Would US Oil Reserve Sales Affect Prices Much ?, Auto News, ET Auto
The White House is examining its policy options to reduce the price of gasoline at the pump and plans to make an announcement in the coming days, the Energy Secretary said in a television interview on Monday.
Senior administration officials have repeatedly blamed OPEC + for rising oil prices, which they say is boosting inflation and threatening the global economic recovery from the pandemic. Speculation is mounting that the administration could order the release of crude from the Strategic Petroleum Reserve (SPR) to lower oil prices after OPEC + last week rejected calls to speed up its production increases.
Politically, the release of SPR oil would demonstrate the administration’s concern over rising oil prices and the impact on the cost of living for households and businesses. But in practical terms, it is not clear whether a release would have much of an impact on prices beyond the very short term as the volume of additional oil that could be made available would be too small.
HISTORY OF THE RESERVE
The SPR was created to contain up to 1 billion barrels of oil by the Energy Policy and Conservation Act of 1975 (Public Law 94-163) in response to the Arab oil embargo of 1973/74 .
“Congress believes that the storage of substantial quantities of petroleum products will decrease the vulnerability of the United States to the effects of a severe disruption in energy supply and provide limited protection against the short-term consequences of disruption in the supply of products.” tankers ”, according to article 151 of the law.
The SPR is part of an emergency reserve network maintained by member countries of the International Energy Agency (IEA), under the 1974 Agreement on an International Energy Program. Members of the IEA agreed to maintain emergency stocks equivalent to at least 90 days of net imports as part of their response to the first oil shock, but the practice of holding emergency reserves dates back much further.
British oil companies agreed to increase their stocks to the equivalent of three months of peacetime consumption in 1936 as part of planning for World War II (“Oil: A Study of Politics and Administration in times of war “, Payton-Smith, 1971).
In the United States, the President is only authorized to order a withdrawal from the reserve if he has determined that it is required by “a serious disruption in the supply of energy” or by international obligations under the system. of the IEA.
The president must determine that an emergency exists and that there is a significant reduction in supply that is of significant scope and duration (US Code Title 42 Section 6241). The president must also determine that a severe increase in the price of petroleum products has resulted from this emergency, and that such a price increase is likely to have a major negative impact on the national economy.
In circumstances below the threshold of a severe disruption of energy supply, the President can order a more limited release of up to 30 million barrels spread over a maximum of 60 days. The President must determine the existence of a condition that “constitutes, or is likely to become, a domestic or international energy supply shortage of significant magnitude or duration” (42 USC 6241 (h)).
It must also determine that “measures taken under this paragraph would directly and significantly help prevent or reduce the negative effects of such a shortage”.
At the international level, the IEA’s emergency reserves and demand reduction programs can be activated “whenever the group as a whole or any participating country experiences or can reasonably be expected to experience a reduction in its demand. oil supplies ”(Agreement on an International Energy Program, Article 12).
The objective is to develop “common effective measures to respond to oil supply emergencies by developing emergency self-sufficiency in oil supply, restricting demand and distributing available oil among their countries over a fair basis “, according to the preamble of the agreement.
SEVERE ENERGY SHORTAGE
The legislative language establishing both the SPR and the IEA’s emergency reserve system makes it clear that the intention was to tackle physical energy shortages rather than just increasing prices. Rising prices may be one of the harmful consequences of an energy shortage, with a negative impact on the economy, but it was not the object of the constitution of emergency reserves.
The release of SPR and IEA reserves makes sense when dealing with supply disruptions due to extreme weather events (eg hurricanes); major oilfield or pipeline accidents; disruption of the main maritime communication routes (eg the Straits of Hormuz and Malacca and the Suez Canal); and embargoes (like the Arab oil embargo).
The release of reserves is also appropriate to maintain an adequate supply of fuel for military and civilian users during protracted military operations (for example, a conflict in the Persian Gulf or between the United States and China).
Finally, the release of reserves can provide mutual assistance to other countries themselves affected by extreme weather events, accidents, disturbances and embargoes. In all these circumstances, the purpose of stockpiling is to gain time for repairing damaged infrastructure or for diplomatic and military action aimed at resolving embargoes, blockades and other political supply disruptions.
But stock releases were never considered and should not be effective in countering OPEC + production policies in the medium or long term.
STOCKS VERSUS FLOWS
SPR and AIE emergency reserves are stocks while OPEC + production policy affects a flow. The use of stocks to try to counter the flows is unlikely to be sustainable or effective in anything other than the short term.
The SPR currently holds 613 million barrels of crude while other IEA members hold emergency reserves of around 900 million additional barrels. OPEC + countries represent more than 40 million barrels per day (bpd) of production. If the US president ordered the release of 30 million barrels of SPR under his more limited authority, that would be equivalent to increasing global supply by 82,000 bpd in a full year, which is not significant.
If the United States succeeds in convincing other members of the IEA to participate in a coordinated exit, which is far from certain, the total volume could rise to 60 million barrels, or 164,000 b / d, full year. These exit volumes would be very low compared to the 400,000 bpd increases each month that OPEC + has already announced, so the price impact would likely be limited.
The United States and other IEA members would have to release very large volumes of crude and product from inventory to have a lasting impact on the price level. But the legal authority for large increases above 30 million barrels by the United States and the same by other IEA members is unclear and there may not be a lot of enthusiasm in all the members.
SHOCK AND TESTIMONIAL?
The SPR and other emergency publications may be able to modify both spot prices and short-term calendar deviations, but the impact is likely to be maximized if the publication is unusually large and / or unexpected. The White House has lost the element of surprise by repeatedly throwing out the idea of an SPR release weeks in advance, meaning it may have to go for a bigger raise to create the “shock and awe” needed.
More generally, an SPR release, unless it is very important and coordinated with other members of the IEA, will probably not on its own have a very lasting impact on the production-consumption balance, the level inventory, prices or variances. To have a meaningful and lasting impact, the administration should combine the publication with domestic policy measures to increase US oil production, as well as diplomatic measures to persuade or coerce OPEC + members to increase their own production faster. .