SPR and Inflation – Strategic Petroleum Reserve Hits Historic Low

The Strategic Petroleum Reserve (SPR) has served as a pillar of security for the United States since 1975, providing the capacity to react to emergencies and oil trade conflicts. The recent Ukraine conflict has prompted the SPR to assume a new function—that of combating inflation caused by the sanctions against Russia due to its invasion of Ukraine.

However, concerns arise as the SPR levels fall to their lowest since 1983. Efforts by the US government to replenish the SPR have been consistently obstructed by OPEC. Could this obstacle in refilling potentially exacerbate global energy inflation？ This remains a critical issue to address.

Strategic Petroleum Reserve

In 1973, OAPEC (Organisation of Arab Petroleum Exporting Countries) proclaimed an oil embargo on the US after the American support for the Yom Kippur War, raising oil prices by 300%. In response, the SPR or the Strategic Petroleum Reserve was introduced in 1975 to mitigate the risk of future oil embargos. It is the largest publicly known emergency supply of oil housed in underground tanks in abandoned salt mines in Louisianna and Texas. In July 2023, the SPR is 346.8 million barrels, which is about 17 days of oil. This is the lowest level since 1983.

Ukraine War and Inflation fight

On March 22 in response to the Ukraine war Joe Biden announced his administration would release 180 million barrels (at a price of $96 vs price paid of ~ $28) to help with US oil prices during the Ukraine war oil shock. This helped lower gasoline prices an estimated 17c-43c per gallon in the US, obviously helping to moderately lower inflation.

After selling the oil at $96/barrel the Biden administration in December last year announced they planned to refill the SPR at around $67-$72/ barrel but appear to be thwarted every time they announce a purchase and the SPR level continues to dwindle.

The problem the Biden administration now has is that every time they go to start replenishing, the SPR OPEC keeps responding with cuts in production – rising the oil price again. An analysis done by the Kobeissi Letter on Twitter has tracked each announcement and each response from OPEC and charted it.

Pulled Offer

On August 1st, the Biden administration pulled an offer to buy 6 million barrels of oil for the SPR, with market conditions, AKA price, and tight oil supply, hindering the plan. Unfortunately for the US, they appear to have missed the current window of $67-$72/barrel as oil prices again climb above $80/barrel, currently sitting at $82. Crude prices are, in fact, now expected to rise further with OPEC+ cutting output, 3.66 million barrels since November last year. This now means that if the Biden administration wants to refill the reserves, they will, in fact, be adding further to oil inflation by increasing demand. So, they are being left with the option of emergency energy security or adding to the current precarious inflation situation, as oil prices once again begin to spike.

Trump 2020 and the SPR

In 2020, under Trumps term, the Department of Energy (who runs the SPR) proposed filling the SPR to its maximum capacity adding an additional 77 million barrels ,however the bill was scuttled at $24/ barrel (the current SPR reserve is an average price of $29.7) claiming it was an oil industry bail out. The $24/ barrel price seems relatively inexpensive compared to the current $82/barrel Biden may be forced to refill at.

Oil Price Rebound

As OPEC strives to maintain elevated costs, coupled with the ongoing war in Ukraine and diminishing Strategic Petroleum Reserves (SPR) in the US, a resurgence of inflationary trends in energy prices appears probable. Due to oil's significant impact on overall inflation amid a time where most economic metrics are experiencing a downturn, this could potentially indicate a stagflation scenario.