NEWS

Strategic Petroleum Reserve Will Face Low Fuel Light

12 Apr 2022, Posted in All Posts, Blog Posts
strategic petroleum reserve

The purpose of the strategic petroleum reserve is for national emergencies, international crises, and other disruptions in the supply of oil. It was never conceived to be a spigot to turn when self-created policies lead to bad circumstances. While there is no doubt that factors like lingering market impacts from COVID-19 and volatile geopolitical conflict are impacting energy costs, it is nevertheless true that options to increase domestic production have been thwarted. Now, releasing strategic reserves may compound harms rather than provide relief.

The balance of the strategic petroleum reserve is currently at its lowest point in 20 years. Not since September 2002 has the quantity fallen below 588 million barrels. With the announcement this month that the federal government plans to release up to 180 million barrels, there will be a 30 percent reduction in this strategic asset by the fall. We will then find ourselves with the national low fuel light on, at levels not seen since 1984.

This is problematic for a number of reasons, not least of which that the longer we tap this reserve, the less we can rely on it in future crises. With this being the Biden administration’s third release so far early in his term, the administration will have lowered the reserve by as much as 260 million barrels within a single year. (A November release included in this total involved both an exchange and an acceleration of pre-authorized sales).

After the planned release of 180 million barrels over the next six months, the reserves will sit just above 400 million barrels – with three years left in President Biden’s term. If any new international conflicts arise in that time, the administration pushes harder on its climate and environmental agendas, or a global economic recession or depression hits for other reasons, we can reasonably expect additional reliance on this reserve, threatening to drain the entire volume. Already the administration has set back energy independence by as much as a decade by formally limiting production opportunities and informally casting uncertainty into the markets. Reduction in strategic reserves further rolls back energy independence.

The second significant problem is that to restore the reserves will cost a fortune. Unmitigated inflation aside, there will be hundreds of millions of barrels to acquire, and no guarantee that the cost per barrel will not be prohibitively expensive. According to the U.S. Department of Energy, the average cost per barrel in the reserve has been $29.70 per barrel. Contrast that with the price per barrel currently floating above $100 per barrel.

Some back of the napkin math tells us that to refill the reserves at the average price would total $9 billion. To refill at the current price would be over $30 billion. Previous petroleum exchanges made with the plan to restore it later when markets are settled may be in vain, as it will still cost more to replace the oil if underlying production is not restored. All signs indicate that the administration does not intend to incentivize or streamline production, instead repeatedly asserting that the energy industry has what it needs.

A third issue is that Congress has been siphoning off the reserve for years to finance the deficit. Largely unpublicized sales reduce the level of this reserve, chipping away at the reserve in times of need and diminishing our assets if we do need funds in a pinch. Large-scale selloffs like the planned release this summer undermine future financing plans.

An alternative policy in past administrations rather than selling the reserve has been to stop filling the reserve, effectively allowing the market to purchase that oil rather than the federal government competing for it. The path this administration has chosen is to limit production altogether and to sell from the reserve. This makes refilling it more difficult and applies upward pressure on the cost to refill if and when that day arrives.

Given this administration’s outspoken plan to end reliance on fossil fuels, it should be noted that cutting off access to reserve resources would severely handicap the national and energy security of the country. It would be a dangerous and ill-advised policy approach to run it down as part of a forced transition away from fossil fuels, leaving no petroleum reserve and therefore leaving no option but renewables. We can only hope this is not the administration’s plan.

As it stands, the strategic petroleum reserve is scheduled to run low on fuel. By the fall, the nation’s low fuel light will be on. If additional crises strike and the administration continues to lean on this reserve rather than promote production, we may be running on fumes before we know it. If production does not increase and the strategic reserve is not left intact, by the end of President Biden’s term, the United States will face unprecedented energy and national security concerns, continued inflation, and food and good shortages.

 

Written by Benjamin Dierker, Director of Public Policy

 

The Alliance for Innovation and Infrastructure (Aii) is an independent, national research and educational organization. An innovative think tank, Aii explores the intersection of economics, law, and public policy in the areas of climate, damage prevention, energy, infrastructure, innovation, technology, and transportation.