Nov 2, 2022 - Economy

Using the Strategic Petroleum Reserve strategically

Illustrations of two oil barrels facing off on a chessboard

Illustration: Sarah Grillo/Axios

America's national crude oil reserve is the federal government's main weapon in the current energy wars. Some say it's time to rethink how it's used.

Why it matters: Questions about the Strategic Petroleum Reserve reflect how the global economy is shifting away from the market-led system that flourished after the Cold War, to one with more government involvement in industries key to security β€” like oil and computer chips.

Driving the news: The Biden administration is on pace to dump a couple hundred million barrels of crude on the market since it started tapping the reserve in March.

  • That may have helped push gasoline prices down from the $5 a gallon we saw in June.
  • It's also drastically shrunk the nation's oil reserves, which are at their lowest level since the mid-1980s.

The rub: The release hasn't solved the main problem, though, which is that U.S. oil producers have been slow to respond to higher prices with increased production.

  • While drilling activity has picked up recently, supplies are still tight, and energy prices are still vulnerable to painful (and politically costly) spikes.
  • On Monday, President Biden suggested that the government could levy windfall taxes on oil companies that don't boost production, a potentially cumbersome, complicated stick to nudge the industry toward greater output.

The big idea: Momentum appears be building for a more consistent and muscular use of the SPR as a tool to help insulate both oil producers and American consumers from big price swings.

  • That would be a stark change from the SPR's historical use as simply a storehouse for emergency oil supplies β€” and it could potentially reshape the way the global oil market works.

How it works: It's not rocket science. In essence, these proposals β€” most clearly sketched out by left-leaning economic policy shop Employ America β€” suggest that the government commit to refilling the SPR via long-term, fixed-price contracts.

  • Such an approach is now possible thanks to a recent rule change at the Department of Energy.
  • Previously, the DOE had been limited to buying oil using futures contracts that were indexed to market prices at the time of delivery. That left producers still exposed to the uncertainty of market swings.
  • "Fixed-price contracts can give producers the assurance to make investments today, knowing that the price they receive when they sell to the SPR will be locked in place, providing them with some protection against downward movements in the market," the DOE has said in public statements advocating for such an approach.

πŸ’­ Our thought bubble: When combined with the recent, large-scale releases from the reserve in response to surging prices, the prospect of long-term contracts to refill the national oil tank could amount to a new mechanism that the U.S. could use to stabilize prices.

What they're saying: "If the goal is to catalyze more investment, you have a pretty interesting carrot at your disposal," says Skanda Amarnath, executive director of Employ America, of the ability to offer long-term markets for oil producers in the SPR.

  • Fixed price contracts could provide a "soft floor" for oil prices for years into the future, reducing uncertainty among oil company executives about committing to spending the money on new wells that might end up losing money if oil prices crash, he says.
  • Such crashes have happened repeatedly over the last decade β€” in 2014, 2016 and 2020 β€” leaving investors with awful returns and executives less willing to boost production in response to high prices.

What we're watching: The oil industry has been largely silent on the idea, though we did get a high level comment from the American Petroleum Institute.

  • β€œThe SPR was established to mitigate the impact of severe supply disruptions, and depleting this strategic asset to historically low levels risks potentially leaving the country unprepared to respond to a true supply emergency,” said Frank Macchiarola, API's senior vice president of policy, economics and regulatory affairs.
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