With much noise coming from all quarters that the Obama administration may undertake a release of oil from the Strategic Petroleum Reserve, the focus is inevitably on prices as the driving factor.
But one of the rationales for such a release could be that with US import dependence down significantly, the country doesn’t need to hold as much oil in inventory as it once did.
Energy economist Philip Verleger, in his widely-read “Notes at the Margin,” has been lobbying against — railing against might be a more accurate term — a release of oil from the SPR as an empty gesture. His fundamental argument is that the current level of oil prices is more a function of products leading crude, with tight inventories for the former and abundant stocks for the latter.
Noting that product inventories are increasingly held not by integrated majors but by independent marketers, Verleger says the anticipation of lower prices brought on by talk of, or the actual occurrence of an SPR release discourages stock-building by these marketers, whose pockets are not as deep as those of an integrated major. And those tight inventories, he argues, are what is holding the price up even in the face of plentiful crude stocks.
But it’s the possible rationale for the SPR release that Verleger and others have referred to that is the most intriguing. It’s not the free-market argument that the US shouldn’t hold strategic stocks at all. It’s that the country is holding too much given changed circumstances.
“The US is obligated to hold a volume equal to 90 days of imports under the IEA agreement,” Verleger writes in his August 27 report. “This will likely decline at a rate of around 8 million barrels per month.”
There are several ways of looking at US import dependence. It’s possible that any combination of numbers could be used as justification by the Obama administration as a reason to sell oil, even if fellow members of the IEA do not follow suit, as they all did last year in response to the cutoff of supplies from Libya.
The starting point number: current inventory at the SPR is 695.9 million barrels, or just under 700 million barrels.
How is import dependency measured? Net imports — which means imports of crude and products, minus product exports and a small amount of crude exports that the Energy Information Administration models into each month’s data — have fallen from 13.354 million b/d at their peak of October 2005, to 8.184 million b/d in June, the most recent month for which data is available. But the June figure was actually higher than recent trends show: the 12-month average of net imports through June was 7.921 million b/d.
That net import number includes the surge in US product exports. So maybe the SPR would look just at straight crude imports. They peaked at 10.765 million b/d in June 2005. In June of this year, they were 9.1 million b/d. But that marked a recent uptick; imports prior to that had been less than 9 million b/d for 10 consecutive months, and in the 12 months to June, they averaged 8.83 million b/d.
Here’s another set of figures that may be cited: imports from Canada and Mexico. An administration looking for a reason to sell crude from the SPR may declare that imports from those countries are akin to domestic sources, particularly Canada, whose options for other export markets are relatively restricted.
So in the 12-month period ending in June, Canadian imports were 2.369 million b/d, a figure that is rising. Mexico’s were 1.023 million b/d, but that figure is falling. In fact, the June level of 862,000 b/d was the smallest in almost 17 years.
But put those two averages together, and that would slice 3.4 million b/d off the crude level total that the administration might declare is at risk and needs to be protected by the SPR buffer. That would leave raw crude imports for the 12 months to June at 8.83 million b/d minus 3.4 million b/d, for “vulnerable” imports of 5.43 million b/d.
Ninety days’ worth of that figure is 488.7 million b/d. Compare that with current stocks of just under 700 million barrels. It’s a big difference.
But that is an extreme way of looking at things, maybe the most extreme. There are lots of other numbers that could be put into the calculator to come up with a different figure. (Though if the net import figure is used, rather than simply crude imports, it would provide rationale for an even bigger sale.)
It’s hard to imagine the Obama administration announcing it is going to sell almost 200 million barrels of oil. And a sale could be dragged out over several years. For example, sales of surplus government-owned metals, built in anticipation of a World War II-like two-front conflict, often went on for years, and are still proceeding for a few metals, like ferrochromium. (One of my first jobs as a commodity reporter back in the early 80s was to check every day whether the federal government had sold surplus tin.)
Still, one of the most fascinating aspects of the Obama administration’s first term is that it came to office on the idea that with US output falling, and import dependence rising, the US needed to move toward a renewable energy future. Instead, the US is producing so much oil, and importing so much less, that there are legitimate discussions about whether the country needs as much in strategic stocks as in the past. That presumably wasn’t on the agenda on Inauguration Day 2009.