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America’s emergency oil stocks are at a 38-year low, but it still has firepower left

New York
CNN Business

Presidents don’t have magic wands to make inflation go away. But they have a powerful tool that can help ease the pain of high gas prices: the strategic petroleum reserve.

More than any of his predecessors, President Joe Biden has aggressively leaned on this emergency oil stockpile to knock down the high pump prices voters despise.

The SPR is a series of underground storage caverns that contain massive amounts of crude oil that can be released during wars, hurricanes or other glass-breaking moments. And Biden has not been shy about doing just that, especially since Russia invaded Ukraine in February.

The amount of oil in the SPR has declined by about a third – 36% to be exact – since Biden took office in January 2021. That has left this emergency oil stockpile at its lowest point since June 1984 – a time when both the US economy and energy needs were substantial less than today.

And Biden isn’t done yet. The president plans to announce the sale of an additional 15 million barrels from the SPR on Wednesday, a senior administration official said Tuesday evening.

Biden has made it clear to his advisers that he is willing to approve future releases to balance the oil market, if necessary.

Importantly, this latest sale announced on Wednesday is not entirely new. It is part of the previously announced plan to release 180 million barrels of oil over six months. The record-setting emergency release, detailed at the end of March, ran slightly behind schedule. It now appears that the administration will reach the target of 180 million, it will just take longer than expected.

The SPR headlines rattle an energy market that is already on the brink of a potential recession. U.S. oil prices fell 3% to $82.82 on Tuesday, returning to levels seen last before rumors swirled about OPEC+’s controversial production cuts. Analysts blamed the sell-off on the SPR news.

This oil price selloff alone should help keep a lid on gasoline prices, which analysts say were already on the way down without Biden taking further action.

While it is difficult to determine exactly how much of an impact the SPR release has had on prices, oil industry veterans tell CNN that Biden’s strategy has been effective, helping to soften the blow of not only the war in Ukraine, but short supply from both OPEC+ and American oil producers.

“Kudos to them. They’ve done a tremendous job in achieving their goal of trying to get energy prices lower,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets.

Gas prices aren’t cheap — a gallon of regular fetched an average of $3.87 nationally on Tuesday — but they’re well below the record high of $5.02 set in June.

“It’s been effective, so far,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service, who noted that oil prices have not taken out the all-time highs set in 2008. “You have to credit the SPR for that. The administration is laser-focused on petrol.”

Kloza said he thinks there is a better than 50/50 chance that gas prices will fall back to the recent low of $3.67 a gallon. But rather than credit US policy, Kloza quoted market forces, fears of recession and the reopening of refineries on the sidelines of maintenance.

“I don’t think they need to do anything until 2023. The market is doing most of the work for the White House,” Kloza said. “I think gasoline is destined to go lower.”

It is not lost on oil market observers that this latest SPR sale announcement comes just weeks before voters head to the polls ahead of the critical midterm elections.

– Given that we are only weeks away from the midterm elections and the OPEC cut, the Biden administration is trying to ensure that energy prices do not peak, said Andy Lipow, president of the consulting company Lipow Oil Associates.

But Lipow noted frustration in the oil industry that, despite complaints about high energy prices, the SPR releases “have done nothing to encourage additional oil production.”

Not only that, but the aggressive emergency releases by Biden have reduced the SPR, potentially limiting the government’s ability to respond to future shocks.

The reserve is not a bottomless pit of oil. It’s more of a rainy day fund, and each release leaves less oil for the next crisis, whatever and whenever that may be.

That’s why the administration plans to detail efforts to replenish the emergency reserve, laying out an important marker for market participants given the scope of the federal action over the past six months.

Biden will announce that the administration intends to buy back crude oil for the emergency reserve when prices are at or below between $67 and $72 a barrel.

The top official said this will serve as “an important signal to producers” by helping to “moderate and stabilize” prices not only when they are high but when they are low.

The plan also serves the purpose of countering criticism about the unprecedented scale of Biden’s reserve releases, one that officials said underscores the administration’s intention to replenish when market conditions make it most advantageous.

“We see the SPR as an incredibly important national security asset, and we want to ensure that it serves its purpose well into the future,” the official said, noting that it remains the largest reserve in the world.

Despite recent emergency sales, the SPR still has more than 400 million barrels of oil, significant firepower that could be used in the coming months to respond to disruptions caused by the war in Ukraine.

“400 million barrels is a lot of barrels,” the official said.

Kloza, the OPIS analyst, said he’s not worried about the shrinking SPR, in part because the U.S. and Canada have the ability, more than decades ago, to increase production sharply, if needed (and if incentivized by higher prices).

“Sometimes reservations become archaic,” Kloza said. “I wouldn’t worry about it until it drops quite a bit lower.”

— CNN’s Alison Kosik contributed to this report

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