Low Oil Reserves are Risky
Reserves weren't intended to help with prices
9/28/20262 min read
The Strategic Petroleum Reserve is a government oil stockpile that eventually gets refined into products people rely on, such as gas, diesel, and plastics. However, the reserve is low, threatening one of the few government levers supposedly used to ease high gasoline prices.
Since the U.S. and Israel went to war with Iran, oil has been in a shipping logistics nightmare. Like previous presidents, the Trump administration has tapped into the stockpile multiple times trying to ease prices. It hasn’t worked.
The reserve has shrunk 30% in six months, yet gas prices remain high and diesel is at a non-inflation record high. The reserve is at its lowest point since the early 1980’s at just 285 million barrels, down from 415 million barrels earlier this year. Before the war, global oil stockpiles were high and there was lots of oil on ships across the world's oceans. It’s mostly been used up and there's a lot less to go around.
The administration is now in a weaker position to use the Strategic Petroleum Reserve to lower gasoline prices. Good! The reserve wasn’t set up to help with pricing; it was set up to help guarantee a short-term emergency supply. Let’s get it restocked.
Waiving the Jones Act to make it easier for ships to dock at U.S. ports, and allowing lower-cost winter blends to begin selling earlier in the year, have both been done. Despite that, gas prices still suffer from an overall upper trend.
Could Venezuelan oil refill the reserves? The Trump administration announced it was entering a partnership with an oil company in Venezuela that would give the U.S. a share of the output from 17 Venezuelan oil fields. The White House claimed the new deal would give the U.S. the right to purchase "a guaranteed 20% of the off-take from all current and future fields" and ensure "a stable supply of low-cost oil that can facilitate refilling the Strategic Petroleum Reserve." They have backed off of that statement.
Why? Simply put, not all crude oil is the same — some is physically lighter or heavier and sulfur levels vary. Venezuela's supply is heavy and dense, with a lot of sulfur. It’s not ideal for the caverns which much of it could be stored in. U.S. strategic reserves are lighter, with medium or light levels of sulfur, which is easier for producing gasoline and diesel than heavier crude.
Even if the oil was the same, many of the 17 oil fields under discussion in Venezuela are new, and will need to be developed from scratch. Some oil fields are so far away from infrastructure that they will take over a decade for oil to start flowing.
China, too, has been dipping into its reserves, but at a much lower rate due to its growing fleet of electric cars, trucks and scooters. That’s not necessarily a good thing, either. Electric prices are skyrocketing in the U.S., and have almost doubled in Europe in the last year. Electrifying everything is not the answer.
Here’s an idea. End the damn four-week war that is now seven months long!
Source used: NPR