New York (CNN Business)The US Strategic Petroleum Reserve is a man-made underground government storage complex built inside four separate salt domes on the Texas and Louisiana Gulf coast.
Combined, the four SPR locations currently hold about 600 million barrels of crude oil. They’re about to get 30 million barrels lighter.
The Biden administration, in conjunction with the 30 other member nations of the International Energy Agency’s governing board, authorized the release of 60 million barrels of emergency oil reserves to stave off price increases resulting from Russia’s invasion of Ukraine. Half of that oil will come out of the SPR.
The West hopes that adding supply to the global energy market will put a ceiling on oil prices. Although Russia hasn’t cut off supply to the rest of the world — and market analysts don’t expect it to — oil prices have nonetheless surged above $100 in recent weeks. Russian oil has become toxic to many oil traders, who report trouble securing financing from Western banks to buy it.
If Russian President Vladimir Put decides to restrict oil shipments, even by a small amount, that could send global oil prices through the roof. The SPR remains one tool in President Joe Biden’s toolbox to counteract supply constraints.
But it’s not a catch-all. In fact, it might not even make a dent.
What is the SPR?
The SPR was created in the wake of the 1973-74 Arab oil embargo, when oil-producing nations in the Middle East halted exports. The resulting oil and gasoline shortages sent energy prices sky-high, and the US economy fell into a recession.
It held a record 727 million barrels of oil in 2009, but the United States has been gradually reducing its storage over the past decade. Its maximum capacity has since been reduced a bit to 714 million barrels.
Intended to insulate the United States from supply shocks, it has been used more as a political tool for presidents facing angry voters when gas prices are high.
For example, Biden released 50 million barrels in November — the largest SPR release on record — when gas prices were about $3.50 a gallon.
The Obama administration released 30 million barrels (the previous record), in 2011 when oil crept up to $100 a barrel. The George W. Bush administration released 20.8 million barrels in 2005 just before Hurricane Katrina hit the Gulf coast.
Why it won’t make a big difference
The world consumes 100 million barrels of oil per day. Although 60 million barrels may sound like a lot, that’s what the world consumes in about 16 hours.
Oil investors, clearly unimpressed by the IEA nations’ plan, reacted by sending even higher after the announcement. Oil hit fresh seven-year highs Tuesday.
“The bottom line is this is not enough to cool off the market. It’s a bit of a band-aid solution,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets.
US crude spiked about 10% Tuesday morning to an intraday high of $105.14 a barrel. That’s the highest level since 2014. Brent crude, the world benchmark, soared about 8% to $105.40 a barrel.
“You need to super-size the [SPR release] numbers,” said Robert Yawger, vice president of energy futures at Mizuho Securities.
In November, when the Biden administration released a record amount of oil from the SPR, prices dipped a bit — and tumbled when the Omicron variant kept people from traveling again. But within months, energy prices were right back to where they started.
“We released 50 million barrels and the market ran over it like a train. I don’t know why it would be any different this time,” said Yawger.
Still, energy industry executives and analysts conceded the Russia-Ukraine crisis is precisely what the SPR is designed for: to cushion the market against national security-related supply shocks. “It’s better than doing nothing,” Yawger added.
But it’s not a long-term solution. Emergency reserves can hold only a finite amount. In fact, the SPR holds the lowest amount of oil since September 2002, according to government statistics.
Matt Smith, lead Americas oil analyst at Kpler, said emergency releases are arguably bullish from a market sentiment standpoint. But they come at a price.
“Every time the US announces a release from the SPR,” Smith said, “it’s one less bullet that it has to be able to use later on.”
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