And it matters. Earlier this week, the International Energy Agency warned that “global oil supply may struggle to keep pace with demand next year”. The SPR could be the final cushion at the end of this year and into 2023 to put a cap on oil prices – and global inflation. What Federal Reserve Chairman Jerome Powell and his peers around the world do with interest rates largely depends on how the energy market plays out.
To understand the limitations of the SPR, one must go into the plumbing of the reserve itself and the inner workings of America’s petroleum refining industry. Over the past year, the White House has sold nearly 115 million barrels from its treasury, with releases hitting an all-time high of nearly 1 million barrels a day since mid-May. At the current rate, the United States is selling more barrels of its reserve than the production of most mid-sized OPEC countries, such as Algeria or Angola.
If Washington sticks to its current pace, the reserve will shrink to a 40-year low of 358 million barrels by the end of October, when releases are expected to stop. A year ago, the SPR, located in four caverns in Texas and Louisiana, contained 621 million barrels. In the current state of the oil market, it’s hard to see how Washington can stop selling in October. Removing this additional supply would mean that commercial stocks would quickly run out, putting upward pressure on oil prices.
In theory, what remains beyond October would still allow the White House to sell more crude in November and December, and into next year. But there’s an important catch: not all raw put aside is equal, and what’s left is, increasingly, far less useful than what’s already gone.
Broadly speaking, SPR contains two types of crude: medium-sour and light-sweet. The first adjective refers to the density of the oil, the second to the sulfur content. Generally, US refiners prefer medium-sour crude, which is denser and contains more sulfur, but it’s a variety they can easily turn into gasoline and other products thanks to their highly sophisticated plants.
The medium-sour that the United States has set aside is the type of crude processed by its domestic refiners. The stored acid medium has a specific gravity of 31.9 degrees API and a sulfur content of 1.44%, mirroring the average crude U.S. refiners have processed over the past five years, which has a specific gravity of 32.6 degrees and 1.34% sulfur. Mild-light in reserves has a much lower specific gravity, at 35.8 degrees, and much less sulfur, at 0.4%. Medium-sour is the grade of crude pumped by Russia, most Middle Eastern countries and Venezuela.
For this reason, the White House has prioritized the sale of medium-acid barrels, satiating refiners’ appetites for their favorite crude. Over the past year, 85% of oil sold by the SPR was medium sour, according to an analysis based on government data. Considering that refining is currently one of the biggest bottlenecks in the oil market, it is crucial to satisfy the preferred diet of American oil refiners. Largest companies – Marathon Petroleum Corp. and Valero Energy Corp. — have been heavy buyers at SPR auctions for the past six months, helping the industry enjoy record refining margins.
While the White House was supplying U.S. refiners with its favorite variety, those sales have dramatically reduced the amount of medium-sour crude inside the reserve — and it’s expected to drop further over the next four months. OilX, a consultant, estimates that by the end of October, the SPR will contain just 179 million barrels of medium-sour crude. To put that into perspective, over the period of June 2021 through October 2022, the United States is expected to sell approximately 180 to 190 million barrels of medium-sour crude from the reserve. Obviously, Washington lacks the firepower to repeat this exercise.
What’s left still leaves the White House with some ammunition — but not much. Already, the government has started offering more light-sweet than medium-sour crude in its latest tender for SPR barrels. Regardless of refiner preference, any barrel is always better than no barrel. But with the good stuff already nearly depleted, the world cannot continue to rely on America’s strategic reserve to control oil prices.
With that in mind, President Joe Biden’s trip to Saudi Arabia next month makes much more sense. The Saudis and their neighbors in the United Arab Emirates pump medium-sour crude. That’s all you need to know.
More from Bloomberg Opinion:
Biden caves to Saudis as gas prices rise: Bobby Ghosh
The West’s Energy War Against Russia Requires Sacrifices: Liam Denning
• The growing cost of hitting Putin where it hurts: Lionel Laurent
(Corrects the description of the density of light crude oil in the seventh paragraph.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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