If oil stopped flowing tomorrow, the U.S. would rely on four storage sites, known as the Strategic Petroleum Reserve (SPR), to keep the critical resource moving.
The SPR is the world’s largest supply of emergency crude oil.
It’s a complex of four deep-underground storage caverns along the Texas and Louisiana Gulf Coasts:
Courtesy of the U.S. Department of Energy.
The SPR was created in the aftermath of the mid-1970’s oil crisis. The idea was to establish a reserve of up to 1 billion barrels of petroleum.
Oil can be released from the SPR under four conditions:
- Emergency drawdowns — When the U.S. faces a disruption in oil supply that threatens the economy.
- Test sales — Tests the readiness of the SPR and personnel to carry out a drawdown.
- Exchange agreements — Oil can be released from the SPR and “loaned” to a private company. Just like a bank loan, an oil loan must be repaid in kind.
- Nonemergency sales — Drawdowns can be authorized to respond to lesser supply disruptions or to raise revenues.
The Biden Drawdown of the Strategic Petroleum Reserves
In March 2022, President Joe Biden authorized an emergency drawdown of 180 million barrels of oil.
The order was in response to rising gas prices caused by Russia’s invasion of Ukraine.
The drawdown worked. The Treasury Department found that gas prices dropped an average of $0.17 per gallon — and they continue to fall.
However, the drawdown sent petroleum reserves to their lowest level in 40 years.
As you can see in the chart below, the SPR dropped below 400 million barrels by the end of November 2022:
It’s the lowest reserve level since 1984.
For context, the SPR was at its highest in 2010 — 726.6 million barrels.
Essentially, what Biden did was deplete our insurance policy against future oil supply issues.
So, while gas got cheaper at the pump, there’s the risk that we won’t be as prepared if future oil supply issues arise.
Next Steps for the SPR
The government has to restock the SPR to mitigate the risk of potential oil supply issues.
The problem is Biden’s drawdown isn’t the only one on the books.
Congress voted to sell 147 million barrels of oil out of the SPR from 2024 to 2027 to fund unrelated legislative issues.
That’s on top of what Biden already siphoned out.
The Energy Department is trying to halt or delay Congress’ drawdown in order to fill the reserves back up.
A bright spot for investors is the only way to refill the SPR is for the government to buy oil. It’ll have to buy the oil on the open market.
This means companies that produce oil will rake in profits after the SPR drawdown.
It will also boost the oil market which is already in the midst of a significant upturn.
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Safe trading,
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He is a certified Capital Markets & Securities Analyst with the Corporate Finance Institute and a contributor to Investing.com. Before joining Money & Markets, he was a journalist/editor for 25 years, covering college sports, business and politics.
