Keeping fuel prices low is a political priority for US President Donald Trump. Just don’t bet on him gambling with America’s emergency oil stocks to achieve a second term in office, at the risk of jeopardizing energy security for the world’s largest economy.
Created in the early 1970s, soon after the oil shock caused by OPEC’s disastrous response to the Yom Kippur war, the Strategic Petroleum Reserve (SPR) remains arguably America’s most important economic buffer. Ironically, the first oil pumped into the giant salt caverns acquired by the US government was shipped from Saudi Arabia.
The SPR was created to ensure the US would never again be held hostage by the oil-rich Persian Gulf states, which still wield phenomenal power to influence the price of the world’s most important commodity. The embargo caused oil prices to quintuple. Fuel rationing was imposed, and a 55mph speed limit was introduced to keep consumption in check and avoid an economic catastrophe.
Today, the SPR contains almost 650 million barrels of crude, which is enough to meet the nation’s total demand for over a month. Two-thirds of this crude is considered to be of a sour viscous grade, ideal for the majority of US refineries and processing plants. Although presidents have the right to tap into the stockpile in cases of “severe energy supply interruption”, its use is tightly regulated.
President George Bush opened the taps to the reserve on the day Operation Desert Storm was launched against Iraq in 1991. Over a decade later, his son used the SPR to provide supplies to refineries soon after Hurricane Katrina devastated supply chains in the Gulf of Mexico. More recently, President Obama decreed in 2011 an emergency release from the SPR to prevent rampant oil prices, which had climbed to $120/b following the collapse of Libya’s government, from derailing the recovery from the financial crisis.
The danger is that such releases can distort markets by providing short-term relief to economic events. Upsetting the physics of supply and demand with artificial stimulus can have long-term consequences. By 2014, supply concerns had abated, causing an oil price crash that threatened to bankrupt petrodollar economies like Saudi Arabia.
Current risks to crude flows
The latest tension between Iran and the US after President Trump imposed new sanctions has again highlighted the importance of the SPR. Tehran has threatened to shut the Strait of Hormuz, and attacks on oil infrastructure in the Gulf along with supply disruptions in Venezuela and elsewhere could provide the necessary excuses for a drawdown should oil markets panic.
However, this would probably be a last resort for the Trump administration. The president and his inner circle are thought to consider the SPR a trump card in their hand, only to be played when all other options to cool prices have been exhausted. With US crude trading below $60/b this isn’t an issue. Trump’s alternative strategy of pursuing closer ties with Saudi Arabia, while intimidating OPEC on Twitter, is working without such drastic measures.
The rise of US shale oil has also raised doubts over whether the SPR still has a role. The US government expects domestic oil output to reach 13 million b/d by next year, consolidating America’s position as the world’s largest producer. Under these circumstances it could be argued that the SPR could be drained to provide a modest financial windfall without any risk to the economy.
To a certain extent, a slow bleeding of the SPR is already under way. Congress has passed legislation for the Department of Energy to sell around 290 million barrels from the SPR by the end of the 2027 fiscal year. Last month, officials were also jawboning about the possibility of using the reserve to blunt any oil price spikes. Such action has proved unnecessary.
Oil stocks prove their value
Of course, the US isn’t the only major consumer with significant reserves of crude in storage. The International Energy Agency requires its members hold the equivalent of 90 days worth of oil imports based on figures for the previous year. The recent shutdown of the 1 million b/d Druzhba pipeline system, after contaminated Russian crude was discovered, forced Poland, Hungary and the Czech Republic to release stocks.
“It’s proved that the system does work,” Neil Atkinson, the head of the International Energy Agency’s oil industry and markets division, told S&P Global Platts. “Stocks are there to deal with issues like this and it would appear that the worst fears that this incident would bring about have not happened so far.”
Meanwhile, emerging economies are also building their own strategic oil stockpiles. China has amassed almost 300 million barrels to safeguard its economy from volatile oil markets. India is building enough strategic storage to salt away 90 days’ worth of imports in case of severe supply disruptions.
Even major producing nations in the Middle East now see the benefits of holding limited strategic stockpiles. Abu Dhabi has sanctioned the construction of its own reserve. Its storage caverns will be chiseled into the Hajjar Mountains surrounding the Port of Fujairah. Once completed, the project will hold around 40 million barrels of crude and help to ensure the country can continue supplying if the gateway to the Persian Gulf is ever blocked.
With so many potential threats of disruptions to oil supplies globally, maintaining strategic reserves has never been more important.