When Russia – Ukraine started in February 2022, the US undertook to release 30 million barrels from its Strategic Petroleum Reserve (SPR) in a bid to prop up world oil markets. That was in response to European and Asian nations’ commitment to free up their energy reserves in a bid to strike a balance in global markets. Back then, the US and 30 other members of the International Energy Agency (IEA) committed to releasing 60 million barrels of oil from their strategic reserves with a view to helping stabilize global energy markets. Half of that total – 30 million barrels –come from the US SPR, and the other half will come from allies in Europe and Asia. The US Department of Energy then announced it would release more than 200 million barrels of oil from the SPR in winter to keep oil prices in check. It confirmed it had sold part of its SPR at $95 a barrel in 2022, which triggered domestic political opposition.

SPR

The US SPR has already been tapped by US officials to allay market concerns. In fact, the US administration has already dipped into its strategic petroleum reserves in the midst of political tensions and military crises to control the oil supply on global markets. The US first released oil from its strategic reserves in 1991 when then President George Bush (senior) ordered so during the Iraqi invasion of Kuwait. That was done in coordination with fellow IEA member states. Fourteen years later, when Hurricane Katrina severely damaged US oil facilities, President Bush (junior) ordered that 30 million barrels be sold from the SPR. Six years after, IEA member states once again decided to tap their strategic reserves to respond to oil supply disruptions following Libya’s civil war. When Saudi Aramco oil installations were struck in 2019, cutting the country’s oil exports by half, the Americans once more tapped their SPR.

The idea of the US SPR dates from World War II (WWII), but it took shape effectively just after OPEC imposed an oil embargo on the West in 1973 and 1974. The Organization of the Petroleum Exporting Countries decided to raise oil prices and stop selling oil to Western governments in protest of their support for the Zionist regime during the Yom Kippur War. That caused an economic crisis in the US, pushing the country to put into practice the idea of SPR. In the following years, the IEA called on consumers to establish strategic reserves for their three-month consumption.

In the US, the president is the sole authority who can order tapping the strategic reserves. President Gerald Ford signed a bill into law in 1975, authorizing the president of the US to release oil from the SPR only when a serious halt comes up in the global oil supply. That is why President Joe Biden’s release of oil from the SPR, at a time the country is faced with no serious threats and the oil supply, is not halted, has caused debate in the country. Republicans believe that the US should only release oil from its strategic reserves to counter the Russian invasion of Ukraine and protect its European and Asian partners without having any impact on local energy prices.

Restrictions

Although oil release from strategic reserves has always been a solution for the US administration, restrictions do apply.

First and foremost, it is not possible to release more than 4.5 mb/d from the SPR. Therefore, if the market is in serious need, tapping the SPR would be faced with serious restrictions.

Second, according to the US Department of Energy, it would take 13 days for the released oil to be supplied on the market after receiving presidential greenlight. Such interval will no doubt let shocks leave impact. Therefore, the SPR cannot offer a quick solution.

Third, the crude oil held in the SPR needs to be processed at refineries prior to being supplied on the market. Therefore, under emergency conditions when the market needs fuel, the SPR can be of no help.

Fourth, although the SPR can ward off price shocks in the short-term, it would give bullish signal to the market in the long-term as it would mean emptied reserves, which would definitely have significant psychological impacts on the market.

Fifth, simply releasing oil from the SPR would not be instrumental in market balance; rather it would be effective when other countries join the initiative. In fact, should the US fail to coordinate  with its allies, including Europe, it could not by itself have any serious impact on the market or at least any impact would be short-lived.

Sixth, replacing the oil released from the SPR can be accompanied by issues and challenges. As the US Department of Energy has announced, oil prices at $68-73 a barrel would be good for starting to replenish the SPR. Although oil purchase for that purpose is done when oil prices are low in the market, the effort to make additional purchase would increase demand and affect prices. Therefore, although the Biden administration has moved to purchase oil at $67-72 a barrel to refill the SPR, the market would experience shortage of supply as demand for high sulfur content oil, which the US Department of Energy looks for, increases due to the production cut by OPEC+ countries.

Seventh, release of oil from US strategic reserves would not be just in favor of the US and its allies in terms of price control; rather, US rivals would benefit as well. For instance, China is a beneficiary to the US SPR oil release without having to dip into its own strategic reserves.

Eighth, refilling the US SPR has faced evident political opposition that may have an impact on the forthcoming presidential election. For instance, former US President Donald Trump has taken to task his successor for oil release from the SPR, saying it would be for wartime and other emergency conditions. Trump asserts that Biden has released oil from the SPR merely to artificially reduce high oil prices without contributing to any decline in energy prices inside the US. That comes against the backdrop of falling popularity of President Biden due to high fuel prices, which would threaten him and his Democratic allies.

Iran Petroleum