A Comprehensive Look At The Challenges In Refilling America's Emergency Oil Supply

With a 20% retreat in oil prices from year-to-date highs, traders and market observers continue to speculate about the Department of Energy's (DOE) plans to refill the Strategic Petroleum Reserve (SPR). Although efforts have started, the scale is relatively small compared to the total replenishment required. The process isn’t as simple as just storing any type of oil, although that would be nice, let’s dive into the details of the process.

In early 2022, the Biden administration initiated the release of oil from the SPR to reduce gasoline prices and maintain supply for allies impacted by the Russia/Ukraine conflict. The SPR, the world's largest emergency crude oil supply, has been utilized in various situations, including 1991's Operation Desert Storm, 2005's Hurricane Katrina, and a 2011 International Energy Agency (IEA) coordinated response to disruptions in Libya and other countries, according to the Energy Information Administration.

The SPR, located across four major sites (Bryan Mound and Big Hill in Texas, West Hackberry and Bayou Choctaw in Louisiana), held about 594 million barrels before these releases. As of November 10th, 2023, it has been reduced to 351.3 million barrels, according to the EIA Weekly Petroleum Status Report.

The DOE's refilling process is intricate, involving soliciting proposals from energy companies for supplying the required oil. These proposals must detail the quantity, quality, and grade of oil, as well as other specific requirements. After evaluating these proposals, the DOE selects the suitable supplier. Full transparency is key to ensure the market has an ample amount of price discovery and it also reduces bias. The first request for oil to refill the SPR was made on June 9th of this year.

The DOE faces a balancing act in its requests. Overly aggressive volume requests could impact the current market supply, potentially leading to inflation. Another complexity is the oil's grade and quality; different types of oil, such as sweet, light, sour, and heavy, are like various cooking oils that you may use like vegetable, olive, or palm oil. They all serve a special purpose or are more efficient when making one product over the other.

The current request focuses on sour crude, less abundant in the U.S. compared to the more common light-sweet crude. Sour crude, essential for heavier byproducts like heating oil and diesel, is already in short supply on a short-term basis and somewhat difficult to source now at an appropriate price point. The sour specification includes a minimum API Gravity of 28.5 and a minimum Total Sulfur content of 0.51. Traditionally, sour crude is sourced in the extreme north like Alaska, moving down to some central parts of California, and all the way down to the Permian Basin. Louisiana also has a significant amount of production, but that production has also seen domestic demand increase for current shortfalls. An item to consider when refilling the SPR is that all of the oil has to be U.S. produced, for now at least, which may have created a disguised “energy boom” within the U.S., but that is a topic for another time.

To date, purchase requests have ranged from 1.2 million barrels to 6 million barrels, as detailed on the SPR's official website. Some of the companies awarded contracts include Exxon Mobil XOM and Sunoco LP SUN. If we have an average refill pace of 3 million barrels per month, it will take over six and a half years to return to previous levels, indicating a need for acceleration in the refilling process.

The Department of Energy's efforts to replenish the Strategic Petroleum Reserve amidst fluctuating oil prices and complex market dynamics underscore the strategic importance and challenges of managing the nation's emergency oil supply. The careful balancing act required in refilling the SPR, from the detailed selection of oil quality to navigating market impacts, highlights the intricacies of national energy policies and their far-reaching consequences. As the DOE continues to navigate these difficulties, particularly with the focus on sourcing scarce sour crude, the process not only reflects the immediate needs of the reserve but also touches upon broader themes of energy independence and market stability. With the current rate of replenishment pointing to a multi-year timeline to restore the SPR to its former levels, the urgency to expedite this process is apparent, underscoring the critical role of the SPR in national and economic security.