barrels from the reserve and Phillips 66 bought 200,000 barrels, which was below the 8 million projected for sale. As explained below, that sale was partially held to fund a modernization of the SPR itself. More sales are expected be held in coming years to fund up to $2 billion for the revamp.
According to the notice of sale, the entire 10 million barrels will be sour crude drawn from three sites—Bryan Mound and Big Hill in Texas, and West Hackberry in Louisiana. Revenues from the sale will be deposited in the general fund of the U.S. Treasury to carry out the National Institutes of Health innovation projects as designated in the 21st Century Cures Act.
The sale from the SPR is required by a law passed last December to help raise funds for medical research. The law has mandated sales of 25 million barrels from the SPR over three years, starting with the sale of 10 million barrels this year.
The US oil reserve is held in a series of heavily guarded underground salt caverns along the coast in Texas and Louisiana and currently holds about 690 million barrels of mostly sour oil, a type containing high sulfur that many U.S. refineries can process. Part of the motivation to sell crude is to finance upkeep for the SPR itself. The reserves are held in salt caverns in Louisiana and Texas, setup decades ago in the aftermath of the Arab Oil Embargo in 1973. The SPR system can hold more than 700 million barrels of oil, the largest strategic stockpile in the world. The idea is that the SPR holds 90 days’ worth of oil supplies, which could be released in the event of a global outage.
A release has only occurred a handful of times, such as the Persian Gulf War, Hurricane Katrina and the Arab Spring.
Some of the storage systems are rusting and corroding after decades of use. In September, the DOE issued a report to Congress, which came to a dire conclusion about the condition of the reserve. “This equipment today is near, at, or beyond the end of its design life,” the report said. The sale "will allow the Department to take necessary steps to increase the integrity and extend the life” of the reserve, a DOE spokesperson said in December after the budget resolution was passed.
the SPR has been viewed as a cornerstone of US energy security policy. As long as the U.S. had 3 months’ worth of supply, it could weather unexpected disruptions. The International Energy Agency was setup in the 1970s as well, and participating members – in addition to the U.S., the group includes Europe, Japan, Korea, Australia and New Zealand – also have pledged to hold a 90-day supply. However, U.S. policymakers no longer view the SPR is all that important. Even the more hawkish members of Congress have been lulled into a sense of security from the surge in U.S. oil production and the resulting crash in oil prices. The world is awash in oil, so why does the U.S. need to stockpile such a massive volume of oil at great expense? The ostensible reason of selling off oil from the SPR is to finance its maintenance to ensure its existence over the long-term, but if the Congress still truly believed in the importance of the SPR, they would have found funding elsewhere instead of reducing the stockpile.