The Fuse

Efforts to Reduce SPR Are Misguided

by Matt Piotrowski | February 13, 2018

Last week, as part of a bipartisan budget package, Congress approved the sale of 100 million barrels from the Strategic Petroleum Reserve (SPR) in order to generate revenue to pay for a small portion of the budget’s costs.

The agreement is part of a worrisome trend of using non-emergency sales from the SPR to pay for programs unrelated to energy security. In the past several years, Congress has authorized sales from the SPR to fund a number of projects, from medical research to transportation. When including the latest budget agreement, authorized sales will reduce the SPR’s volumes by approximately 300 million barrels, or almost 45 percent, by 2027. The one positive in the series of SPR sales is the effort to raise money to modernize the reserve.

When including the latest budget agreement, authorized sales will reduce the SPR’s volumes by approximately 300 million barrels, or almost 45 percent, by 2027.

“The SPR is only effective if it can get its petroleum to market quickly and efficiently in the event of a supply emergency,” SAFE’s CEO Robbie Diamond said. “Geopolitical risk is alive and well in the oil market, and the SPR is America’s only formal short-term line of defense against oil supply disruptions and price spikes.”

Critics of the SPR say it is no longer useful because of relatively low gasoline prices, a sharp decline in net imports of petroleum, and the rise of shale production. But that is a false narrative. Dealing with the country’s energy security vulnerabilities requires sustained and targeted involvement by the federal government. The SPR, set up in 1975 in the aftermath of the Arab Oil Embargo, plays an important role in insulating the U.S. economy from a volatile and unpredictable global oil market by bringing oil to market quickly in the event of a global supply emergency. It has also played a role in reducing negative effects of severe weather events, as evidenced after Hurricane Harvey hit the Gulf Coast last year.

As we noted last week, the surge of U.S. production to above 10 million barrels per day (Mbd) does not resolve the country’s energy security dilemmas. The U.S. still consumes 20 percent of the world’s oil and imports approximately 45 percent of its crude needs. Furthermore, shale oil production cannot be counted on to rise indefinitely.

Even if the U.S. continues to produces more oil for the foreseeable future, it will remain dependent on the global market for decades to come.

Even if the U.S. continues to produces more oil for the foreseeable future, it will remain dependent on the global market for decades to come. Spare capacity in the global oil markets is low, geopolitical risks continue, and the U.S. economy is still affected by international price increases. In fact, the levels of geopolitical volatility (see Venezuela, Iran, Iraq, and Russia) remain high enough to make the case that the SPR is as significant today as it has been in the past.

With demand rising globally and limited investment in long-term upstream projects, the likelihood of a tighter market next decade is increasing. In that case, the SPR will be needed to serve as an important security buffer to counter supply losses or major oil producers, particularly those in OPEC, exploiting their market power.

It is important that we take advantage of the country’s current energy boom, but we cannot forget that vulnerabilities still remain. If demand continues to grow and domestic production peaks and then falls, we may return to where we were before the shale boom started—overly reliant on imports, including volumes from unstable producers. Moving forward, there needs to be a vigorous debate about the SPR’s size and role before any more changes are made.

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