The savage attack on Ukraine by Vladimir Putin has exacerbated the already alarming spike in gasoline prices due to the post-COVID-19 surge in demand. In response, President Joe Biden announced a historic release from the federal government’s emergency crude oil reserve known as the Strategic Petroleum Reserve, or SPR. Yet despite the unprecedented scale of the release, the question remains open as to what impact the action will have on the price at the pump. And while most Americans are aware of its existence, few of us understand how SPR works. Here is an overview.
The concept of storing oil for a rainy day dates back to 1944, but it took the Arab Oil Embargo of 1973 to convince Congress to take the plunge. In 1975, President Gerald Ford signed the Energy Policy and Conservation Act which created the Strategic Petroleum Reserve and authorized the acquisition of up to one billion barrels of oil by market purchase. free. The first delivery took place in July 1977 with the receipt of 412,000 barrels of Saudi crude. Today, the SPR is the world’s largest emergency oil reserve.
The SPR has a capacity of 714 million barrels and currently holds 577 million barrels stored in 60 salt caverns on the Gulf Coast of Louisiana and Texas. Salt domes have proven to be the most economical and environmentally friendly way to store large quantities of oil and natural gas, as salt does not react with oil and has self-healing properties that seal the microcracks in the walls of the cave. A typical storage cavern is 200 feet in diameter and up to 2,550 feet deep, enough to hold two Empire State buildings (minus the spiers) end to end. The caverns are formed by injecting water and pumping out the resulting brine as the salt dissolves, a process known as “solution mining” which allows great precision in creating the voids of cylindrical storage.
The oil is removed from storage by pumping fresh water from the bottom of the cavern. Since oil floats on water, the injected volume of water displaces the oil and forces it upward for extraction. The oil is then transported by a network of pipelines or tankers connecting the SPR to half of the American refineries.
The intent of the SPR is to provide emergency supplies during times of economic, environmental, or geopolitical crisis, as authorized by the President. Prior to 2021, there have been three emergency releases: 1991 during Desert Storm, 2005 in response to Hurricane Katrina, and 2011 to supplement lost production from the Libyan Civil War. The Secretary of Energy is also authorized to make small oil loans to counter short-term supply disruptions at U.S. refineries. And perhaps unsurprisingly, Congress has stepped in 7 times to mandate SPR sales as a fiscal gimmick to mask deficits resulting from deficit spending bills. Tablecloth.
But the scale of Biden’s March 31 announcement following two smaller releases in November and March dwarfs any previous withdrawals from the strategic reserve. The President has authorized the sale of 180 million barrels over the next 6 months, or 30% of the current inventory. The administration is also coordinating with other allies and partners to release supplies from their own strategic reserves in a concerted effort to partially offset embargoed Russian crude oil.
Will the SPR’s release provide relief to consumers beleaguered at the gas pump? Probably not much. The addition of 1 million barrels per day represents about 1% of the 100 million barrels of global consumption, so even if it is partially compensated by the allies, the impact is minimal. Economists estimate a short-term decline of 10 to 35 cents per gallon of gasoline, but also acknowledge that longer-term prices will be higher as the supply rebuilds.
The real impact is more psychological: a coordinated Western pact to compensate for Russian production lost to sanctions, and a sign to domestic voters that the administration is aware of the pain American consumers must bear as a necessary consequence. of our duty to resist tyranny and uphold freedom. Stay calm and engine on.
Christopher A. Hopkins is a Chartered Financial Analyst in Chattanooga.