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US budget deal to sell 8% of Strategic Petroleum Reserve

A budget deal struck by US House Republicans and the White House would see millions of barrels of crude from the Strategic Petroleum Reserve (SPR) sold

The deal reflects a profound shift in much of Washington’s view on energy security as the surge in domestic production over the past decade has dramatically reduced oil imports and eased supply fears rooted in the 1970s oil embargo crisis. The proposed sales would begin in 2018, with 5m barrels of oil a year sold from 2018 through 2020; 8m barrels in 2022 and 10m barrels a year from 2023 to 2025. In total, 58m barrels, around 8%, of the SPR’s 695.1 barrels of crude would be sold off.

The bill would also require the Department of Energy to carry out a strategic review of the SPR and develop proposals “related to its role in national policy, relevant legal authorities’ configuration and performance, and long-term effectiveness”.

The US is part of the International Energy Agency, which requires its members to hold enough in strategic and industry reserves to cover 90 days of imports. Because of falling imports, the US now holds much more than that. Net petroleum imports averaged just 4.74m barrels a day (b/d) over the first seven months of this year, the lowest they’ve been since the mid-1980s. At that level, the 695.1m barrels stockpile is equivalent to 146 days of imports in government-held stocks alone. Reducing the SPR by 58m barrels would bring this down to around 134 days of import cover.

“It is far from clear that US oil import dependence will remain this low forever”

While there is plenty of import cover today, the planned sale is being criticised as ill-timed, opportunistic and potentially damaging to US energy security.

The proposed sale comes amid one of the worst oil price downturns in a generation, making it a curious time to be thinking of selling off reserves. The Department of Energy says that the average price paid for oil in the reserve is $29.70/b. Analysts at ClearView Energy Partners, a consultancy, calculated that the price adjusted for inflation is around $74/b. Given the depressed oil price outlook, the SPR oil would be sold at a loss.

Projections released alongside the bill envision the sales raising a total of $6.2bn to pay down the deficit, with the implied assumed oil price rising steadily from $70/b in 2018 to $95/b in 2025.

Others warn that lawmakers are acting too hastily in selling down the SPR. “It is far from clear that US oil import dependence will remain this low forever”, Jason Bordoff, a director at Columbia University’s Center on Golobal Energy Policy, told a Senate hearing on the issue in early October. “The reduction in import dependence has been driven by both increased domestic supply as well as reduced demand, but there is great uncertainty about the outlook for both.”

Bordoff warned, in particular, that shale production is still relatively new, making it difficult to forecast production with much certainty. “It would be unwise to take any large decisions on energy security until we have a better understanding”, Bordoff said.

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