President Donald Trump told U.S. energy officials to purchase “large amounts” of oil to fill up the nation’s emergency reserve after the biggest price crash in a generation.
Replenishing the Strategic Petroleum Reserve — as proposed by some oil lobbyists earlier this week in light of the collapse in prices — would enable the government to take as much as 77 million barrels off the world market.
Oil prices jumped after Trump’s announcement, paring their worst weekly performance since 2008. Still, the purchases are unlikely to be able to offset the supply boost major producers such as Russia and Saudi Arabia have promised in the coming month.
Government Gains. The U.S. stockpile, set up after the Arab oil embargo in the 1970s, has previously been tapped in response to emergencies, such as Hurricane Katrina. The reserve has a storage capacity of 713.5 million barrels, with some 635 million barrels now buried in underground salt caverns along the U.S. Gulf Coast.
“While filling the SPR will not materially offset the tidal wave of new supply hitting the global oil market, it makes total sense from a national security and budgetary perspective,” said Bob McNally, founder of consultant Rapidan Energy Group.
“Better to buy low and before an emergency than the other way around,” said McNally, who oversaw the last major fill-up of the reserve as a top oil official at the White House during the George W. Bush administration.
What was not immediately clear was whether the purchases require congressional approval. The reserve can be filled at a rate of 225,000 barrels a day for most storage sites, the Energy Department said in 2016.
In recent years, Congress has used the stockpile as a piggybank for government programs, and Trump had previously approved reducing it by half, something that critics opposed even as the shale revolution allowed the U.S. to reduce its reliance on imports.
If the government filled the reserve to capacity at today’s prices, the purchase would cost about $2.6 billion and could generate about 430,000 barrels-a-day of demand over approximately six months.
“We’re going to fill it right up to the top — saving the American taxpayer billions and billions of dollars, helping our oil industry,” Trump said on Friday.
Currently the government expects oil supply to exceed demand by about 970,000 barrels a day this year. Yet one of the world’s biggest oil traders, Trafigura Group, now expects oil demand to contract by as much as 10 million barrels a day due to the coronavirus outbreak.
The U.S. has so far spent about $25.7 billion building the SPR, including $5 billion for facilities and almost the rest for crude. The average cost of the oil has been $29.70 a barrel.
Trump said the move to purchase now “puts us in a position that’s very strong, and we’re buying it at the right price.”
Crude prices plunged over 20% this week in the worst weekly slump since 2008 after major producers embarked on a war for market share by boosting output just as the coronavirus slams demand.
The price crash has put pressure on American shale drillers, several of which have cut capital spending and dividends to bolster their balance sheets.
”The president’s directive to the U.S. Department of Energy to restock the Strategic Petroleum Reserve can help alleviate the oversupply disruptions in the marketplace,” said Anne Bradbury, CEO of the American Exploration and Production Council.
Earlier this week, the administration suspended a planned sale of 12 million barrels of oil from the reserve, citing market conditions. Any further delay of that sale beyond Oct. 1 would require action from Congress.