Peak Oil is You

Donate Bitcoins ;-) or Paypal :-)

Page added on July 30, 2022

Bookmark and Share

U.S. Plans to Push Down Oil Prices Won’t Be Straightforward


The Biden administration announced plans Tuesday for the next tranche of sales from the strategic petroleum reserve, as well as a proposal for future purchases to refill the SPR.

The sales announcement is the latest under the administration’s plan announced in March to sell 180 million barrels from the SPR over a six month period, part of a coordinated release of strategic stocks by members of the International Energy Agency.

The repurchase plan is subject to final Department of Energy rule-making. But as announced, it would allow the Department of Energy to arrange future purchases on a fixed-price basis—that is, agreeing a sales price in advance rather than buying barrels at an unpredictable future price. The administration argues that these new purchase terms (for oil to be purchased after fiscal year 2023) would boost investment by giving producers greater confidence in future prices.

Neither sales from the SPR nor its refilling are without problems, both practical and political in nature.

Crucially, the ability to purchase crude oil in the future—under fixed-price arrangements or the current protocols—is dependent on a future Congress authorizing the funds needed.

Whether the fixed-price provision will actually boost investment in new supply is unclear. Many U.S. producers already manage future price uncertainty via crude oil futures (and options). Recent NYMEX crude futures have had daily trading volume of 700 million barrels. The ability to lock in a predictable price is particularly needed since the amount of oil that would refill the SPR is relatively small in the context of the global crude market, and therefore would be unlikely to have a material impact on global prices. In the unlikely event that Congress authorized a complete refill of the SPR to its current authorized storage capacity of 714 million barrels within a single year, purchases would add roughly 640,000 barrels per day to global oil requirements for one year—in a global marketplace of roughly 100 million barrels per day. (Note that the global reference is the appropriate one, both because oil is traded in a global marketplace and because the U.S.—as discussed below—can purchase non-U.S. crudes for the SPR.)

A less-considered issue, nevertheless of high significance, is the mismatch that exists between the quality of crude oil produced in the U.S. and the crude most U.S. refineries utilize, which has historically been the basis for crude oil stored in the SPR.

In recent years, successive administrations (with help from successive Congresses) have sold crude from the SPR, most recently to mitigate the impact of rising global crude oil prices but also to fund SPR renovations and meet other spending objectives. SPR sales have been facilitated by the shale revolution, which eliminated U.S. (net) import dependence, eliminating the country’s obligation under the IEA treaty to hold oil inventories equivalent to 90 days of imports. The SPR reached a peak of just over 726 million barrels in late 2009; it had fallen to 638 million by the end of 2020 and now stands at 475 million barrels.

Historically, crude oil was placed in the SPR to meet the requirements of U.S. refiners, and there is a significant mismatch between that and the quality of crude produced by US shale operators. In particular, the average crude oil in the SPR is a close match for the average crude used by U.S. refineries, but both are significantly heavier than typical U.S. production. Moreover, most U.S. production is also relatively low in sulfur while U.S. refineries are generally configured to process higher sulfur crudes. Perhaps not surprisingly, then, this year’s crude oil sales from the SPR have been predominantly “sour” (or higher in sulfur)—to date, roughly 116 of 119 million barrels sold have been “sour.”

Continued SPR management in a fashion consistent with the historical pattern could however, raise challenges. First, the headline figure of 475 million barrels in the SPR could overstate the potential impact for U.S. refiners and global oil markets; sour crudes, which made up 60% of the SPR at the beginning of this year, are now half of the stockpile because the market has preferred buying sour crudes from the SPR so far this year. The most recent Energy Department sales notice switches from marketing predominantly sour crudes to lower-sulfur “sweet” crude, but it remains to be seen whether U.S. refiners will have a substantial appetite for such crudes, at a time when a relatively small number of SPR sales to foreign companies have already created significant political controversy.

And similarly on any potential refill in the future—the main U.S. crude streams are a poor match for the SPR, at least based on historical management practices. Indeed, the SPR reached full capacity at the end of 2009 with a cargo of Saharan Blend crude. But purchasing non-U.S. crudes could become a political liability even if it was necessary to manage risks faced by domestic refiners.

The steps that the administration is taking are supposed to help with pain at the pump, after national gasoline prices reached record levels earlier this year. Higher prices pose risks to the economy (via stretched consumer budgets and lower confidence) as well as to the administration (via lower job approval ratings). Indeed, the White House SPR announcement also included analysis by the Treasury Department, which concluded that the SPR sales from the U.S. and its allies had reduced gasoline prices by as much as 40 cents per gallon compared with what they would have been otherwise.

However, the SPR moves under consideration are not straightforward in terms of their practical implementation. Nor is their market or political impact.


4 Comments on "U.S. Plans to Push Down Oil Prices Won’t Be Straightforward"

  1. makati1 on Sat, 30th Jul 2022 6:17 pm 

    The US is full of shit as usual. They can only cause it to go up, not down. The rest of the oil producing countries are giving the finger to the US and West. “Collapse suckers, it’s our turn”, is the common thought.

  2. Theedrich on Sun, 31st Jul 2022 7:02 pm 

    Absolutely true, Mak. The U.S. is moribund and thinks it can wag the rest of the world with promissory drivel. Meanwhile it is trying to stave off fate by waging an overt proxy war in Ukraine and a covert one in Syria.

    Collapse is America’s future.

  3. centeno on Tue, 9th Aug 2022 11:22 pm 

    Money is a very important part that is counted as one of the essential elements while using the Toto site. All the services provided by the Toto site are perfectly provided, and even if the charge and exchange are smoothly done, if there is no event in which the money is paid, it is applicable. Money is a very important part to the extent that many members boldly leave the playground.

  4. redbull on Wed, 21st Sep 2022 11:37 pm 

    How far can you go before hitting rock bottom? Slope, a new arcade game from Y8 games, challenges you to roll down the slope for as long as you can without falling off the edge or hitting any obstacles along the way. Prepare for a serious speed boost as you fall downhill on the seemingly endless surface. Even if you play it a few dozen times in a row, you will have the desire to improve. Another significant advantage of the Slope Game is the new method of logging in under your own nickname and competing on the number of points with other players.

Leave a Reply

Your email address will not be published. Required fields are marked *