The savage attack on Ukraine by Vladimir Putin has exacerbated the already alarming spike in gasoline prices due to the post-COVID-19 surge in in demand. In response, President Joe Biden announced a historic release from the federal government's emergency stash of crude oil known as the Strategic Petroleum Reserve or SPR. Yet despite the unprecedented scale of the release, it remains an open question as to the impact the action will have on the price at the pump. And while most Americans are aware of its existence, few of us understand how the SPR operates. Here is a look.
The concept of stockpiling oil for a rainy day traces back to 1944, but it took the Arab oil embargo of 1973 to convince Congress to take the plunge. In 1975, President Gerald Ford signed the Energy Policy and Conservation Act that created the Strategic Petroleum Reserve and authorized the acquisition of up to one billion barrels of oil by purchase in the open market. The first delivery took place in July 1977 with the receipt of 412,000 barrels of Saudi crude. Today the SPR is the world's largest supply of emergency oil.
The SPR has a capacity of 714 million barrels and currently holds 577 million barrels stored in 60 salt caverns on the Louisiana and Texas gulf coast. Salt domes have proved to be the most economical and environmentally friendly way to store large quantities of oil and natural gas, as salt does not react with petroleum and has self-healing properties that seal any microcracks in the walls of the cavern. A typical storage cavern measures 200 feet in diameter and up to 2,550 feet in depth, enough to hold two Empire State buildings (minus the spires) end to end. The caverns are formed by injecting water and pumping out the resulting brine as the salt dissolves, a process known as "solution mining" which allows for great precision in creating the cylindrical storage voids.
Oil is removed from storage by pumping fresh water into the bottom of the cavern. Since oil floats on water, the volume of water injected displaces the oil and forces it to the top for extraction. The oil is then transported by a network of pipelines or tanker ships connecting the SPR with half of all US refineries.
The intent of the SPR is to provide emergency supplies in times of economic, environmental or geopolitical crisis as authorized by the president. Prior to 2021 there have been three emergency releases: 1991 during Desert Storm, 2005 in response to Hurricane Katrina, and in 2011 to supplement lost output from the Libyan civil war. The Secretary of Energy is also authorized to make smaller loans of oil to counter short-term supply disruptions at US refineries. And perhaps not surprisingly, Congress has intervened 7 times to mandate sales from the SPR as a budget gimmick to mask shortfalls resulting from deficit spending bills. Slick.
But the magnitude of Biden's March 31 announcement on the heels of two smaller releases in November and March dwarfs all previous withdrawals from the Strategic Reserve. The president authorized the sale of 180 million barrels over the next 6 months, 30 percent of the present inventory. The administration is also coordinating with other allies and partners to release supplies from their own strategic reserves in a concerted effort to partially offset embargoed Russian crude oil.
Will the release from the SPR provide relief to beleaguered consumers at the gas pump? Probably not much. The addition of 1 million barrels per day represents about 1 percent of the 100 million barrels of global consumption, so even if partially matched by allies the impact is tiny. Economists estimate a short-term drop of 10 to 35 cents per gallon of gas, but also recognize that longer term prices will be higher as the reserve is replenished.
The real impact is more psychological: a coordinated Western compact to offset Russian output lost to sanctions, and a sign to voters at home that the administration is aware of the pain American consumers must bear as a necessary consequence of our duty to resist tyranny and support freedom. Keep calm and motor on.
Christopher A. Hopkins is a chartered financial analyst in Chattanooga.