President Donald Trump released his official budget proposal this week, a plan that includes the sale of a significant chunk of the U.S. Strategic Petroleum Reserve.
The blueprint proposes beginning sales as soon as next year, and the initial sale could raise as much as $500 million. Over the next decade, the U.S. Department of Energy would sell off tranches of crude from the SPR, with plans to halve the nearly 700 million stockpile. The White House expects to raise $16.6 billion over that timeframe.
The SPR was initially setup in the 1970s after gasoline shortages and inflation battered the U.S. economy, an energy crisis stemming from the 1973 oil embargo from the Middle East. The logic of the SPR was straightforward: by stockpiling enough crude oil to last for roughly 90 days, the U.S. could guard against any potential supply disruption, whether from war, natural disaster, or political crisis.
That plan was central to the formation of the International Energy Agency (IEA), made up of OECD countries that also pledged to stockpile three months' worth of oil supplies. The IEA also became a forum for data sharing, which is what it is mainly known for today.
Because the U.S. has never really had a coherent energy strategy, the SPR has been considered one of the few cornerstones of America's energy security. It has had bipartisan support, and touching the stockpile has been politically difficult. Sales from the SPR have only been conducted a few times, and only in extraordinary circumstances.
However, both political parties are no longer prioritizing energy security. The shale revolution has led to a surge in oil production, and even in a market of $50 oil, shale output continues to rise. Output could actually break an all-time high, perhaps as soon as later this year. Also, gasoline prices are nearly half of what they were before the 2014 price crash.
In the past, dismantling the SPR would have been an explosive political issue. But rising oil supplies and cheap gasoline remove energy security as hotly debated political issue. Over the last two years, the U.S. Congress authorized the sale of 190 million barrels of crude through 2025, which led to sales in January and February of this year of 6.4 and 10 million barrels, respectively.
And with Congress already having shown the willingness to draw down on the SPR, President Trump appears to be on politically safe ground by proposing deeper cuts. His budget calls for the sale of 270 million barrels by 2027. "Given the long-term trajectory of domestic energy production and transportation capabilities, a smaller SPR is projected to be able to continue to meet international obligations and emergency needs," the White House said.
But energy experts have repeatedly cautioned against such a move. Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, warned that market risks have not gone away even though shale output has surged. "The risk of complete collapse in Venezuela is just one of many reminders that the world remains vulnerable to oil price shocks, and those will be felt by U.S. consumers at the pump just as much today even though we import less oil than we used to because oil is a global commodity," Bordoff told the Washington Post.
As for the markets, oil prices actually took a hit on Tuesday when the President's budget was released, which analysts attributed to fears of new supply coming out of the SPR. As Reuters notes, cutting the SPR down by half over 10 years would equate to the release of 95,000 barrels per day. That's an extra 95,000 bpd at a time when OPEC is trying desperately to take crude off of the market in order to boost prices. "It's not huge, but it won't help Saudi efforts," Oystein Berentsen, managing director for oil trading company Strong Petroleum, told Reuters.
Also in President Trump's budget were a couple other noteworthy items affecting the oil and gas industry. First, it proposes to open up the Arctic National Wildlife Refuge (ANWR) in Alaska for oil and gas drilling, a politically sensitive area that has been off limits to the industry for decades. Interestingly, the White House proposed overhauling the revenue sharing formula for offshore drilling, cutting payments to coastal states and sending more money to the federal treasury. That is one of the few proposals that might perplex industry proponents, and especially Gulf Coast lawmakers, many of which are Republicans.
And of course, the least surprising thing about the President's budget were the fierce cuts to federal agency budgets, most notably the proposed 31 percent cut to the EPA. The Departments of Interior and Energy would see more modest reductions.
To be sure, all of this is just a proposal. Presidential budgets never make their way through Congress intact, so there is no guarantee that SPR sales move forward or that drilling in ANWR takes place. The coastal state revenue sharing formula is probably the least likely to happen and it is also unclear how the Congress will grapple with agency spending. Stay tuned.
By Nick Cunningham of Oilprice.com
