Strategic Petroleum Reserve

Although both presidents Truman and Eisenhower wanted to create a strategic petroleum reserve it did not happen until the 1970s following the 1973-1974 Arab oil embargo. The reserve was created in the states of Texas and Louisiana by hollowing out subterranean salt formations. This approach costs about a tenth as much as above ground storage and is positioned close to Gulf oil refineries. Thus, there is only a two-week delay from a presidential order to release reserves and their appearance on the market. The caverns are cylindrical and typically 200 feet in diameter and 2,500 feet deep. The two in Texas are at Big Hill and Bryan Mound and the two in Louisiana are at West Hackberry and Bayou Choctaw.

The maximum capacity of the strategic petroleum reserve is about 714 million barrels. At times the reserve has been full but by the end of 2019 it held 634 barrels and at the start of April 2022 it holds 568.3 million barrels. Biden’s plan to take 180 million barrels at a million a day will draw it down by a third. Will this help contain the price of oil? Will it replace Russian oil imports that the US will stop? And what will the ramifications of this action be including for your investments?

How Much Russia Oil Did the US Import?

Up until the US cut off Russian oil imports the US imported 200,000 barrels of oil and 475,000 barrels of petroleum products from them. The million barrels a day from the reserve will more than make up for imports from Russia. Other US oil imports come from Canada, Mexico, Saudi Arabia, and Colombia. Half of US imports are from Canada. Mexico imports roughly the same as Russia did and Saudi Arabia and Colombia combined roughly equal Mexican imports. The US exports oil to Mexico (13%), Canada (10%), and 7% each to China, South Korea, and India. In 2021 the US had a net export total of 160,000 barrels of oil.

Will Oil Prices Go Down Due to Depletion of the Strategic Petroleum Reserve?

The amount of oil taken out of the strategic petroleum reserve is not enough to affect world oil prices if OPEC decides to manipulate prices by holding back on production. Russia is trying to sell more oil to India, at a discount. Europe may have to pay a premium for oil from the Persian Gulf and natural gas from the USA. As the war in Ukraine drags on it will put more pressure not only on petroleum but on commodities like wheat, corn, and sunflower seed products all of which Ukraine is a major supplier. The strategic petroleum reserve is meant to make up for a shortfall in imports and even with the drawdown will provide enough oil for years considering that Colombia, Mexico, and Canada are not likely to quit selling oil to the US and neither are the Saudis today. The risks to your investments lie in the uncertainty of the war in Ukraine and the fallout from that. The use of the strategic petroleum reserve to stabilize prices looks like more of a protective factor than a risk to your investments. If you trade oil futures this action will tend to stabilize prices in the US. If you have energy investments in the US the mess in Ukraine and Russia will likely provide higher profits for the indefinite future.

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