Buy low, sell high? Not in DC!
In what seems like amazingly bad timing (and what will likely be mocked in years to come – see England the sale of gold circa 2000), under a budget deal reached on Monday night by the White House and congressional leaders from both parties, the U.S. will sell off around 8% of the 700 million barrel Strategic Petroleum Reserve (SPR). The sale that was proposed in the recently negotiated, bipartisan bill currently under consideration represents over 8% of the 695 million barrels of reserves.
The bill calls for oil reserve sales to begin in 2018 at 5 million barrels per year, rising to 10 million by 2023 and totaling 58 million barrels by 2025. The proceeds of the SPR sales will be deposited into the general fund of the Treasury. Unfortunately, oil has fallen so much that the revenue earned will be far lower than had this decision been made just two years ago.
Oil reserve sales to start
The proposed legislation claims that “the age and condition” of the strategic oil reserve “have diminished its value” as an energy-security asset, requiring its modernization. “Global oil markets and the location and amount of United States oil production and refining capacity have dramatically changed in the 40 years since the establishment of the Strategic Petroleum Reserve,” it also noted.
The decision to sell off 8% of the SPR comes as countries including China and India are building their own reserves, and buying cheap crude on the market to supply their huge new tank facilities.
Data from the International Energy Agency projects that China has stockpiled more than 200 million barrels to date and will add another 20 million more barrels this year. China plans for its oil reserve to be at least 500 million barrels by 2020. Keep in mind that Germany, Japan, South Korea, France, Spain, Italy and other major oil importers all have their own strategic oil reserves of varying sizes.
On a historical note, the U.S. government has released crude from the strategic reserve on three occasions in supply emergencies: in 1991 during the Gulf War, in 2005 after hurricane Katrina knocked out oil production in the Gulf of Mexico, and in 2011 after the war in Libya. Also of interest, in 1996 and 1997, it also sold 28 million barrels to fight the ballooning federal deficit.
Oil imports into the U.S. topped 9.5 million barrels of crude a day in July (latest data), a 35$ decrease from a record 14.7 million in August 2006.
The bill also permits the government to sell as many barrels as it takes to pay for a $2 billion program from 2017 to 2020 to upgrade the aging the strategic reserve, and expanding the SPR pipeline network.
Of note, the proposed Bipartisan Budget Act of 2015 that calls for the sale of oil reserves will push out the U.S. government’s borrowing authority until March 2017 and also includes a hard-fought compromise on spending for the next two years.