Posted October 24, 2022 at 6:00am
After the Biden administration announced the latest sale of crude oil from the Strategic Petroleum Reserve to put a damper on pump prices last week, Republican lawmakers called the move a stunt to mollify gasoline price-sensitive voters before the election in November.
“The Strategic Petroleum Reserve was built for a national energy crisis — not for a Democrat election crisis,” Sen. John Barrasso, R-Wyo., said after the sale was announced.
But while lower gas prices may help Democrats at the polls, the latest sale is one in a series first announced in March to soften an oil price spike following Russia’s invasion of Ukraine. It’s also the case, oil market analysts said, that the law that created the reserve allows presidents broad discretion to direct sales from the stockpile, the U.S. remains in line to meet international oil reserve requirements, and the country is far less reliant on oil imports than it was when the reserve was created in the 1970s.
Presidents from both parties have ordered sales from the reserve, including during the first Gulf War in the 1990s, following Hurricane Katrina in 2005 and after political upheaval in Libya in 2011.
Samantha Gross, director of the energy security and climate initiative at the Brookings Institution, said sales from the reserve can help bridge the loss in oil from Russia until the market reaches a new equilibrium.
Weaning the world off the oil that Russia has wielded as a tool to manipulate Western policy is a different use of the SPR than has been seen previously, according to Gross.
“The SPR gives us some flexibility to help us do that and to give the market some time to readjust and to bring production up in other places,” she said.
The latest sale by the Energy Department, which manages the stockpile, was announced Wednesday, when the administration said it would sell 15 million barrels in December.
Abhi Rajendran, an adjunct research scholar at Columbia University’s Center on Global Energy Policy, said Biden will have to direct more sales from the reserve in the coming months to push prices down and make up for lost Russian oil exports.
Filling a gap
The European Union has adopted eight rounds of sanctions against Russia since it started the war. But Russian oil exports have only declined in recent months, Rajendran said by phone.
“Where does the supply come from to fill that gap?” Rajendran said. “You’re going to have to lean on the SPR this year,” Rajendran said, adding that the reserve has historically been used to balance out short-term disruptions in the oil market.
The year after Arab nations of OPEC declared in October 1973 that in response to U.S. support for Israel they would cut oil production and limit exports, the U.S. joined an international alliance to require a network of countries to hold in reserve a minimum of 90 days’ worth of oil for emergencies.
That alliance, run through the Paris-headquartered International Energy Agency, remains in place today, and IEA member nations have coordinated sales of oil onto the global market this year to cool turmoil in oil markets.
By 1975, Congress approved the creation of its reserve, a network of four underground sites in Texas and Louisiana with a total capacity for 714 million barrels.
Congress has also directed sales from the reserve through law, including recently in 2015 and 2018 laws.
Ian Lange, director of the mineral and energy economics program at the Colorado School of Mines, recalled how that mandated sale from the 2018 law occurred as oil prices tanked during the early months of the COVID-19 pandemic.
“We had to sell some reserves in April 2020 when the prices were really crashing,” Lange said by phone. “It’s not just the executive branch that does it.”
The White House has successfully used the reserve this year to help calm oil markets, Ben Cahill, senior fellow in the energy security and climate change program at the Center for Strategic and International Studies, a think tank, said in an interview.
“It worked as intended,” Cahill said. “It cooled the market.”
While sales from the U.S. reserve cannot function as a long-term solution to counter production cuts from the OPEC-plus cartel, which includes Russia, America is no longer reliant on oil imports as it once was, Cahill said.
“The U.S. is a force in the market in a way it wasn’t before,” Cahill said.
From the 1970s until the broad advent of hydraulic fracturing in the 2000s, the U.S. imported more oil than it made. Today, the United States is the No. 1 producer of oil and gas of any country worldwide. China, Japan, South Korea, Spain and India also have major strategic oil stockpiles.
“From the ’70s up until 2019, 2018, the U.S. was generally an oil importer. It didn’t produce a lot of crude itself,” Lange said. “One of the big differences is the U.S. moving from being a sort of net importer to an exporter with the rise of U.S. shale oil.”
Biden administration officials told reporters Tuesday that DOE would buy oil to replenish the stockpile when prices drop to $67 to $72 per barrel or less.
Rajendran is skeptical that prices will fall to that threshold unless the economy contracts. “I don’t really see how $67 to $72 happens without a recession,” he said.
Brent crude, the international oil benchmark, was trading on the Nasdaq exchange at roughly $92 Friday afternoon.
In a letter that Sen. Steve Daines, R-Mont., sent Biden on Thursday, Daines said the administration should do more to encourage additional U.S. oil production.
“Manipulating energy reserves to bring gas prices down from historic highs as the midterm elections approach is not an accomplishment, it is a national security risk,” Daines said.
Washington Rep. Cathy McMorris Rodgers, the top Republican member on the House Energy and Commerce, said during a Wednesday interview with Fox Business that federal policy to encourage more drilling for fossil fuels, including oil and gas, would be a priority under a House Republican majority.
“It’s just outrageous what President Biden is doing right now with the Strategic Petroleum Reserve,” Rodgers said.
“We are anxious for the Republicans to win the majority in the House so that we can unleash American energy,” she said, “and send a strong signal that we want more oil and natural gas production in the United States of America.”
Partisan squabbling over the stockpile is nothing new, said the Brookings Institution’s Gross.
“There’s no trigger for the SPR,” Gross said. She added, “It’s always going to be politicized. It’s just the nature of the beast.”