The Strategic Petroleum Reserve Won’t Save You

Everyone wants a magic bullet. Especially when there’s a monster around – and anyone who’s filled up their car has seen what’s lurking behind the pump…

What happens when the average price of a gallon of gas tops $5?

Carbon credits, taxes and tariffs are adding to the expenditures column for energy producers and coming soon for nearly all companies. (Have you checked your carbon footprint cost on Google Flights lately?).

But there’s nothing that gets people more riled up than the rising cost of gas…

Mr. President, Do Something!

As we have recently seen, ordinary people get angry. Then the pressure builds on politicians to “DO SOMETHING,” and there’s a general sense of urgency. The most famous example was during the 1970s.

• Stagflation saw wages flatten while inflations soared. Inflation topped 11% in the U.S. In the UK, peaking at over 20%.

Much of the crisis was due to the infamous oil embargo of 1973-74. In response, the U.S. created the Strategic Petroleum Reserve, the world’s largest emergency supply of petroleum.

Now we’re in a similar situation, with inflation reaching 8.6% in the U.S. in June. The United States Petroleum Reserve, aka the “SPR,” holds hundreds of millions of barrels of crude oil in case of an emergency. With sky-high prices at the pump, this begs the question where’s the SPR? Why not open it up? That’s a good question. But, in fact, the SPR taps have already been opened. Over 129 million barrels of oil have been released from the SPR over the past 12 months.

3 CRITICAL Facts Investors Must Know About the SPR…

And they all lead to the same conclusion: the Strategic Petroleum Reserve won’t save consumers from high prices. Here’s why.

1. The SPR doesn’t solve long-term structural issues. First and foremost, the SPR is a temporary supply-side solution. It was never meant to function as a price control over the long term. The SPR works by providing an alternate source of petroleum supplies. If supply drops in one area – say, another oil embargo from Arab nations, as in the 1970s – the SPR can be used to keep the oil flowing. And by providing extra supply, the SPR can – in theory – keep prices slightly lower.

2. The SPR supplies the same fuel to companies that set the prices. The SPR is actually “open” now, with President Biden authorizing the release of a million barrels a day from the reserve. And the most recent numbers reflect that – 25.2 million barrels of oil left SPR sites in June, just a bit under the one-million-barrels-a-day target. But who gets that oil? Marathon (MRO), Valero (VLO), et al. – the oil refiners that supply most of the U.S. with fuel for the pumps. After all, the SPR sells crude oil, not refined gasoline. If there’s a bottleneck with the refineries, then the SPR isn’t the solution. And of course, the SPR has a limited supply, in part because of another fact that’s often ignored.

3. The SPR: Congress’s dirty secret. It’s the Strategic reserve; like a fire alarm, don’t open it unless there’s an emergency. So, how did the President of the United States get away with opening the SPR now? Turns out, he’s not the only one who has tapped the SPR early. From 2015 to the present, no fewer than six bills in Congress – several of them bipartisan – have used SPR sales as a source of funding. Need some extra cash to fund infrastructure? To pay down the deficit? To fund tax cuts? Just plan some SPR sales sometime down the road, and boom. Easy money. So if Congress is already abusing the SPR, why get mad when someone else does, too? As an investor, here’s what’s happening:

• You’ve got a reserve that was never intended to control prices
• All releases go to the same supply chain that’s already having issues
• Both Congress and the President aren’t using the SPR as initially planned.

The SPR won’t solve the current price shock. It can’t.

• The SPR isn’t meant to control prices; it’s meant to add a supply for the US in an emergency. Tiding things over till supply chains are restored.

But what if the rest of the world decided to tap in?

The Global Strategic Reserve?

U.S. oil exports have skyrocketed over the past few months. In weaning itself off Russian oil and gas, the EU is buying up all the supply it can find.

Over the past few months, the SPR has been releasing nearly 1 million barrels of oil per day. This would rank the SPR as the “9th largest “producer” if you compared it to recent production from OPEC nations.

It is somewhat ironic, that just a few short years ago, in the depths of the pandemic, we were concerned about the SPR and oil storage overflowing due to demand destruction.

Now we have the exact opposite problem, too much demand and not enough supply.

Regards, Marin Katusa.