Yahoo Finance Inside the challenging effort to refill America’s energy backstop
This was supposed to be the year that the Biden administration took a first swing at the laborious process of refilling America’s energy backstop, the Strategic Petroleum Reserve (SPR).
But it hasn’t worked out that way.
The reserve is hovering near lows not seen since the early 1980s after historic deployments during the early months of the war in Ukraine and additional withdrawals mandated by Congress this year. The low levels have become an increasingly urgent issue with global energy jitters on the rise amid fears of a widening conflict in the Middle East as well as the ongoing Ukraine war.
As of Oct. 27, 351 million barrels of oil sat at the ready in the reserve’s underground salt caverns in Texas and Louisiana. That’s a drop of 20 million barrels even from the beginning of this year.
Overall, reserve levels have shrunk by roughly 44% since Biden’s inauguration due to the drawdowns, most notably the emergency move to release 180 million barrels throughout 2022 to stabilize the crude markets and lessen the pain at the pump following Russia’s invasion of Ukraine.
The administration unveiled a new plan last month to try and jumpstart replenishment efforts soliciting bids at $79 a barrel but, with oil currently trading above that, it’s unclear when the reserve will be refilled to pre-Ukraine war levels. Some industry watchers are charging the administration is not moving aggressively enough.
“I don’t think they have any sense of urgency,” said Ed Hirs, energy fellow at the University of Houston, in a recent interview with Yahoo Finance about the efforts. “Why in God’s name did the Department of Energy not sell at 100 and then buy at 70 when they had the opportunity to?” he added.
The answer, says the Biden administration, is essentially that it’s more complicated than that. The Department of Energy has managed to add 5 million barrels to the reserve thus far this year but that represents a proverbial drop in the bucket of the much larger reserve.
The larger win, officials say, is the end of congressionally mandated oil sales first imposed back in 2015 that had threatened to drain an additional 140 million barrels in the coming years to fund other priorities like road maintenance and budget shortfalls.
Those required outflows finished up in March, a senior Department of Energy official told Yahoo Finance, ending what they also say is a significant logistical hurdle to replenishment.
“It's a pipeline, so it has to go one direction,” the official said on the laborious process of getting oil in or out of the massive salt caverns 2,000 to 4,000 feet below the earth’s surface. Another logistical factor that has hampered replenishment is an ongoing modernization effort at the SPR known as the Life Extension 2 program to improve operational integrity.
What the department now has, officials hope, is the opportunity “to grab at the volatility that is the oil market” and increase purchases in the months ahead.
'That was a real emergency'
The SPR was established in 1975 in the aftermath of the Arab oil embargo, which caused gasoline prices to spike and laid bare America’s energy insecurity.
The reserve is raised by a process of bidding by the private sector to sell oil to the government. The solicitations are open to companies provided they can fulfill a checklist of requirements from being cleared to do business with the government to promising to deliver specific types of oil at a given time. For example, one recent solicitation invited companies to submit bids for three million barrels of sour crude oil for delivery next January.
The ups and downs of the reserve have been an area of intense political interest in the years since, with the stockpile being tapped for a variety of reasons from Congressional efforts to fund its own priorities to moments of crisis like Operation Desert Storm in 1991, Hurricane Katrina in 2005, and the war in Ukraine in 2022.
“There have been times in the past where both Republican and Democratic administrations have drawn down the SPR without any emergency,” Raymond James energy analyst Pavel Molchanov told Yahoo Finance, adding “that’s always a bad idea.”
But Molchanov and others have emphasized that the use of the SPR following Russia’s invasion of Ukraine, when oil temporarily soared above $130 per barrel, was precisely what the energy backstop had been designed for.
“That was a real emergency,” says Molchanov.
Last year’s sales came at an average of about $95 a barrel. The small replenishments so far this year — about 5 million added to the reserve so far with another 1 million under contract — came in at an average of $72 per barrel representing a tidy profit for the government but not enough to yet take a sizable bite out of the overall reserve’s depletion.
'I have no concerns'
The state of the reserve as we near the end of 2023 is different than what Department of Energy officials had hoped at the start of the year.
As recently as this January, Energy Secretary Jennifer Granholm was discussing plans to add 60 million barrels to the SPR. She even teased a roomful of reporters at the White House that an announcement could be imminent.
“I have no concerns that we will be able to refill and replenish the SPR and do it at a savings to taxpayers,” she said during a White House briefing on Jan. 23, adding, “Just stay tuned, it’s going to happen very soon.”
By July, Granholm was using much more cautious language, saying in a CNN interview that it is “definitely possible” that the pace of purchases will pick up but also conceding that the effort would last into the next presidential term at the very least.
This October, the Department of Energy announced a new plan to solicit bids for 6 million barrels — to be delivered in December and January — and said it plans to re-solicit on a monthly basis through next spring at least.
They are hoping to fetch $79 a barrel this go-around but it’s unclear how much private sector interest is in the offing. “Typically, the Energy Administration bids are so low that it is not cost-effective for energy companies to agree to sell at discounted prices,” Louis Navellier, founder and chief investment officer at Navellier & Associates, tells Yahoo Finance.
Yet Molchanov of Raymond James is skeptical that the reserve urgently needs to be refilled given the hundreds of millions of barrels left as well as US access to worldwide reserves.
“The SPR is not the end all and be all,” he said, noting the SPR makes up about 30% of the total reserves held by 31 member countries in the International Energy Agency, of which the US is a member.
“Could the kind of response that occurred after Russia invaded Ukraine be repeated? Absolutely. It could be repeated even for longer,” said Molchanov. “We had 1.5 billion barrels for the IEA, now there’s 1.2 billion, so there’s still plenty of cushion.”
Energy markets of course got another scare this year when the Hamas attack on Israel sent crude prices higher but those increases have returned to previous levels as the Middle East war hasn’t yet provoked the direct participation of oil producer Iran.
Even if Tehran were to enter the conflict — or another serious disruption were to occur — the Department of Energy says stockpiles are still at the ready.
In the event of a serious disruption, the senior Energy official stressed, the SPR remains “a tool that's considered for use” even at current levels.
Ines Ferre is a Senior Business Reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre. Ben Werschkul is Washington correspondent for Yahoo Finance.
Click here for politics news related to business and money
Read the latest financial and business news from Yahoo Finance
