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Page added on September 5, 2014
Why the US should start selling oil out of the SPR
Economist Philip Verleger looks at the size of the US Strategic Petroleum Reserve, and then looks at the world’s hot spots, and sees a way to solve some of the problems of the latter with the former. He has contributed this guest blog to The Barrel.
Russia’s adventurism in Ukraine, ISIS’s alarming advances in Syria and Iraq, China’s economic slowdown, and the continuing US consumer malaise share a common cause: high oil prices.
Russia could not afford its aggressive moves against Eastern Europe if oil sold for $60 per barrel rather than $100. ISIS’s aggression would grind to a halt if sales of oil from its captured areas were cut off. US consumers might spend more but for their constant fear of higher gasoline prices.
Today, the global economy’s burden of high-cost oil can be removed for a year or two if two countries — the United States and Saudi Arabia — cooperate. The United States’ role would be to sell the almost seven hundred million barrels of oil held in its strategic petroleum reserve. The addition of this oil to global markets would bring prices down to $50 if the second player, Saudi Arabia, simply did nothing, that is, maintained its current production. Should this happen, crude prices could be halved.
The policy is predicated on the fact that the United States no longer requires its Strategic Petroleum Reserve. The reserve was created at a time when the nation was very dependent on imported oil. The dependency is in the past. The Reserve no longer serves the purpose for which it was developed. It can, however, be used as a strategic asset today.
Lower oil prices caused by sale of oil from the reserve would benefit the United States, Saudi Arabia, Europe, and almost every country in the world. The losers would be Russia and ISIS.
Russia would suffer because it is the quintessential “petro state.” The nation requires high oil prices to survive. Low prices would depress its GDP four or five percent and put the economic solvency of its two national stalwarts, Gazprom and Rosneft, at risk. Both companies could be bankrupted by low oil prices, just as Enron was more than ten years ago. This threat would prompt senior officials at both companies to put enormous pressure on Vladimir Putin to back down from his belligerent stance.
Lower oil prices would also undercut ISIS. This terrorist group relies on oil revenue from the fields it has occupied. The crude seeps into the market through various channels, very likely at significant discounts to world prices. The organization’s income stream would dry up if prices fell. If this happens, the cash-starved extremists would likely find it much harder to continue operations.
Lower crude prices today might also offer a modest prop to the faltering economies of China, Japan, Europe and the United States. Real benefits would be seen in the US. Historically, expanding consumption increases the nation’s growth.
Since 2008, though, consumers have shown little willingness to return to their old ways. Stagnant wages and rising medical costs are the primary causes of the malaise but high gasoline prices contribute. Gasoline today captures more than three percent of total consumer expenditures. Consumers would have an extra $130 billion or so to spend on other things if gasoline spending fell to two percent of total expenditures. This would add a modest one percent to GDP directly and an additional amount indirectly. Europe would see similar but more modest benefits.
There is, of course, a downside to lower crude oil prices. Progress toward US energy independence would slow. Some companies would stop drilling in the oil-boom states. Others would reduce their efforts.
Such a development would not be all bad, though. Serious permanent damage is being done to many areas in the rush to drill wells and get fields into production. A drilling slowdown would allow more orderly progress. New techniques that boost recovery while causing less environmental damage could come on line.
In addition, a cut in the expansion rate of US oil production would allow the United States to address the oil export question in a more careful fashion. One can even imagine a rational strategy being developed.
Saudi Arabia, too, would gain from slowing US production. Right now, the surging US output is leading some to call for the Saudis to cut back. Oil sales from the US strategic reserve that reined in US expansion could create short and long-term benefits for us and the Kingdom. Saudi Arabia would also gain from an enfeebled ISIS.
In sum, there are many good reasons to sell US strategic stocks, reserves now superfluous given the changed US situation. Such sales will be resisted, however, by those who cling to the idea that this oil must be held for use in a real emergency. To these individuals I ask a simple question: What constitutes an emergency if not a potential land war in Europe (as suggested by Washington Post columnist Anne Applebaum) or the threatened spread of ruthless terrorists across much of the Middle East?
28 Comments on "Why the US should start selling oil out of the SPR"
JuanP on Fri, 5th Sep 2014 8:05 am
Platts has been putting out a lot of crappy articles lately.
If we start using the strategic reserves to lower prices, the Chinese will start buying that cheap oil like crazy to fill theirs.
Also, when we are done doing that we may no longer be able to fill them up again, ever, because of soon declining production, and we may be left with depleted strategic reserves. Those reserves should be used to save this country from a crisis, not to create crises in other countries.
We should leave the Russians to their own devices. I believe this unnecessary confrontation with Russia is the one that will do the dollar and the USA in, and if so, we deserve it. Might doesn’t make right. We are on the wrong side here, fighting with Nazis committing ethnic cleansing. I am very glad that the Ukrainian armed forces have been virtually destroyed.
paulo1 on Fri, 5th Sep 2014 8:26 am
re: “The policy is predicated on the fact that the United States no longer requires its Strategic Petroleum Reserve. The reserve was created at a time when the nation was very dependent on imported oil.”
This writer is truly an idiot swallowing the Saudi America line all the way up to the sinker. What would happen if all the imports stopped? I don’t know about others, but every other day I read articles about how so many US citizens have virtually no savings or resources to depend on if a pay cheque stopped. The recommendations by debt counsellors is to have 6 months of survival money salted away for an emergency. The US is flat assed broke, but at least they have some oil tucked away and a history of food harvest and relative plenty.
Furthermore, if he thinks Russia (and Russians) will simply decline into obscurity with the prospect of tough times, he had better dust off some WW11 history books. And just over 100 years ago serfs were bought and sold with the land. Finacial deprivation is child’s play for these hardened people. Academics haven’t a clue about desperation and resolve of folks with nothing.
As for the threats of ‘ruthless terrorists across the ME’, that cat is long out of the bag. Guess what, it is spreading and will never stop until the infidels have vacated their lands and stop supporting puppet regimes and ruthless self-serving monarchies set on selling off the last of the black goo to the highest bidder. When it is gone the ruling families will have mysteriously moved to Europe or US and the poor will have nothing but hunger and dislocation. Their anger will be exported, though….forever. Anger will be all they will have left to show for this blip in petroleum history.
What constitutes a real emergency platts might ask? well, we might get a good idea when the heat is turned off in northern Europe this winter.
Paulo
Makati1 on Fri, 5th Sep 2014 8:58 am
This article proves that economists were cheated by the college that they get their degree from. Obviously they didn’t learn anything worthwhile and lost the ability to think in the bargain. They do fit right in with the DC Mafia crowd though.
rockman on Fri, 5th Sep 2014 9:06 am
Besides the previous stated reasons there’s a basic flaw to the proposal: by CONGRESSIONAL LAW no more than 1 million bopd can be released from the SPR and that for only 30 days. And by CONGRESSIONAL LAW any released oil must
be replaced in a relatively short time. No executive order from the POTUS can oberide the law. Obviously it would take an act of Congress.
But what if the did? First, the 1 million bopd is slightly more than 1% of global oil consumption so it would anything close to the impact he proposes. And whatever impact might develop would easily be cancelled by yhe pil exporters each reducing production by just a small portion of 1#.
I don’t think the folks behind this piece are really that ignorant of the facts just stated. IMHO yhey are writing to Joe6pack who is unable to see the obvious BS. IOW pure propoganda.
Plantagenet on Fri, 5th Sep 2014 9:10 am
Oil prices are ALREADY coming down thanks to the millions of barrels of oil per day being produced by the US shale oil industry.
JuanP on Fri, 5th Sep 2014 10:01 am
Rock, I agree this is done on purpose for J6P. This article is like Swiss cheese, it’s mostly holes. I think the crowd here will have fun criticizing the many errors contained in it.
westexas on Fri, 5th Sep 2014 11:05 am
It seems to me that almost no one in the media is paying any attention to decline rates. Note that a few years ago, circa 2005 or so if memory serves, ExxonMobil put the global decline rate from existing oil wells at about 4% to 6% per year.
The EIA’s numbers for the decline rate from existing Bakken and Eagle Ford Shale Play oil wells are at about 6% and 8% respectively, except that they are talking about per month, rather than per year, decline rates.
Some numbers for extrapolated declines:
If we combine the December, 2013 EIA numbers for Bakken + Eagle Ford, they produced 2.2 mbpd of Crude + Condensate (C+C) in December, 2013.
If we extrapolate the EIA’s estimates for month over month declines in legacy production*, the oil wells completed in these two plays in 2013 and in prior years would be down to a combined production rate of about 0.9 mbpd in December, 2014, about a 60% decline in one year.
Or, in other words, based on EIA data, the industry would have to add 1.3 mbpd of new production from 12/13 to 12/14, just to offset declines from existing Bakken and Eagle Ford wells (completed in 2013 and prior years).
The EIA puts US C+C production at 7.9 mbpd in December, 2013. If we assume that the balance of existing US C+C production (excluding Bakken + Eagle Ford) is declining at about 7%/year, the remainder of US C+C production in December, 2013 would decline by about 0.4 mbpd from 12/13 to 12/14.
Based on the foregoing, existing US oil wells as of December, 2013 would decline by about 1.7 mbpd from 12/13 to 12/14, and again based on the foregoing, just to maintain US C+C production for 10 years, the US would have to put on line the productive equivalent of about 17 mbpd, or approximately the productive equivalent of the current production from Iraq, times six.
So far, the US oil industry has been able to offset declines and add new production, but the higher the production rate, the greater the volumetric loss of production from existing wells, which is why Peaks Happen. It’s when, not if, that the industry is not able to offset the declines from existing wells.
*If we are looking an projecting multi-year declines, one would need a hyperbolic or two-step exponential decline estimate, but for just 12 months, I think it’s reasonable to extrapolate the current EIA monthly estimates.
Davy on Fri, 5th Sep 2014 11:06 am
Paulo, the Russian people are nothing like the people that fought WWII the same is true for the rest of the great powers that fought. That said this article and the whole topic of oil as a weapon and America oil independence shows the degree of disconnect in the MSM world today.
westexas on Fri, 5th Sep 2014 11:08 am
And based on the most recent four week running average EIA data, US refineries were dependent on crude oil imports for 45% of the crude oil inputs into US refineries.
Plantagenet on Fri, 5th Sep 2014 11:16 am
West Texas
I agree—Decline rates are very important. Its the “red queen” effect. We have to drill ever more wells just to keep up with declines. Of course, well drilling is a kind of economic activity itself—it creates many good paying jobs and lifts the economy of the oil producing states.
J-Gav on Fri, 5th Sep 2014 11:29 am
JuanP – Good point (re: your 1st post). Platts revels as it wades in BS up to its eyeballs.
Any article with a sentence thats like this: “Russia could not afford its aggressive moves against Eastern Europe if …” was either written by a kindergartner or a mouthpiece for DC’s bumbling foreign policy.
Russia rampaging through Romania, Bulgaria, Belarus, Poland, Hungary, the Baltic States etc??? It’s also already been proven that they did NOT invade eastern Ukraine, as Western media whores have been ranting. Who started the whole thing there anyway for Chrissake? Victoria Nuland bragged about spending $5 billion to oust their (admittedly shitty) elected president and bring a couple of neo-nazi parties into the Kiev power circle.
What goes around, comes around, and payback’s a bitch.
ghung on Fri, 5th Sep 2014 11:34 am
Plant: “…it creates many good paying jobs and lifts the economy of the oil producing states.”
…until it doesn’t. There’s the rub. At some point, North Dakota and other shale play areas will look like they’ve been gang-raped and left in a ditch. They’ll be left with a mass of useless, expensive infrastructure to maintain or abandon, and the players will be long gone. They’ll be reliant upon a tax base that no longer exists and an ageing, declining population surrounded by brown fields, and cows, perhaps, grazing behind what used to be Starbucks or some shipping terminal. Over-built roads and sewers won’t be maintained, schools will close, and promises (like pensions) won’t be kept.
Sounds like my kind of place 😉
Perk Earl on Fri, 5th Sep 2014 11:48 am
Talk about an out of touch article. This Author drank the Kool-Aid that we are producing so much oil (even though we still import oil) that we can use the SPR to lower world oil prices. Let’s see what could go wrong:
1. Lose our reserve oil supplies for emergencies and if and when oil imports are reduced.
2. Alienate oil exporting countries by reducing oil price below their breakeven price.
3. Reduce exploration due to low price.
4. Shut down marginal oil plays that require a high oil price.
5. Give China a huge discount on oil to fill up their SPR.
Once it is gone the presumption is to leave the SPR empty, and once it is used up, watch oil prices go right back up to where they are now or higher.
It’s like eating all of your calamity supply food based on over confidence the grocery stores will always be full no matter what disaster may occur.
ghung on Fri, 5th Sep 2014 11:53 am
Gosh, Earl, the author didn’t drink the Kool-Aid; he’s pouring it. I would say he’s quite in touch with the mainstream mentality.
KingM on Fri, 5th Sep 2014 12:29 pm
How short sighted is this? Sheesh, if anything we should be buying more oil for the SPR while the getting is good.
DMyers on Fri, 5th Sep 2014 1:48 pm
Mr. Economist Philip Verleger is trying for a Ronald Reagan redux. Reagan supposedly defeated USSR by coaxing KSA to ramp up oil production to bring down the oil price, with devastating impact on USSR.
I agree with the criticisms above. The idea is ridiculous.
frankthetank on Fri, 5th Sep 2014 1:49 pm
Rainy day fund. This guy is a moron. Should add to it. Personal transportation will at some point have to go 100% electric (or bike/shoes), while what is left of the oil will have to go to military/shipping and Ag. Coal will make a big comeback… bank it. Natural gas won’t last forever.
rockman on Fri, 5th Sep 2014 4:14 pm
“…and other shale play areas will look like they’ve been gang-raped and left in a ditch.” Not true for Texas. Notice the funds going towards the road and school infrastructure. And the boom is actually bringing in a lot of new residents (allowing Texas more votes in DC after the last census) and new companies with some relocating from the EU due to our relatively low energy costs:
“The oil drilling boom’s impact on Texas coffers continues to outpace officials’ expectations. Texas ended the 2012-13 biennium with a $2.6 billion surplus, more than double the $964 million surplus projected. Texas taxes paid by energy development firms will be at least $2 billion more than earlier projections, resulting in $8 billion in the state’s piggy bank by 2015.
The revisions means that the Rainy Day Fund could be more flush than expected for the 2015 legislative session, even after lawmakers backed measures asking voters to approve tapping the fund’s revenue stream for water and road projects.
Texas voters approved transferring $2 billion from the Rainy Day Fund to a state water infrastructure bank. Earlier this year, state lawmakers also passed a measure that would require dedicating half of the future tax revenue currently earmarked for the Rainy Day Fund to the state highway fund. Under that scenario, the Rainy Day Fund will have a balance of $8.1 billion by the fall of 2015.”
And taking advantage of our energy resources isn’t a new proposition…it began over 100 years ago. Hundreds of thousands of Texas university graduates have had a significant portion of their education paid for by the fossil fuel industry:
“In 1900, the Permanent University Fund earned approximately $40,000, mostly from grazing leases; by 1925, income had increased to about $700,000 per year, and by 1943 was just under $1 million per year. In the late 1950s, the PUF earned about $8,513,000 per year and was valued above $283,642,000; in 1990, the PUF was valued at $3.54 billion and earned $266 million in income. Currently, PUF land assets deliver proceeds through oil, gas, sulfur, and water royalties, rentals on mineral leases, and gains on fiduciary investments.
As of December 2008 figures, the PUF holds approximately $8.8 billion in investments and 2,100,000 acres of land located mostly in West Texas (think Permian Basin). The PUF exclusively serves institutions in the University of Texas System, which receives two-thirds of its proceeds, and the Texas A&M System, which receives the remaining one-third. As of 2008, the University of Texas System received the fifth-largest endowment in the nation, and the Texas A&M System received the tenth-largest. At one time, the PUF was the chief source of income for the university system. Of the 2007-08 year’s $1 billion core academic budget of UT Austin, the AUF’s funding accounted for $143 million.”
Sounds more like consensual (and very satisfying) sex more than rape. LOL.
Solarity on Fri, 5th Sep 2014 4:48 pm
The Strategic Petroleum Reserve is a successor to the old Naval Oil Reserve; a safety buffer set-aside to ensure the Navy would always have enough fuel available. Hence, based on history, the reserve is truly there for emergency requirements that today extend far beyond naval uses. It would be foolish to squander this resource on a non-crisis.
Given that the administration is intent on significantly devaluing the US dollar, they could print copious amounts of money, buy crude, and fill-up the SPR. This process would be converting nothing (bogus dollars) into something valuable. This action would be a smart move and therefore will not happen.
nemteck on Fri, 5th Sep 2014 5:15 pm
Lower oil prices caused by sale of oil from the reserve would benefit the United States, Saudi Arabia, Europe, and almost every country in the world. The losers would be Russia and ISIS.”
Completely nonsense! The Saudis need oil above $100 to satisfy public expenditures, for example. Russia is not the USA where, if one does not have the accustomed Kellogg’s cereal brand, then the day is ruined. The Russians have a different mentality learned from hundreds of years of hardship. Besides, shutting down Russia oil will increase the price since the release of the US SOR is but a drop in the world oil bucket and the effect will last only for a number of days.
Bob Owens on Fri, 5th Sep 2014 5:45 pm
The SPR is for an EMERGENCY! Like: If we don’t get the harvest in we will STARVE! or: A hurricane has destroyed New York! We need GAS! or: ISIS has invaded Saudi Arabia! All oil production has STOPPED! Any other use is politics at work.
Davy on Fri, 5th Sep 2014 7:26 pm
Nemteck said – Russia is not the USA where, if one does not have the accustomed Kellogg’s cereal brand, then the day is ruined. The Russians have a different mentality learned from hundreds of years of hardship
Yea, Nem, the Russian’s day is ruined if he doesn’t get his vodka and smokes. Russians are lazy like the rest of us Humans. I get tiered of you guys talking them up like supper humans they are not.
rockman on Fri, 5th Sep 2014 9:09 pm
Solarity – Everyone likes to think they understand the primary reason why the SPR was built. The gov’t make it difficult to dig out the facts but it is a Congressional law and thus public record. The primary potential beneficiary of the SPR was, and still is, the Debt of Defense. By law the majority of the oil is reserved for the sole use of the DOD. Just as the original Naval Petroleum Reserve was established.
But what happened to the NPR? It was oil in the ground…oil that could not be quickly produced but was worth a great deal to the gov’t. So how does the DOD have it’s cake and et it to?
Simple: monetize the NPR and replace it with reserves stored for quick recovery…the SPR:
“For much of the 20th century, the Naval Petroleum and Oil Shale Reserves served as a contingency source of fuel for the Nation’s military. All that changed in 1998 when Naval Petroleum Reserve No. 1, known as Elk Hills, was privatized, the first of a series of major organizational changes that leave only one of the original six Federal properties in the program.
Set aside in a series of Executive Orders in the early 1900s, the government-owned petroleum and oil shale properties were originally envisioned as a way to provide a reserve supply of crude oil to fuel U.S. naval vessels in times of short supply or emergencies. The Reserves remained mostly undeveloped until the 1970s, when the Nation began looking for ways to maximize its domestic oil supplies. In 1976, Congress passed the Naval Petroleum Reserves Production Act authorizing full commercial development of the Reserves.
{BTW does anyone think the SPR program beginning in 1975 was a coincidence with the gov’t opening up the NPR for production? Notice below that just one of the NPR fields has produced more oil in just 16 years starting in 1976 then we have in the SPR today. And that much of that one billion bbls of oil was sold very cheap…less than $20/bbl, in the 80’s}
The crude oil, natural gas, and liquid products produced from the Reserves were sold by DOE at market rates. Revenues were deposited to the U.S. Treasury.
One of the largest of the Federal properties, the Elk Hills field in California, opened for production in 1976 and became the largest (in terms of production) oil and natural gas field in the lower 48 states at one point in its history. In September 1992, the field produced its one billionth barrel of oil, becoming only the thirteenth field in the Nation’s history to reach that milestone. While managed by DOE, Elk Hills generated over $17 billion in profits for the U.S. Treasury.”
And what eventually happened to the isn’t Elk Hills Field? It was sold by President Clinton at a time when oil prices were $11.91/bbl:
“On February 5, 1998, the Department of Energy and Occidental Petroleum Corporation concluded the largest divestiture of federal property in the history of the U.S. government.
The sale agreement completed a privatization process that began in 1995 when the Clinton Administration proposed selling Elk Hills. The divestment removed the federal government out of the business of producing oil and gas at Elk Hills.
In May 1995 the Clinton Administration proposed placing the federally-owned Elk Hills Naval Petroleum Reserve on the market as part of its efforts to reduce the size of government and return inherently non-federal functions to the private sector. In February 1996, the Congress passed and the President signed the Defense Authorization Act for Fiscal Year 1996 containing authorization to proceed with the sale.”
Makes a rather logical plan by US gov’t/DOD when you put all the pieces of the puzzle together, eh?
Nony on Fri, 5th Sep 2014 9:18 pm
Would domestic resources be sufficient for wartime use? Obviating the need for SPR?
Makati1 on Fri, 5th Sep 2014 9:34 pm
Nony, according to my research, the US Military uses about 430,000 barrels of oil per day. That is the same as the country of the Philippines uses per day.
At that usage, the SPR contains (if full) about 4 1/2 years worth of oil for the military to use.
That’s $15,700,000,000.00 per year just for oil for the military.
jv153 on Sat, 6th Sep 2014 8:25 am
Plantagenet – shale oil is expensive and Brazil, India, China, Indonesia, UAE and Iraq are all using much more oil than before.
rockman on Sat, 6th Sep 2014 11:30 am
M – And let’s not forget that the US gov’t is also obligated by treaty to assist our allies with fuel if required. But even without that burden the US DOD is still the largest single consumer of refined products on the planet. Given the potential need for the DOD to continue/expand efforts to stabilize oil producing regions it seems unlikely that stat will change.
Kenz300 on Sat, 6th Sep 2014 11:50 am
It is time to transition away from the oil monopoly on transportation fuels……………
For too long we have relied on nations that want to do us harm to provide us energy. This makes no sense when alternatives are available.
Bring on the electric, flex-fuel, hybrid, biofuel, CNG, LNG and hydrogen fueled vehicles.
Every country needs to develop a plan to become more energy self sufficient and economically self sufficient. Europe is beginning to see that relying on Russia for energy is dangerous for their economies. Home “grown” energy sources like wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste can all help countries become more energy independent.
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The Truth Behind Big Oil Attacking Ethanol – YouTube
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