The Special Petroleum Reserve

Dual-pronged attack on inflation

Given how vital oil and oil products are to our daily lives, policymakers pay close heed to changes in the prices of fossil fuels.

With the massive overhaul of international crude oil supply lines following the sanctions on Russian exports, the Federal Reserve required emergency assistance to fill the void and keep a lid on prices.

Step in the US Department of Energy (DOE). With access to a large petroleum reserve (SPR), the DOE has been able to assist the Fed by selling from its government inventories to keep a lid on energy prices and aid the fight against inflation.

Strategy effectiveness

After oil prices briefly peaked in March 2022, they have since retreated. As the DOE accelerated sales, Brent crude is now almost 11% lower than during the same period last year.

Privately owned commercial crude inventories onshore in the US are 11% higher than during the same period in 2022.

The price we pay for petrol and diesel is more closely linked to the commercial inventories our suppliers have immediate access to. Therefore, by selling oil from the SPR and shielding commercial inventories from drawdowns, the DOE has effectively kept a lid on international oil prices.

The propping of commercial crude inventories and supplemental US crude exports has come at the expense of government inventories; the SPR is around 37% lower than 12 months ago.

With OPEC+ signalling another 500,000 barrel/day cut to international supply, the DOE is quickly stepping in with its 26m SPR drawdown riposte to keep prices stable.

The durability of the strategy

The SPR was set up during the Arab Oil Embargo as a hedge against potential future actions by a foreign actor severing critical oil supply to the US. With particular emphasis on a scenario in which OPEC supply is throttled.

US lawmakers have raised concerns that a drawdown on the SPR from 20th February would compromise US energy security. This viewpoint doesn’t consider the recent massive overhaul in the US energy supply chain.

The US has achieved sales without any hindrance to its energy security as international supply chains and US production have evolved so markedly in the last 10 years.

In December 2011, the US imported almost 127m barrels of oil from OPEC-producing nations. The total SPR at the time was 696m barrels. The SPR represented 5.5 months of OPEC imports.

In November 2022, the US imported around 41.5m barrels from OPEC. With the SPR at 389m barrels, the coverage is equivalent to approximately 9.4 months.

Despite the selling from the SPR, the US has more coverage of OPEC supply than it did 10 years ago.

US production is surging again, with just over 371m barrels in November 2022. Canadian imports are 100% higher than in 2011, increasing to approximately 4m barrels per day. Canada has supplanted OPEC as the most important supplier to the US.

Outlook

Increased US production, the reduction in tenuous OPEC+ supply and displacement caused by supplies from the key strategic ally Canada has transformed the US energy landscape, negating the need for such a large SPR.

The US energy security is so robust that the DOE can suppress prices at home and abroad without reducing crucial inventory day coverage ratios.

Key US strategic allies, including Australia, should be none too concerned about the current levels of the SPR and the threat of higher prices from a critical drawdown. There is some way to go before the SPR levels make foreign policy vulnerable to the leverage of supply chains.

Commercial inventories are well shielded so far, and with the price of WTI nearing the $70 replenishment handle, there will be opportunities to top up in the near future.