Column: Would U.S. oil reserve sales affect prices much?: Kemp

A maze of crude oil pipes and valves is pictured during a tour of the Department of Energy in the Strategic Petroleum Reserve in Freeport, Texas, the United States, June 9, 2016. REUTERS / Richard Carson

LONDON, Nov. 9 (Reuters) – The White House is reviewing its policy options to lower gasoline pumps and expects an announcement in the next few days, the energy secretary said in a television interview on Monday.

Senior officials have repeatedly blamed OPEC + for the spike in oil prices, which they believe is fueling inflation and threatening global economic recovery from the pandemic.

Speculation mounts that the government may order the release of crude oil from the Strategic Petroleum Reserve (SPR) to lower oil prices after OPEC + rejected calls to accelerate its production hikes last week.

Politically, releasing oil from the SPR would demonstrate government concerns about rising oil prices and the impact on the cost of living for households and businesses.

In practice, however, it is unclear whether a release beyond the very short term would have a major impact on prices, as the amount of additional oil that could be made available would be too small.

RESERVE HISTORY

The SPR was created by the Energy Policy and Conservation Act of 1975 (Public Law 94-163) in response to the Arab oil embargo of 1973/74 to hold up to 1 billion barrels of petroleum.

“Congress notes that the storage of significant quantities of petroleum products will reduce the United States’ vulnerability to the effects of a major power disruption and provide limited protection from the short-term effects of disruption to petroleum products,” according to Congress Section 151 The Law.

The SPR is part of a network of emergency reserves maintained by the member countries of the International Energy Agency (IEA) under the 1974 International Energy Program Agreement.

IEA members agreed to hold emergency supplies of at least 90 days of net imports in response to the initial oil shock, but the practice of holding emergency reserves goes back much further.

The British oil companies agreed in 1936, as part of planning for the Second World War, to increase their stocks to the equivalent of a three-month peace consumption (“Oil: a study in wartime policy and Administration”, Payton-Smith, 1971).

EMERGENCY CONDITIONS

In the United States, the president may only order a withdrawal from the reserve if he has determined that it is necessary due to a “major disruption in energy supply” or international obligations under the IEA system.

The President must determine that there is an emergency and that there is a significant reduction in the offering of significant size and duration (US Code Title 42 Section 6241).

The President must also note that such an emergency has resulted in a sharp rise in the prices of petroleum products and that such a price increase is likely to have a significant negative impact on the national economy.

In circumstances that do not reach the threshold of a serious interruption of the energy supply, the President can order a more limited release of up to 30 million barrels over a maximum of 60 days.

The President must determine that there is a situation which “constitutes or becomes likely to be a domestic or international energy shortage of significant magnitude or duration” (42 USC 6241 (h)).

It must also state that “the measures taken under this subsection would directly and significantly help to prevent or reduce the adverse effects of such a deficiency”.

At the international level, the IEA’s emergency reserves and demand reduction programs can be activated “if the group as a whole or a participating country maintains or can reasonably be expected to reduce its oil supplies” (Agreement on an International Energy Program, Article 12).

The purpose is to “develop joint effective measures to deal with emergencies in the oil supply by developing emergency self-sufficiency in oil supplies, restricting the demand and distributing the available oil fairly among their countries”, according to the preamble of the agreement.

SEVERE ENERGY SHORTAGE

The legal language that both the SPR and IEA emergency reserve systems introduce makes it clear that the intent was to address physical energy shortages, not just raise prices.

Rising prices can be one of the detrimental consequences of energy shortages with a negative impact on the economy, but it was not the purpose of creating emergency reserves.

The release of SPR and IEA reserves makes sense in the event of supply disruptions due to extreme weather events (eg hurricanes); major oil field or pipeline accidents; Disruption of important maritime transport routes (e.g. the Straits of Hormuz and Malacca and the Suez Canal); and embargoes (such as the Arab oil embargo).

The release of reserves is also suitable for maintaining an adequate fuel supply for both military and civilian users during extensive military operations (e.g. conflicts in the Persian Gulf or between the USA and China).

Finally, releasing reserves can provide mutual help to other countries that are themselves affected by extreme weather events, accidents, disruptions and embargoes.

In all these circumstances, the purpose of the share release is to gain time to repair damaged infrastructure or to take diplomatic and military action to resolve embargoes, blockades, and other political disruptions.

However, warehouse releases were never intended and are unlikely to be effective in the medium or long term to counter the OPEC + production policy (https://tmsnrt.rs/31Egjfj).

SHARES VERSUS LIQUIDS

The emergency reserves of the SPR and the IEA are stocks, while the production policy of OPEC + affects a river. Using stocks to counter the flows is unlikely to be sustainable or effective in any way other than the short term.

The SPR currently holds 613 million barrels of crude oil, while other IEA members hold emergency reserves of about another 900 million barrels. The OPEC + countries account for more than 40 million barrels per day (bpd).

If the US President ordered the release of 30 million barrels from the SPR under his more limited authority, that would represent an increase in global supply of 82,000 bpd on an annual basis, which is insignificant.

If the United States were to get other IEA members into a coordinated release, which is far from certain, the total annual volume could rise to 60 million barrels, or 164,000 bpd.

These stock release amounts would be very small compared to the 400,000 bpd per month increases already announced by OPEC +, so the price impact would likely be limited.

The United States and other IEA members would have to release very large amounts of crude oil and products from their stocks in order to have a lasting effect on the price level.

But the legal authority for large increases in excess of 30 million barrels by the United States and the same by other IEA members is unclear and there may not be much enthusiasm among members as a whole.

SHOCK AND AWESOME?

SPR and other emergency communications can change both spot prices and calendar spreads at short notice, but the impact is likely to be maximized if the notice is unusually large and / or unexpected.

The White House has lost the surprise effect by repeating the idea of ​​an SPR release several weeks in advance, meaning it may have to make a larger increase to create the necessary “shock and awe”.

More generally, unless it is very extensive and coordinated with other IEA members, an SPR publication will in and of itself have little lasting impact on production and consumption, inventory levels, prices or spreads.

To have a significant and lasting impact, the government would need to combine the clearance with domestic policies to increase US oil production, as well as diplomatic measures to convince or force OPEC + members to increase their own production faster.

Related materials:

– The Strategic Oil Reserve: Background, Authorities and Considerations (Congressional Research Service, 2020)

Related columns:

– Depleted US oil supplies leave the market vulnerable to shocks (Reuters, November 4th) read more

– Rising oil prices fuel expected inflation (Reuters, November 3)

– US oil futures rally fueled by Cushing stock draws (Reuters, October 28) read more

– OPEC + comfortably with rising price trend (Reuters, October 26) read more

Editing by Mark Potter

Our Standards: The Thomson Reuters Trust Principles.

https://www.reuters.com/business/energy/would-us-oil-reserve-sales-affect-prices-much-kemp-2021-11-09/