The Biden administration’s inconsistent approach to the Strategic Petroleum Reserve (SPR) has raised concerns and intensified skepticism among oil producers and tanker owners. Initially, the White House proposed refilling the SPR at specific oil prices (between $67 and $72 per barrel) aiming to strike a balance between supporting the industry and protecting consumers. However, crude oil prices have since dipped below $70 and recent statements by Energy Secretary Jennifer Granholm and Biden’s energy security adviser, Amos Hochstein, suggest a wavering commitment to this strategy.
This uncertainty coincides with the fallout from Silicon Valley Bank’s collapse, which significantly impacted oil futures. Amid this chaos, there was an opportunity for the Energy Department to refill the SPR and signal support for domestic oil producers. Still, the administration’s contradictory messaging has left the oil markets unclear about its intentions.
“The story here is not that complicated,” today wrote a Liam Denning, the Bloomberg Opinion columnist covering energy, mining and commodities. “Bank failure and fear of contagion hit risk assets of many types. Money managers stampeded out of oil-price bets at a pace that would do SVB’s depositors proud. Rory Johnston, who writes the Commodity Context newsletter, calculates speculative open interest in crude contracts fell during the two weeks through March 21 at its fastest pace on record. Net speculative length collapsed to its lowest level since March 2020. In other words, this was the sort of blood-on-the-streets moment where buyers with a cool head and cash on hand could swoop in. Like an Energy Department nominally seeking to refill the SPR and signal support to domestic oil producers, for example.”
But the Department of Energy did not swoop in and it’s uncertain when it will.
According to Denning about 75% of the 180 million barrels released from the SPR have already been “refilled” by canceling future Congress-mandated sales. However, a gap of 40 million barrels remains, which will grow to over 60 million this year as the last of the mandated sales are executed.
“Biden’s energy policy is a high-wire act balancing green objectives with the demands of energy security today,” writes Denning. “As with the recent approval of the Willow oil project in Alaska, the president will draw fire from within his own party’s ranks for anything that looks friendly to fossil fuels. Yet the underlying logic of using the SPR to modulate the market is sound green politics, too. As last year’s brush with $5 pump prices, and Biden’s response, demonstrated, he is apparently aware that letting oil supply drain ahead of demand is a good way to lose power before an energy transition can take hold.”
“Why else make a show of the new approach on the SPR in the first place?”
And then there is the strategic importance of oil reserves. In the current situation affecting the global tanker markets – tight supply accompanied by high charter rates – is being driven by the conflict in Ukraine and headlines show the difficulty countries around the world are having sourcing energy. A conflict with China would have more dramatic consequences for the markets. There would be significant but unpredictable impacts on oil markets, tanker markets, and trade flows upon which to base assumptions on tanker availability.
“In the event of a broad conflict with China in the Pacific theater, the U.S. will likely lose reliable access to the currently relied-upon sources of oil within the Pacific region,” wrote Captain Stephen M. Carmel, Senior VP at Maersk Line Limited, in a recent article on oil security. “The U.S. will then need to manage exceedingly long lines of supply to ensure oil flows to the forces in the greatly increased quantities demanded by a wartime operational tempo.”
So how will we move the oil into and around the United States if oil production is slowed down by a cyber or physical attack on domestic production facilities or pipelines? If the SPR is drawn-down because of conflict we can not rely on American tankers to meet even the most basic energy needs. Even with the SPR full and domestic crude oil systems operating properly Department of Defense (DoD) will need over one hundred oil tankers of various sizes in the event of a serious conflict in the Pacific. According to Carmel the DoD currently has access it can count on – assured access – to less than ten. Not only does the U.S. lack the tonnage required to support a major conflict in the Pacific, it has no identifiable roadmap to obtain it.
“We need to be able to get from source to points of need… Multiple studies and wargames have come to the conclusion that we have multiple gaps (in bulk fuel posture). The first gap is our Tanker Security Program.” said US Air Force General Jacqueline Van Ovost, Commander of U.S. Transportation Command, while facing questions from Hawaii Representative Jill Tokuda during congressional testimony today. “We need to store it (bulk fuel) including on the water and in resilient locations so that if one is lost we have others to feed the fight.”
Without a plan to resupply the SPR, without redundant bulk fuel facilities in the Pacific, without a plan by the US Maritime Administration or the US Navy to build the oil tankers needed to bypass attacks during conflict, without certainty about the future of tensions with China, and with closures of other petroleum storage facilities like the US Navy’s massive Red Hill storage tanks… not refilling the SPR while prices are low could be more than an economic blunder. It could be a serious national security mistake.
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