The SPR theoretically gets as low as 71 million barrels with currently planned releases, excluding the return of 32 million exchange barrels and presumed repurchase of the 180 million emergency release
We make the case that the appropriate size of the SPR is 300-400 million barrels due to material shifts in the sourcing of imported oil barrels
Strategies For the SPR
There is no real precedent for the ongoing U.S. SPR release. We've discussed this at length in prior work but to set the proverbial table again:
- The SPR was 621 million barrels in September 2021
- 40 million mandatory and 32 million exchange barrels were released late 2021 through April 2022, taking the SPR to 551 million barrels
- President Biden announced an 180 million emergency release in March 2022
- 165 million of 180 million emergency barrels have been released or will be released pending final awards from the recent Notice of Sale
- The SPR will have 371 million barrels of inventory when the 2022 emergency release is completed
- An additional 300 million barrels will be released through 2032 as part of mandatory / budgetary releases
- Completing all pending sales would theoretically take the SPR to only 71 million barrels
- The return of 32 million exchange barrels (by FY24) and repurchase of the 180 million emergency barrels leaves the SPR at 283 million barrels in 2032
We are sympathetic to the idea the SPR is being used for political gains to reduce gasoline prices heading into midterm elections. We also think concerns regarding cavern degradation from drawdown cycling are serious and should merit consideration and debate to properly frame SPR policy.
Additionally, we believe the implied SPR size of just over 100 million barrels in 2032 (71 million + 32 million exchange returns) without replenishment of the 2022 emergency release is simply too low and would risk national security.
That being said, clearly U.S. reliance on oil imports in general and OPEC oil imports in particular has changed.
Only 15% of U.S. oil imports currently come from OPEC countries down from nearly 70% when the Arab Oil Embargo began in October 1973 (OAPEC then) and over 80% in the months leading up to the first SPR purchase in July 1977.
The remaining oil imports come from North & South America (79%) and Africa.
Canada now represents 60% of U.S. oil imports.
Compared to 60% today, Canada represented 25% of U.S. oil imports in October 1973 and fell below 5% in the early 1980s. Indeed, in June 1981, the U.S. only imported 121,000 barrels of oil per day from Canada.
Per Department of Energy data, the SPR has never purchased or held Canadian oil and in general the SPR does not hold heavy barrels.
Let's review the statutory authority for SPR drawdowns.
SEC. 3. As used in this Act:
(8) The term "severe energy supply interruption" means a national energy supply shortage which the President determines -
(A) is, or is likely to be, of significant scope and duration, and of an emergency nature;
(B) may cause major adverse impact on national safety or the national economy; and
(C) results, or is likely to result, from (i) an interruption in the supply of imported petroleum products, (ii) an interruption in the supply of domestic petroleum products, or (iii) sabotage or an act of God.
The 1990 Energy Policy and Conservation Act Amendments expanded SPR drawdown authority to include responding to a short-term supply interruption that that "constitutes, or" is "likely to become, a domestic or international energy supply shortages of significant scope or duration."
This increased authority is limited to 30 million barrels released for no more than 60 days and subject to minimum SPR holdings.
A few thoughts:
- Clearly the Biden Administration relied on the "is likely to" language for its SPR drawdown authority. No severe supply disruption had or has occurred, but the Russian invasion of Ukraine arguably made a "severe energy supply disruption" likely. In the real world, however, U.S. oil exports have increased since the emergency SPR release. Not only were imports not impacted, but the U.S. simply exported much of its SPR release to the rest of the world.
- The increased drawdown authority provided by the 1990 amendments pours water on any idea that the SPR is to be used for only major supply disruptions. This language seems far more applicable to the circumstances in 2022 which mostly relate to "international energy supply shortages," but alas those provisions would have significantly limited the amount of barrels released.
- We segregated U.S. oil imports into those from North & South America in the chart above to make a point. What is the demand forecast from those worried about a reduced SPR providing protection for oil imports now mostly from Canada, Mexico and South America?
- Said differently, if the U.S. loses access to oil imports from North and South American countries we would assume demand is significantly reduced as a result of global conflict and a halt in global trade. Indeed, we can envision scenarios where U.S. production and the current import slate would need to be curtailed, or need storage space, given the demand loss under these circumstances.
Dividing the SPR size by just the imported barrels the U.S. is theoretically protecting from the Middle East and Africa tells a different story on days of supply. After the large drawdown in 2022 to the current SPR size 422.5 million barrels, days of cover using this metric are just under twice the long-term average.
Even if the SPR were as low as the 283 million barrels contemplated by all currently planned releases, exchange returns and emergency replenishment, days of oil cover from imports not from the Western Hemisphere would be at 217 days vs the long-term average of 167 days.
Another way to represent this dynamic is to look at U.S. oil production and imports from North & South America versus U.S. demand (products supplied).
Since 2019, 'safe' oil supplies have accounted for 85% of U.S. product demand versus only 56% between 1973 and 2010. U.S. shale and Canadian oilsands significantly altered import risks.
We should note Mexico has articulated its intent to significantly reduce or fully curtail its oil exports starting in 2023, highlighting not all barrels from our neighbors are safe and that the facts needed for an intellectual and non-political debate on the SPR size continue to change.
According to the Department of Energy the SPR was established in the aftermath of the 1973-74 oil embargo, to counter disruptions in commercial oil supplies which could threaten the U.S. economy. As the nature of U.S. foreign oil supplies has changed, so has the risk of a disruption in supply. Any material disruption in supply from primary or secondary sources today will likely result in a material reduction in oil demand, offsetting the supply loss.
The U.S. had three emergency SPR releases prior to 2022. Only half of the 34 million barrels offered during the war in Iraq sold. Only 21 million of 31 million barrels offered after Hurricane Katrina sold. The 2011 SPR release related to conflict in Libya totaled 30 million barrels.
22 million barrels - on average - were released during prior emergency SPR releases. Given the increase in U.S. oil production, resulting reduction in overall oil imports, the changing nature of import country counterparties and days of SPR cover needed for 'at-risk' barrels, we think fifteen times prior emergency releases and 200-300 days of 'at-risk' supply is sufficient.
That gets us to 300-400 million SPR barrels.
- The U.S. is scheduled to release 196 million barrels from the SPR between 2023 and 2027 at the same time it will be looking to replenish the 180 million barrels released this year.
- It would take Congressional approval, but netting the planned sales and purchases seems to make sense.
- Regardless if mandated sales and emergency replenishment are netted or occur concurrently, the net impact from the SPR sales and refill will be de minimus to global supply and demand.
- The Biden Administration should begin to seeks structured trades beginning in 2023 to replenish the 2022 release. DOE authority for these types of transactions has been requested and is pending.
- The U.S. has no heavy oil strategic reserves, but some amount should be contemplated to better align combined U.S. oil production and SPR holdings with U.S. refinery slates.