SPR Now Stands for Selective Political Rhetoric
February 2, 2023 § 5 Comments
Two weeks ago, The House entertained 140 amendments to HR21, a bill intended to influence the drawdown of the Strategic Petroleum Reserve (SPR). President Biden had executed a drawdown last year in response to oil supply disruptions caused by the Russian invasion of the Ukraine. An amendment by Marjorie Taylor Greene seeking to halt the drawdown was defeated 418 to 14, a historic beat down of any amendment. That is interesting, and embarrassing for her, but what in Sam Hill is going on here?* The answer, further detailed below, is that the SPR has been passe for quite a while. Now, it is just a piggy bank for the administration in power and a convenient political football for the opposition, the latter being emboldened by the fact that the public (including “experts”) does not realize that the original purpose of the SPR is no longer relevant, certainly not at its current size. Here’s why.
The Arab Oil Embargo in 1973 caused a major supply disruption in the US. President Ford signed the Energy Policy and Conservation Act in 1975, which enabled a petroleum reserve of up to 1 billion barrels of oil in four locations in Texas and Louisiana. This target was later lowered to 714 million barrels. The purpose was to ameliorate the effects of “economically-threatening disruption in oil supplies”. SPR releases have been ordered 3 times prior to the current one, twice by Republican Presidents and once by a Democrat. There has been no hint of releases being a partisan issue. Until now.
The three previous releases were in 1991 (Desert Storm driven), 2008 (Hurricane Katrina), and 2011 (International Energy Agency led effort in response to dramatic supply disruptions in Libya and elsewhere). The significance of the year 2011 is that US shale oil production hit its stride shortly thereafter. Once it did so, two aspects became clear. One, that the reserves were enormous, and two that production could commence within months of financing and permitting. Several thousand drilled, but not completed (DUC, pronounced duck) wells could come on stream even faster, and nearly half the cost would already have been incurred. Today, North America is essentially self-sufficient in oil, and natural gas too, for that matter. This is a far cry from the Arab Oil Embargo days that caused the creation of the SPR. Back then, the US was heavily dependent on imported oil and new domestic oil production, especially offshore, would take years. Today, shale oil in the ground is the strategic reserve.
Let’s discuss timing. SPR releases are limited to a rate of 1 MM bpd (one million barrels per day). 90 MM barrels could be drawn in 90 days, or roughly 3 months. Double that and we have 180 MM barrels in 6 months. Currently, the SPR is at about 370 MM barrels. That could get drawn down another 100 MM barrels and still leave enough cushion for shale oil production to pick up the slack in the event of a catastrophic curtailment of normal oil supply. Not only is the current drawdown to 370 MM barrels not consequential to national security, even a further withdrawal would be safe. There is a caveat. Many small operators went bankrupt during the Covid related demand drop and the properties are now with more fiscally conservative owners. Therefore, in the event of a true national energy related emergency, the government may need to step in to assure the necessary production. Persuasion largely failed in the last year or so, but nor did we have a dire situation. In fact, none of the three previous releases were triggered by anything approaching the threshold of supply disruption envisioned when the SPR was authorized. In each case, as in the one ongoing, the release was coordinated with other countries. The US portion was about 30 MM barrels on each occasion, a barely noticeable dent in the total (see figure). So, in close to half a century after creation, the SPR has never been needed for the original purpose. US shale reserves and the feasibility of relatively rapid production ramp up further reduce the justification for anything more than a modest reserve of 200 MM barrels. The current brouhaha over withdrawals is a tempest in the SPR teapot.
February 2, 2023
*Everybody look what’s going down, from For What It’s Worth (Stop, Hey What’s That Sound), song by Buffalo Springfield (1966), written by Stephen Stills.
If you look forward 5-10 years, the ability of the Permian Basin to grow production will be significantly impaired. Productivity on a per foot basis is actually declining already. Global demand will hit 110 million BPD (10% higher than today) before 2030 and US production will probably never get above 14 million BPD. The SPR will look a lot more valuable at that point. Like any insurance policy, not having used it (for it’s intended purpose) doesn’t mean it’s not worth having.
Even if you are right regarding uptick in demand in the face of EVs and other substitutions for fossil fuel, I am not suggesting elimination of the SPR. I am suggesting reduction to 200 MM barrels, consistent with two facts: North America is now essentially self sufficient in oil (and gas) and trade with other parties is a matter of convenience. The other fact is that, your Permian Basin forecast notwithstanding, shale oil in the Bakken, Delaware Basin and elsewhere (including the Permian), can be produced at relatively short notice. So, the original imperative for 714 MM barrels is not there. A smaller insurance value, at a smaller premium paid, is sufficient and fiscally prudent.
Thank you Vik
It is obvious to most of us from the oil patch but a clear explanation often is a good thing. May be on your next letter if interested, I like to hear your opinion on SMR Small Modular Reactors which was recently got a certification from the Nuclear Regulatory Comission.
I see SMR may address many aspects of Europe’s energy crisis near and long term. I resides on this side of the pond that is why I am asking. Europe is never going to be united Europe for many reasons and SMR can provide independence and energy security. Major companies may even resort to SMR for their own energy needs bypassing anyone in the loop. Thoughts!
Thanks, Abe. A very good idea and I will definitely do one on SMRs next and give it a European flavor. A fun video I did with my Amsterdam son is all about the energy crisis in Europe, and touches on SMRs. https://www.youtube.com/watch?v=S2nBtzBI8Mk Incidentally, Chris Gould and I recently published a book on the subject. Since it was with RTI Press, a nonprofit, the soft copy is free at: https://www.rti.org/rti-press-publication/carbon-free-power. Hard copies on Amazon for folks like me who want to hold books!
Thank you Vik I watched the video well done for both of you and downloaded the book and can not wait to finish reading. I will wait in the mean time your article on SMR.
I would like to give you a ring when I am in the States during March. kind regards