Draining the Strategic Petroleum Reserve for Political Purposes is Bad Policy and Dangerous

The SPR is not a piggy bank. Drawing down the SPR risks foreign aggression and physically damaging the storage caverns

President Biden ordered the largest drawdown of the Strategic Petroleum Reserve in U.S. history for the stated purpose of reducing gasoline prices.  This purely political decision is not what the SPR was created for, threatens our national security, and can potentially and permanently damage the oil storage facilities.

The Administration has sold almost 115 million barrels from the SPR, with the releases reaching nearly one million barrels per day since mid-May 2020.  At this rate, U.S. oil sales are equivalent to the exports of medium-sized OPEC countries.  This is unsustainable because the supply is limited to the oil stored in the SPR and must be replaced as soon as possible, increasing the demand for crude oil, which will put additional upward pressure on oil prices. The SPR drawdown makes it very clear that this Administration is only interested in the short-term political points resulting from lower gasoline prices while enacting policies that hinder the development of actual petroleum reserves— the crude oil and natural gas under our feet in the United States. 

By engaging in this destructive behavior, the Biden Administration highlights its goal of destroying the U.S. oil and gas industry under the guise of protecting the climate while weakening a key component of our national defense, the Strategic Petroleum Reserve.

Background of the SPR

Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy Policy and Conservation Act of 1975 to help prevent a repetition of the economic dislocations caused by the 1973-1974 Arab oil embargo.  The capacity of the SPR is 727 million barrels, and by the end of 2009, it was virtually filled to its capacity with 726 million barrels of crude oil.

The fundamental reason that the U.S. needed an emergency reserve of crude oil was that the U.S. was importing two-thirds of its oil consumption in the early 1970s.  It was widely believed that the U.S. was running out of crude oil and natural gas, which had been projected years earlier by the “Peak Oil Theory.” The shale revolution in 2000 proved that the U.S. had vast oil and gas reserves, making it the world’s largest producer of natural gas starting in 2011 and the largest producer of crude oil beginning in 2018.

The SPR consists of 4 salt domes in south Texas and Louisiana.  The largest salt dome oil storage facility is the Bryan Mound Strategic Petroleum Reserve near Freeport, Texas, which can hold 250 million barrels of crude oil.  It was created by pumping water from the nearby Brazos River and injecting it under high pressure into a salt formation, creating cylindrical caverns 2,000 feet in height and 200 feet in diameter.

To get oil out of the salt domes, water is pumped back into the caverns to force out the oil.  However, the process also washes out more salt.  The Bryan Mound domes were designed for a maximum of 5 fills and drains, which was deemed sufficient when they were built since tapping into the SPR was supposed to occur infrequently in extreme national emergencies.   After five rounds, the walls of the salt domes become structurally unsound and are vulnerable to leaks or complete failure. 

The Good, Bad and Ugly

Draining its Strategic Petroleum Reserve has made the U.S. the world’s largest swing producer, which has helped reduce world oil prices.  However, this is only temporary because the capacity of the SPR is limited, and it is being depleted at an alarming rate.

Source:  Bloomberg and EIA

At the current drawdown rate, the SPR will be at a 40-year low of 358 million barrels by October of this year, when withdrawals are slated to end.  One year ago, the SPR contained 621 million barrels of crude oil.  Unfortunately, there is a real possibility that the White House will not stop drawing down the SPR in October because the mid-term elections are in November, and they will not want to risk the political effects of skyrocketing crude oil and gasoline prices.

Another complicating factor is that SPR contains two grades of crude oil: medium-sour and light-sweet. The Administration has been drawing down the medium-sour crude, which is heavier (denser) and contains more sulfur than the light-sweet crude primarily produced in the U.S. Unfortunately, most U.S. refineries were designed to process medium-sour crude and cannot efficiently use domestically produced crude oil.  (This mismatch between the crude oil that most U.S. refineries use and the crude produced in the U.S. is a huge problem that I will explore in an upcoming article). 

Since approximately 85% of the SPR drawdowns have been medium-sour crude, less of it remains in storage. Therefore future withdrawals will be crude that is not in high demand by U.S. refiners and will therefore be sold to foreign buyers, further reducing the supply of crude oil in the U.S.

This will likely lead to gasoline shortages and higher gasoline and diesel prices which will provoke a political firestorm.  In other words, the energy policies of the Biden Administration have dug a deep hole for them and U.S. energy security.  This situation increases the probability that crude oil, gasoline, and diesel prices will likely skyrocket later this year, pushing the U.S. further into a recession. 

Every U.S. recession, starting with the Arab oil embargo, has been preceded by drastic energy and food cost increases. Unfortunately,  we appear to be headed in that direction again.