US to release 180 mn barrels of oil from Strategic Petrol Reserves. What does it mean?
The Russia-Ukraine War has caused an immediate, negatively compounding effect on global fuel prices by straining the already stretched supplies. Fuel prices were already high before the war, and the war only sent prices shooting through the roof across the globe.
Unlike India, which has a favourable stance with Russia; US and other European countries have been feeling the immediate heat of this crisis. To combat these global prices, US President Joe Biden has announced a short-term measure that will help US handle the situation better in the short-term period. Say, for the next 6 months.
Joe Biden's administration will release 180 million barrels of oil from the nation's Strategic Petroleum Reserves (SPR) over the next six months to curb soaring gasoline prices.Meaning, approximately 1 million barrels of oil will be released every day for the next 6 months, which will be the largest supply of oil withdrawn yet from US' existing petrol reserves. This is expected to bring down gas prices of $4.99 by about 10-35 cents/gallon.
BUT WHAT ARE THESE RESERVES?
Strategic Petrol Reserves or SPR is basically an oil backup that is maintained by countries to serve them in unexpected times of emergency, when oil supply in the globe is botched up.
In US, it is maintained by the Department of Energy so that the oil reserves can be used in unexpected times like natural disasters and wars. There are four areas along the Louisiana and Texas Gulf Coast where these oil reserves are held in deep underground storage caverns, created in salt domes.
The four sites vary in size:
- Bryan Mound, the largest of the four, is a 500-acre location with 19 storage caverns that can hold roughly 230 million barrels.
- Big Hill is 271 acres, with 14 storage caverns and an inventory of 143.7 million barrels.
- Bayou Choctaw, on 356 acres, has six storage caverns and a capacity of 71.9 million barrels.
- West Hackberry is 405 acres with 21 storage caverns that can hold 192.3 million barrels.
WHY WERE THEY CREATED IN THE FIRST PLACE?
In 1975, the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo on the US, which damaged the US Economy since they were dependent on the OPEC for oil. To prevent any further situations like these, the US decided to reserve some oil barrels as emergency stock pile.
HOW MUCH OIL DOES THE US HAVE?
The stock reserves contained 727 million barrels of oil in 2009; by October 2021, the reserves were about 605 million barrels and as on March 25, 2022, the reserves held 568 million barrels of oil. Since November 2021, Joe Biden has used this backup thrice to maintain global oil prices.
- In November 2021, Biden allowed the release of 50 million barrels.
- In March 2022, US joined 30 other countries (who are members of the International Energy Agency) to release 30 million barrels.
The 180 million barrel release is touted to be the biggest release in American history, and will reduce reserves to less than 400 million barrels.
WHY AND HOW WILL THE SUPPLY FROM THE RESERVES MAKE A DIFFERENCE?
As per universal economics, demand and supply decide the price of a commodity and in order for the price to be stable over a period, both demand and supply have to be maintained. When supply is lesser than the demand, more people will ask for it, which raises the price of the commodity. Just like the way the oil prices are right now.
So, to reduce the existing price, all Biden has to do is flood the market with oil from somewhere and supply them to those who need it the most - his citizens.
As per the US Energy Information, US is a net petrol exporter. In 2021, US imported 8.47 million barrels per day from 73 countries and exported 8.63 barrels per day to 176 countries and 4 US territories. But since fuel prices have been consistently rising, the US government will either have to reduce exports or find a way to use the existing US petrol reserves. Thus, the US will use their reserves to at least temporarily reduce the price tension and bring it down.
Biden's move is not expected to make much of an impact, as the prices might come down in cents/gallon and the reduced prices might only stay for a few weeks.
As per experts, a better way to deal with the problem is to take care of it from the demand side.
DO OTHER COUNTRIES HAVE THESE STRATEGIC RESERVES TOO?
The US and other IEA member countries including Germany, Japan, Australia and the United Kingdom are required to hold oil in emergency reserves equivalent to 90 days of net oil imports.
India has three strategic petroleum reserves with a combined storage capacity of 5.33 million tonnes (about 38 million barrels). These are located in Visakhapatnam (1.33 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes).