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TLDR- The U.S. SPR is down 52% from its peak- The SPR was meant as much or more for economic security as wartime security- U.S. production and import sources have changed materially since creation of the SPR- The 2022 Emergency Release was largely offset by a reduction in future mandatory sales- The U.S. should strive to refill the SPR to 500 million barrels

The debate surround the United States Strategic Petroleum Reserve ("SPR") continues unabated since the 2022 emergency release in response to Russia's invasion of Ukraine.  Peaking at 726.6 million barrels of oil inventory in 2011, the SPR is down a whopping 52% since, at its current 351.3 million barrels.

Was the release appropriate or political?  Will or can the SPR be refilled?  What is the appropriate size of the SPR?  We hope to address some of these questions and more.

The recent conflict between Hamas and Israel highlights the real possibility of global events impacting oil markets and U.S. energy security, which is partially why the SPR was created.  But U.S. oil production recently reached all-time highs and the U.S. is currently a net exporter of oil & petroleum products creating a vastly different domestic oil environment than when the SPR was created.  That being said the SPR is an insurance policy and insurance is often used to protect from unknown, rather than known risks.  

SPR History

The SPR was created in 1975 in response to the Arab oil embargo of 1973-1974 as part of the Energy Policy and Conservation Act ("EPCA"; EPCA, P.L. 94-163), with lawmakers seeking to "diminish the vulnerability of the United States to the effects of a severe energy supply interruption" or to "carry out the obligations of the United States under the international energy program."

The International Energy Agency ("IEA") was created in 1974 to manages the International Energy Program ("IEP"), a multilateral international treaty that embodies a set of reciprocal legal rights and obligations to which IEA Members are bound under international law. In broad terms, IEA Members share the collective goal of ensuring a reliable, affordable and clean energy supply.

The IEP requires member countries to maintain emergency reserves equivalent to 90 days of prior year net exports of crude and petroleum products with a combination of public and private inventories.  As a net exporter of oil and petroleum products recently, the U.S. is no longer statutorily required to hold any strategic reserves under the IEP.

SPR Drawdown Authority

The EPCA provided statutory authority for an SPR drawdown in the event of a "severe energy supply interruption".  Despite the widespread belief that the SPR is for wartime usage, EPCA language primarily allows for SPR drawdowns due to adverse impacts on the national economy.  Further the President has significant discretion to utilize the SPR through the "or is likely to be" language - there need not necessarily be a national energy supply shortage, just the possibility of one.

The EPCA further highlights drawdown of the SPR is related to the short-term economic impact of energy security:

Test releases of up to 5 million barrels are also allowed:

In response to the Exxon Valdez oil spill in 1989 Congress amended the EPCA via P.L. 101-383 to allow for SPR drawdowns in the event of domestic supply interruptions, with limitations (30 million barrels maximum for no more than 60 days, as long as the SPR is currently 252 million barrels, with the SPR inventory requirement having been amended lower multiple times).

2022 Emergency Release

The elephant in the room is that there was no "national energy supply shortage" related to the 2022 war between Russian and Ukraine.  Global and domestic prices did rise, impacting the U.S. and other economies, but no impact on oil or petroleum products imports materialized.  President Biden used the liberal "is likely to" language of the EPCA for his 180 million barrel emergency release, even if the shortage never occurred.

We think the reality of the 2022 release may be more complicated than a soundbite or Tweet for the following reasons.  

1. In early 2022 the U.S. and world were still dealing with the impact of COVID-19, which included rising inflation.  Higher oil and gasoline prices would have contributed to the increase;

2. Russia would have benefitted from higher oil prices, offsetting export restrictions meant to incentivize an end to the conflict;

3. The U.S. Congress has mandated a reduction in the SPR for years.  Fast-forwarding future year sales with concurrent cancellation had no medium-term impact on the size of the SPR given prior legislation.

Indeed the following legislation related to SPR drawdowns were enacted across the Obama, Trump and Biden administrations, with most long before the 2022 emergency release:

Section 403 of the Bipartisan Budget Act of 2015 (Public Law 114-74) requires the Secretary to draw down and sell a total of 58 MMbbls of crude oil from the SPR over eight consecutive years, commencing in FY 2018 and continuing through FY 2025.

Section 404 of the Bipartisan Budget Act of 2015 (Public Law 114-74) authorizes the Secretary to sell crude oil in an amount up to $2 billion for the period encompassing FY 2017–2020.

Section 32204 of the 2015 Fixing America’s Surface Transportation Act (FAST Act) (Public Law 114-94) requires the Secretary to draw down and sell a total of 66 MMbbls of crude oil from the SPR, or a volume which generates up to $6.2 billion, over three consecutive years, commencing in FY 2023 and continuing through FY 2025.

Section 20003 of Tax Cuts and Jobs Act of 2017 (Public Law 115-97) directs the Secretary of Energy (the “Secretary”) to sell 7 MMbbls from the SPR in fiscal years (FY) 2026-2027.

Section 30204 of Bipartisan Budget Act of 2018 (Public Law 115-123) directs the Secretary to sell 30MMbbls in FYs 2022-2025; 35 MMbbls in FY 2026; and 35 MMbbls in FY 2027 from the SPR.

Section 501 of Consolidated Appropriations Act, 2018 (Public Law 115-141), directs the Secretary of Energy to draw down and sell a total of 10 MMbbls of SPR crude oil commencing in FY 2020 and continuing through 2021.

Section 3009 of America’s Water Infrastructure Act of 2018 (Public Law 115-270) requires the Secretary to draw down and sell a total of 5 MMbbls of crude oil from the SPR in FY 2028.

The 2021 Infrastructure Investment and Jobs Act (Public Law No. 117-58), includes a provision to draw down 87.6 million barrels of crude oil from the U.S. Strategic Petroleum Reserve (SPR) in fiscal years (FY) 2028 through 2031.

In aggregate, over 350 million barrels of SPR oil were legislatively mandated to to be sold to fill budget holes before the 2022 release.  Both Democrat and Republican Congresses and Presidents pushed forward and signed these bills into law.  The SPR was hardly viewed as strategic until recent releases fired up public political debate.

Indeed, in 2017 President Trump's first budget proposed selling half the SPR over ten years.  Together with then existing mandated sales, the SPR would have been nearly completely depleted if enacted.  Energy Secretary Rick Perry repeatedly pushed forward the idea that the SPR should be smaller.  In 2019 the Senate Committee on Energy & Natural Resources held a hearing to discuss the role of the U.S. SPR on energy security. In short, the size of the SPR and reducing its size has been the policy for most Democrats and Republicans for years.

One need look no further than the increase in U.S. oil production for the changing political attitude toward the SPR.  Shale oil changed the domestic and global supply picture materially.  But in addition to U.S. supply increases, a number of long-cycle Canadian oil sands projects came online in the 2010-2020 era, with a concurrent increase in U.S. imports of Canadian crude (mostly heavy oil).

U.S. oil production and Canadian imports have been equal to nearly 100% or more of the oil run through U.S. refineries since 2019.  Due to U.S. refinery configuration and the logistics of moving crude this simplifies the story of U.S. oil import needs, but the short version is that U.S. energy supply and import risks have been reduced materially, in our opinion.

The U.S. is no longer as reliant on OPEC imports as it once was.  Over 70% of oil imported into the U.S. now comes from our friendly neighbors - Canada and Mexico.

Mandated Sales Rescinded

On December 29, 2022, the Consolidated Appropriations Act, 2023 was passed.  The Act included language permanently rescinding $12.5 billion of the roughly $17 billion received from the 180 million emergency release from the Department of Energy, leaving just $4.5 billion available for refilling the SPR - enough for roughly 55 million barrels at an $80 per barrel repurchase price.

In essence, the 2022 Emergency Release simply fast forwarded future mandated sales.

We'll do the strike throughs for you.  All bolded section were struck removing 140 million barrels of mandated sales between fiscal years 2024-2027:

SEC. 403. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE. (a) DRAWDOWN AND SALE.—Notwithstanding section 161 of the Energy Policy and Conservation Act (42 U.S.C. 6241), except as provided in subsection (b), the Secretary of Energy shall draw down and sell— (1) 5,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2018; (2) 5,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2019; (3) 5,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2020; (4) 5,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2021; (5) 8,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2022; (6) 10,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2023; (7) 10,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2024; and (8) 10,000,000 barrels of crude oil from the Strategic Petroleum Reserve during fiscal year 2025.

SEC. 32204. <<NOTE: 42 USC 6241 note.>> STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE.

(a) Drawdown and Sale.– (1) In general.--Notwithstanding section 161 of the Energy Policy and Conservation Act (42 U.S.C. 6241), except as provided in subsections (b) and (c), the Secretary of Energy shall drawdown and sell from the Strategic Petroleum Reserve– (A) the quantity of barrels of crude oil that the Secretary of Energy determines to be appropriate to maximize the financial return to United States taxpayers for each of fiscal years 2016 and 2017; (B) 16,000,000 barrels of crude oil during fiscal year 2023; (C) 25,000,000 barrels of crude oil during fiscal year 2024; and (D) 25,000,000 barrels of crude oil during fiscal year 2025.

SEC. 30204. STRATEGIC PETROLEUM RESERVE DRAWDOWN. (a) DRAWDOWN AND SALE.— (1) IN GENERAL.—Notwithstanding section 161 of the Energy Policy and Conservation Act (42 U.S.C. 6241), except as provided in subsection (b), the Secretary of Energy shall draw down and sell from the Strategic Petroleum Reserve— (A) 30,000,000 barrels of crude oil during the period of fiscal years 2022 through 2025; (B) 35,000,000 barrels of crude oil during fiscal year 2026; and (C) 35,000,000 barrels of crude oil during fiscal year 2027.

SPR Size

It is important to note the SPR does not hold any heavy oil and through 2020 has never held any Canadian oil per DOE data.  Heavy oil splits inside salt caverns through geothermal heating, creating dangerous and inoperable storage. The U.S. SPR is mostly medium grade sweet or sour oil.  

There are a number of ways to look at the appropriate size of the SPR.  As noted previously, the U.S. no longer has IEA statutory requirements to hold oil or products, but if a "severe energy supply interruption" were to occur today for an extended period of time it would still be tied to imports and global markets.

Days of gross imports are currently below the long-term average.

Days of net imports are above the long-term average.

Days of oil imports not from Canada or Mexico are above the long-term average.

The ideal size of the SPR is as much art as it is science.  Among others, the factors include:

1. Durability of U.S. oil production growth

2. U.S. refinery configuration

3. The inability to hold heavy oil (roughly 70% of U.S. oil imports are 30 degree API or lower)

4. The impact of EVs and the energy transition on oil demand

5. U.S. desire to use the SPR for global imbalances in addition to domestic shortages

6. Budgetary stress

7. Political will or dysfunction

With the money left at DOE for SPR refill (only statutory use for emergency sale proceeds) and remaining exchange barrels set to be returned, we believe the SPR is theoretically sized at roughly 425 million barrels today once those barrels return. On our math there remains 115 million barrels of mandatory SPR sales between fiscal 2024 and 2032.  Put bluntly those remaining sales should be cancelled and we expect they will be in future legislation.  

It is our contrarian belief that all else being equal the SPR would quickly see storage rather than withdrawal needs in the event the U.S. was pulled into a global or bilateral war with another superpower.  If shipping lanes were compromised or U.S. exports otherwise diminished as demand weakened significantly from a global conflict storage needs would be significant.  We witnessed a similar dynamic in 2020 during the COVID-19 outbreak.

U.S. oil production is largely light/sweet oil.  Refinery configurations and yields require that we run heavier grades to produce all the products consumers utilize, but most of our heavy oil imports are currently sourced from Canada.  We do have concerns about the long-term durability of shale oil due to the hyperbolic nature of production declines and remaining tier 1/2 inventory, but U.S. oil producers have been stacking the flatter tail end of shale oil declines for a decade.  U.S. oil production should be stable but is challenged to materially exceed the current 13 million barrel per day rate, in our opinion.

Due to U.S. oil production increases and the much larger reliance on Canadian imports compared to when the SPR was created, U.S. energy security - for itself - has likely never been more secure.  But oil markets are also more global and fungible, morphing the use case for the U.S. SPR to mute the impact of higher prices related to global conflicts and supply interruptions rather than interrupted supplies hitting U.S. shores.  

The SPR was created for national security reasons and for national economic reasons.  High oil and gasoline prices create inflation and pain for consumers. Buttressing this view, the 2022 emergency release occurred despite no impact on U.S. energy supplies, there was no "severe energy supply interruption."  We tend to believe the plan all along was to swap mandatory barrels for emergency releases, which is supported by DOE testimony weeks before the December 2022 appropriations bill was passed.  

The threat of SPR usage is as meaningful and important as its actual usage but it cannot dictate global oil markets or prices over the medium or long-term.  Statutory language from the EPCA realized this in the 1970's indicating the SPR was for short-term supply disruptions.  The 180 million barrel emergency release in 2022 represented less than two days of global demand. OPEC can and did offset U.S. SPR drawdowns with matching production cuts.

U.S. oil production and imports no longer suggest a 700 million barrel SPR is needed.  The best resource for U.S. energy security is sound energy policy, not the SPR, in our opinion. Sadly, we aren't optimistic the dysfunctional U.S. political environment changes anytime soon and policy can't change geology.  If our belief about peaking U.S. oil production is correct, the U.S. has ceded its role as the swing producer from the last decade back to OPEC.  Democrats being over-reliant on energy transition and the impact of EVs on oil demand is not helpful.  Nor is Republicans selling off the SPR as they did in 2018 with full control of the White House, Senate and Congress then claiming to have no involvement for the current SPR size.  The U.S. SPR was and is a signal of market strength.  Dysfunction in U.S. politics will continue to dilute that signal regardless of its future size.    

Appendix

A list of prior SPR releases can be found here

Sandia National Laboratories, a DOE/NNSA laboratory, has served as scientific and geotechnical advisors to the SPR since 1978.  A study on the impact of the 2022 releases can be found here