Bloomberg: Biden’s SPR move may be less than it seems … and risky!

SPR: Strategic Petroleum Reserve
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I had an interesting experience at the Costco gas pumps on Friday …

Note: I always try to fill-up at Costco since their prices tend to be at least a half-a-buck per gallon cheaper than other local stations.

The guy in the pump next to me — dressed in camo-accented working duds, filling his MAGA-stickered pick-up truck — says to me: “Finally, Biden has done something right.”

I say; “What’s that?”

He says; “Releasing oil from the reserves.”

I say: “Won’t help much.”

He says: “At least it’s something.”

Score one for Joe.

We quick-fill and get on with our days.

The convo prompted me to do some digging…

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First, it helps to put the numbers in perspective…

Biden authorized the release of 1 million barrels per day (BPD) for 180 days.

Total: 180 million barrels of oil coming out of the U.S. SPR.

Is that a little or a lot?

We Americans consume about 20 million barrels of oil per day … so, it’s about a 9-day supply of oil.

Worldwide, oil consumption is just under 100 million barrels per day … so, a million BPD potentially increases the global supply of oil by 1%.

The Strategic Petroleum Reserve — which was conceived in 1975 after the infamously disruptive Arab oil embargo — has a capacity to hold about 725 million barrels of oil.

It’s designed to protect the U.S. energy needs if foreign nasties cut-off our dependent supplies.

From 2000 to 2020, the SPR was essential full to it’s practical capacity … hovering between 600 and 700 million barrels.

Note: It’s not clear to me why the level “hovered” instead of staying fixed near 700 million barrels.

Last fall (i.e pre-Ukraine), Biden released 50 million barrels from the SPR … drawing the inventory level down to about 550 million barrels.

OK, with that as background…

The one certainty is that the SPR will be drawn down to under 400 million barrels … about half of the previously defined “strategic need”.

That means that the tanks will eventually need to be re-filled — increasing future demand for oil … which will likely increase future oil prices during the replenishment period.

Hmm

Or, Team Biden can let the SPR linger with the tanks half-full and hope that there isn’t a catastrophic disruption to oil supplies.

Frame of reference: That would be kinda like allowing our strategic reserve of medical supplies and medicines dwindle and and hope that an epidemic doesn’t happen.

How did that work out?

Bottom line: Net long term effect is just a shifting of 180 million barrels of oil demand down-the-road.

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What about the near-term price effect?

Bloomberg points out that: SPR ”interventions have a spotty record. It’s as common for them to be followed by increases in prices as reductions.”

For example:

Even before Russian tanks rolled into Ukraine in late February, West Texas Intermediate crude increased 18% since Nov. 23, when 50 million barrels were released to calm oil markets.

How can that be?

Bloomberg’s simple answer: The SPR doesn’t produce any oil … it’s just an unusually large pile of inventory, and in commodity markets, shrinking inventories are almost always bullish for prices.

Ouch.

Plus, The Russian oil sanctions may eventually cut oil supply by a million barrels per day if they’re ever really enacted … or non-Russian oil suppliers (think OPEC) may just dial back their production to keep prices high.

Again, the certainty is that the SPR will be drawn down and need to eventually be replenished … the uncertainty is what will happen to gas prices at the pump.

Bloomberg’s conclusion:

The U.S.’s dominance of energy markets could be in jeopardy in a way it hasn’t been since the 1970s.

With Biden’s oil reserve weapon heading toward half-full levels, he risks looking like a naked emperor.

Whatever, I’ll still be pumping at Costco…

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