By Timothy Gardner, Arathy Somasekhar and Anushree Mukherjee
WASHINGTON/HOUSTON, Aug 31 (Reuters) – Six months into the U.S.-Israeli war with Iran, Washington may find it harder to calm jittery oil markets after U.S. presidents drained the aging Strategic Petroleum Reserve over the last five years.
The SPR, which Washington created after the oil crises of the 1970s, holds crude in a series of 60 underground salt caverns along the coasts of Texas and Louisiana. After years of releases by former President Joe Biden and President Donald Trump, the reserve is at its lowest level since 1982, holding just 289.7 million barrels.
The level will drop to about 243 million if Trump releases a final batch of 39 million barrels from a March agreement with the International Energy Agency. More than 30 countries agreed then to release a record 400 million barrels, with the U.S. contributing 172 million, in an effort to calm markets after the U.S. and Israel launched the war on Iran on February 28.
Oil in the caverns, some of which are as tall as the Empire State Building, floats on top of water. The water level rises as more oil is released, which can damage cavern walls and pipes and pumps that draw out the crude.
A Department of Energy source said the minimum operating level is 70 million barrels.
Siddharth Misra, a professor of petroleum engineering at Texas A&M University, said that while the absolute physical floor for the SPR is 70 million barrels, the practical minimum level for safe operations is close to 250 million barrels.
“The core mission of the reserve is to supply the market rapidly during a crisis,” said Misra. “But operating below 250 million barrels pushes the infrastructure into a dangerous zone,” said Misra, noting his comments do not necessarily reflect his university’s position.
Trump said on Sunday the U.S. will refill the SPR using Venezuelan oil, but it was unclear how quickly that could help replenish the reserve or reduce gasoline prices. Washington is expected to reach a deal with Caracas this week aimed at reviving Venezuela’s battered oil industry, that could give the U.S. control of a fifth of its vast proved crude reserves.
The Trump administration released the 172 million barrels of SPR oil as a loan that companies must repay with interest in the form of about 40 million barrels of additional oil, about what the U.S. uses in two days. That return will not begin until later this year and is not slated to be completed until late 2028.
Kevin Book, an analyst with ClearView Energy Partners, said in a research note late on Sunday that whether the U.S. ships Venezuelan oil directly to the SPR or sells it to fund purchases of U.S. oil for the reserve, a full replenishment “could take years” and be cut short by elections at home and in Venezuela.
LONG TIME COMING
The dearth of oil in the SPR has been a long time coming. Thanks to the U.S. oil boom that began in 2008, the country is now a net total petroleum exporter, so an IEA requirement for members to store 90 days of net petroleum imports no longer applies.
Beginning in 2021, Biden released about 230 million barrels in coordination with international partners to dampen oil prices, including sale of a record 180 million barrels after Russia invaded Ukraine in 2022.
Washington began replenishing the SPR, but the Iran war halted that. And money has run dry. Last year, Congress provided just $171 million to replenish the reserve, far below the roughly $20 billion needed at that time.
The Department of Energy did not immediately respond to a request for comment.
Some restrictions are already in sight. U.S. law prohibits the president from ordering routine, small drawdowns if the reserve falls below 252.4 million barrels. The president could still order releases for major emergencies.
The SPR’s caverns are generally in good condition but the Department of Energy is concerned about the integrity of the wells due to ongoing needed work, a Government Accountability Office report said in May.
“The SPR’s drawdown, distribution, and fill capabilities are currently limited and are at risk going forward due to longstanding issues with aging infrastructure compounded with ongoing major construction intended to address them,” the GAO said.
The GAO found that the SPR’s ability to quickly fill and draw down oil is at risk due to problems including ongoing construction outages.
‘LESS POLICY FLEXIBILITY’
Clayton Seigle, a senior associate at the energy security and climate change program at the Center for Strategic and International Studies think tank, said at an August 24 event that the SPR level is “precariously low.” The cushion of crude reserves and dwindling ability by OPEC to boost oil output rapidly, “is so thin that we’ll have less policy flexibility in the case of future disruptions” to tame oil markets, Seigle said.
Oil market watchers are concerned about levels.
“Would market participants worry more, as we approach the bottom of the barrel? Clearly, yes,” said Lutz Kilian, director of the Center for Energy and the Economy of the Federal Reserve Bank of Dallas. “They may even question the ability of the release of whatever oil is left to calm the market.”
If the reserve gets tapped much further, it would likely push oil prices higher, harming the economy, Kilian said.
“Once inventories are for all practical purposes exhausted, demand destruction becomes the only response to a shortage of oil.”
(Reporting by Timothy Gardner in Washington, Arathy Somasekhar in Houston, and Anushree Mukherjee in Bangalore; writing by Timothy Gardner; Editing by David Gregorio)
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