Buy high sell low seems to be the mantra of the US Congress…. The United States Energy Information Administration (EIA) said the two recently enacted laws—the Bipartisan Budget Act and the Fixing America’s Surface Transportation Act— will affect the country’s Strategic Petroleum Reserve.
New laws allow the sale of millions of barrels of oil
The two newly enacted laws authorize the sale of crude oil from Strategic Petroleum Reserve over the next decade.
The Bipartisan Budget Act allows the sale of the 58 million barrels of oil between FY 2018 and 2015 to reduce the deficit and around 40 million to 50 million barrels of oil in FY2017 to 2020 for the modernization of the Strategic Petroleum Reserve.
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Under the Bipartisan Budget Act, the Department of Energy (DOE) is required to complete a long-term strategic review of the Strategic Petroleum Reserve to ensure that it meets the current and future energy as well as economic security goals.
On the other hand, the Fixing America’s Surface Transportation Act authorizes the sale of 66 million barrels of oil in FY 2023-2025 to support the Highway Trust Fund.
Strategic Petroleum Reserve designed to ease significant disruption in oil supplies
The Strategic Petroleum Reserve is the world’s largest stockpile of government-owned emergency crude oil. It has four storage locations along the Gulf of Mexico.
At present, the Strategic Petroleum Reserve holds 695 million barrels of crude oil or approximately 96% of its 727 million barrel design capacity.
The Strategic Petroleum Reserve is designed to help ease significant disruptions in oil supplies from events including severe weather, major geopolitical occurrences, and unplanned production, transport, and deliveries.
It is also holding one million barrels of ultra-low sulfur distillate at the Northeast Home Heating Oil Reserve, and one million barrels of gasoline at the Northeast Gasoline Supply Reserve.
The United States is a member of the International Energy Agency (IEA). It has the obligation to maintain stocks of crude oil and petroleum products, both public and private, to provide at least 90 days of import protection. The U.S. is also obliged to collectively participate in the release or sale of oil supplies to help balance a shortage among IEA members in the event of a severe energy supply disruption.
The Strategic Petroleum Reserve holds crude oil stock equivalent to 156 days of import protection based on September levels of net crude oil and petroleum product imports.
DOE ensures readiness of Strategic Petroleum Reserve during emergencies
The United States participated in the collective action of IEA members to release strategic petroleum stocks in during the Operation Desert Storm in 1991, Hurricane Katrina in 200, and during the oil supply disruption caused by the hostilities in Libya.
The Strategic Petroleum Reserve released 17.2 million barrels of oil during the Operation Desert Storm, 11 million barrels of oil during the Hurricane Katrina, and 30.6 million barrels of oil during the Libya hostilities.
The DOE is conducting test sales occasionally to ensure the readiness of the Strategic Petroleum Reserve to respond to emergencies. In May 2014, the agency performed its third test sale of five million barrels of oil (statutory maximum), and some of the proceeds from the sale were used to help establish the Northeast Gasoline Supply Reserve.
The DOE is required by law, to buy back petroleum products from test sales within one year of the completion of the sale.
In addition to the emergency sales and test sales; the oil held by the Strategic Petroleum Reserve has been released through a mechanism called an exchange.
Under this mechanism, an entity usually an oil refiner borrows oil from the Strategic Petroleum Reserve and later replaces it in full along with a premium of an additional quantity of oil. The exchanges normally happen during severe weather conditions.
Furthermore, there had been occasions when the oil from Strategic Petroleum Reserve was sold to meet its specific and general government fiscal purposes.
In 1996, 12.8 million barrels of Weeks Island oil were sold and generated $227 million to reduce the federal budget deficit. In 1997, another 10.2 million barrels of oil were sold and generated $220 million to reduce the deficit.