The Biden administration is preparing to offload a million barrels per day of crude oil from U.S. reserves over the next six months, setting up federal coffers to grow by tens of billions of dollars.
But the government could have been in a position to earn billions more if the Trump administration had been successful at refilling the Strategic Petroleum Reserve in 2020, when oil was selling for a period at or below $20 per barrel.
HOW BIDEN’S RECORD STRATEGIC PETROLEUM RESERVE SALE WILL WORK
President Joe Biden signed a memorandum Thursday declaring that the oil market suffers from a severe supply interruption, authorizing the Department of Energy to draw down and sell Strategic Petroleum Reserve oil to supplement the market. The White House announced the drawdown rate would be 1 million barrels per day on average for a six-month period — or about 180 million barrels.
After COVID-19 lockdowns began in the spring of 2020 and the oil market crashed, the Trump administration sought funding from Congress to stock up the Strategic Petroleum Reserve as a way to help the ailing industry and fill it to its 714 million barrel capacity.
There was a 77 million barrel gap at the time, and the immediate plan was to purchase those barrels to reach capacity volume, although it didn’t work out after the requested funding to do so was left out of the CARES Act.
Had the department been able to purchase 70 million barrels at a rate of $20 per barrel, it would have cost about $1.4 billion to fill up the SPR when oil prices cratered in 2020.
Turning around and selling those 70 million barrels at $90 per barrel today would bring in about $6.3 billion, netting the government some $5 billion.
Former Treasury Secretary Steven Mnuchin later said in April the administration was exploring how to secure and store “several hundred million” more barrels of oil, which would have required the acquisition of substantial additional storage capacity.
Assuming the administration could have worked out a purchase of 200 million barrels at a price of $30 per barrel, it would have paid around $6 billion. Those barrels would be worth $18 billion today at a conservative price of $90 per barrel.
Former President Donald Trump took issue with Biden’s use of the reserve Thursday and said the SPR was filled “100% full” during his administration, although the reserve never hit capacity during his tenure and had about 60 million fewer barrels than when he entered the White House.
As for the newly announced sale, the memorandum Biden signed specifies that the oil will be sold “at a rate the [energy secretary] may determine.”
Tristan Abbey, who worked on SPR modernization at the Senate Energy Committee and the National Security Council during the Trump administration, said SPR crude is sold to purchasers at a market rate.
The U.S. benchmark West Texas Intermediate opened at a price of $107 on Thursday, which means if 180 million barrels were sold at that premium, it would raise about $19 billion.
A lot could happen through the spring and summer in terms of the geopolitics of the war in Ukraine and the state of the oil market to affect the market rate, however, changing the calculus.
“Drawing down 1 million barrels per day over six months is a large volume for a long period of time. The market will price it all in, even six months from now, so it is impossible to know exactly how much revenue will be generated,” Abbey said.
At $115 per barrel, 180 million barrels would turn in about $20.7 billion, while $90 per-barrel oil would raise about $16.2 billion.
It is also not yet clear how or when the Energy Department will auction off the barrels. If multiple auctions are held, the price premium for barrels sold in April could be much different than those sold later in the year.
Whatever the premium is, the government is positioned to bring in big money. Public data show that past sales, both those made in conjunction with congressional mandates and under emergency conditions, have raised billions of dollars.
The 30 million-barrel sale that the Obama administration authorized in response to the Libyan civil war in 2011 raised $3.3 billion, which went into a designated SPR Petroleum Account.
Congressionally mandated sales have generally required smaller-scale sales than that but have brought in billions as well.
The Energy Department carried out a sale of 4,307,485 barrels in May 2019, raising $299,999,960.89 for the Energy Security and Infrastructure Modernization Fund. Sales under that program raised $971,024,412 for the fund between fiscal years 2017 and 2019, notwithstanding separate scheduled sales.
Notably, a senior Biden administration official said Thursday that the revenue generated from the newly announced sale would be used to refill the reserves.
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“When it comes to the refilling, restocking, the reserves, all of the funds that will be attained by the Department of Energy’s results on the sale, this oil will then go to restocking the reserve,” the official said.
