U.S. Strategic Petroleum Reserve is Ever More Politicized

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Researched by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--A bill meant to limit federal authority to tap the U.S. Strategic Petroleum Reserve (SPR) stands little chance of passing, though the reserve may be depleted in any event because of trends outside of Washington's control.

With only one Democrat nodding in consent, the House of Representatives voted 221-205 to pass H.R. 21 (118), a bill designed to limit presidential authority to draw on the SPR. "Except in the case of a severe energy supply disruption," the bill reads, SPR sales are prohibited unless the government offers a complementary increase in acreage available for drillers.

In April, a few short months after Russian military forces crossed into Ukraine, U.S. President Joe Biden announced the government would draw some 180 million barrels of oil from the complex of storage caverns along the U.S. Gulf Coast over the course of six months.

West Texas Intermediate (WTI), the U.S. benchmark for the price of oil, shot up from about $91 when the war began to as high as $123 a few weeks later. When Biden announced plans to tap the SPR, WTI was at $102 per barrel, some $22 higher than current levels.

The Biden administration spent much of last year combatting consumer-level inflation, which reached double-digit territory last summer. For everyday consumers, one of the most common signs of inflation is at the gas pump.

At the time, motor club AAA was crediting the decision to tap the SPR for offsetting the geopolitical risk premium and supply-side restraints stemming from the war.

"The upward push on oil prices caused by Russia's war in Ukraine is meeting stronger downward pressure from the planned SPR oil release and increased COVID fears in China," AAA stated. "And lower global oil prices are reflected in falling pump prices for consumers in the U.S."

And yet, a few months later, consumer gasoline prices hit the highest level ever at just more than $5 per gallon, though overall inflation had started to ease by then. Nevertheless, with Biden spending much of his time last year talking about his efforts to control the price at the pump, his counterparts in the GOP accused him of using the SPR to cover bad policy.

With the energy transition in full swing, the White House was averse to new offshore leases and Biden's critics said stifling the domestic energy sector was at least part of the reason for higher commodity prices.

H.R. 21 (118) includes language on increased lease sales, but it would take years for those new reserves to yield meaningful barrels. Meanwhile, despite concerns that the pace of growth is slowing, inland shale oil production should break the 2019 record this year, and 2024 levels are expected to be even higher.

The SPR was created in coordination with Western allies at the International Energy Agency (IEA) in response to the Arab oil embargo in the 1970s. And it's been tapped repeatedly--after Hurricane Katrina and in response to the Arab Spring uprisings, to name two examples.

The worst outbreak of regional war since World War II would certainly quantify as a "severe" energy supply disruption as outlined under H.R. 21 (118). Congress, meanwhile, has been selling reserves from the SPR to fund the deficit since 2015.

The SPR nevertheless is depleted with the volume at its lowest level since the mid 1980s. Should a winter storm freeze the wellheads in Texas again, or another major hurricane knocks regional refineries and producers offline, the nation would have to draw more on foreign supplies, a taboo for some members of the GOP.

Elsewhere, the White House said it would buy the oil to refill the SPR once crude oil prices dropped to about $70 per barrel--an unlikely floor, given forecasts for higher-for-longer crude. And yet, the SPR still holds about 160 days of supply, higher than the IEA's recommended level.

With just one Democrat in support of the bill, it's unlikely that H.R. 21 (118) will move through the Senate, much less meet Biden's pen. Much of the legislation, meanwhile, is somewhat moot given the SPR was established to respond to "severe" disruptions in the first place.

Oil is political and it's global. No single political party and no single country can influence the market on its own. With its fate in the Senate all but doomed, and with the threat of a presidential veto, the latest U.S. volley over energy is less of a constructive exercise and more of an example that energy is a political tool, both at the international and national level.

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