Should the U.S. Refill the Strategic Petroleum Reserve While Oil is Cheap & Pay Down the Debt With the Profits Later?

What’s the story?

• Declines in demand for gasoline & aviation fuel caused by stay-at-home orders imposed by state & local governments in response to the coronavirus (COVID-19) pandemic have led to turmoil in energy markets.
• On Monday, April 20th, oil futures contract prices ― which are essentially an amount a contract buyer will pay to take possession of oil ― slid because dwindling consumer demand has led to a glut of crude oil in storage facilities.
• A futures contract that expires April 21st for West Texas Intermediate crude oil (considered the benchmark for U.S. crude oil) to be delivered in May closed at a historic low of -$37.63, which effectively means that contract sellers would pay contract buyers to take delivery of the oil due to the lack of storage options. Futures contracts for later in the year remain positive, which indicates the storage concerns could be short-lived, as the June contract closed at $20.43 a barrel and the December 2020 contract closed above $32 a barrel.
• In a press conference Monday, President Donald Trump reiterated his administration’s plan to fill the Strategic Petroleum Reserve with oil produced by small- and medium-sized U.S. companies. In March, he sought congressional approval to make purchases but was denied, and said he’d like Congress to allow the administration to make purchases but absent that will resort to storing it:

“At a minimum we will let people store… and charge for it. It’s a good time to buy oil and we would like to have Congress approve it, so instead of just storing it for usually big companies… So we are going to either ask for permission to buy it or we’ll store it. One way or the other it will be full.” 

• A proposal advanced in The Washington Post to have the federal government buy & sell futures contracts based on the capacity of the Strategic Petroleum Reserve could generate a profit of hundreds of millions of dollars to taxpayers.

What is the Strategic Petroleum Reserve?

• The Strategic Petroleum Reserve (SPR) is a supply of petroleum held by the Dept. of Energy (DOE) for emergency use. It was created in 1975 after the 1973-74 oil embargo by OPEC to mitigate the impact of future supply disruptions on U.S. energy markets by holding 1 billion barrels of oil in reserve. 
• The SPR’s maximum authorized storage capacity reached an all-time high of 750 million barrels in 1991, but that declined after a facility closure. The most oil held in the SPR was 726 million barrels in 2009. The Energy Policy Act of 2005 authorized expansion of the SPR to its original goal of 1 billion barrels of storage capacity, but that failed to materialize because of opposition to a proposed facility in Mississippi.
• The SPR currently has a congressionally authorized capacity 713.5 million barrels of oil (actual physical capacity is 727 million barrels) at the four operational SPR facilities: Bayou Choctaw, Louisiana (76 million barrel capacity); Big Hill, Texas (170 million barrel capacity); Bryan Mound, Texas (247.1 million barrel capacity); and West Hackberry, Louisiana (220.4 million barrel capacity). 
• SPR facilities are located 2,000-4,000 feet below ground in naturally-occurring salt formations that offer cost, environmental, maintenance, and security advantages over surface storage tanks. Salt caverns are about one-fifth the storage cost of surface tanks, geologic pressures naturally seal cracks in the salt formations to prevent oil leaks, and the temperature differential keeps the oil circulating to keep its quality consistent. They can also be enlarged to fit precise dimensions through a mining process in which the salt is dissolved with fresh water.

How could the SPR be used to turn a profit for taxpayers?

• The Trump administration announced on March 19, 2020, that it would begin acquiring 77 million barrels of American-made oil to take the SPR near its capacity to be delivered as early as late April, or in May & June. A solicitation for the first 30 million barrels of that oil went out on April 2nd. As of April 17, 2020, the SPR held an inventory of 635 million barrels of oil with 78.5 million barrels of capacity. 
• Allan Sloan of The Washington Post wrote that the SPR should be used to turn a profit for taxpayers by buying oil in the nearer term and selling it later in the year. 
• Using Friday’s closing price for June oil future contracts, $18.27, and the same day’s closing price for December contracts, $33.82, the SPR could’ve turned a profit of $15.55 per barrel, or $1.22 billion, by utilizing the full 78.5 million barrels of capacity. Removing for the 30 million barrels of oil storage offered already, that amounts to $754 million in profit to the SPR that could be used to offset the budget deficit.
• In 1994, Congress moved away from the practice of appropriating funds for the purchase of crude oil. From 2000-2009, it used a royalty-in-kind program to acquire oil in which producers diverted a portion of their volume to the SPR. Currently, the SPR leases storage space and assesses a fee that is paid by the government retaining a portion of the stored oil.

— Eric Revell

(Photo Credit: iStock.com / onourdongel)