Explainer: How the US’s strategic petroleum reserve works

Joe Biden is releasing millions of barrels from the United States’ crude oil stash. Here’s what you need to know.

Oil infrastructure
The US reserve currently holds about 586 million barrels in four heavily guarded locations on the Louisiana and Texas coasts [File: US Department of Energy via AP]

US President Joe Biden has announced the release of one million barrels of crude oil every day for the next six months from the Strategic Petroleum Reserve (SPR), the largest such release from the United States stockpile in history.

The move comes as oil prices have spiked since Moscow’s invasion of Ukraine on February 24 and subsequent sanctions slapped on Russia by the US and its allies.

The latest amount of US oil release would make 180 million barrels available – or the equivalent to about two days of global demand – and marks the third time the US has tapped the SPR in the past six months.

It is also possible that the International Energy Agency, the world’s energy watchdog, of which the US is a member, may also release barrels when IEA countries meet on Friday.

The 31-member IEA, representing industrialised nations but not including Russia, presided over the fourth coordinated oil release in its history on March 1 of over 60 million barrels of crude – its largest yet.

As part of the IEA’s March release, the US committed to releasing 30 million barrels of SPR oil.

Before that, Washington pledged in November to release 50 million barrels of SPR oil, though an expected move in tandem from China did not materialise, as prices surged along with demand recovery for the COVID-19 pandemic.

Here’s what you need to know about the SPR and President Biden’s announcement:

Why was the SPR created?

The US created the SPR in 1975 after an Arab oil embargo led to a spike in gasoline prices and damaged the US economy. US presidents have tapped the stockpile to calm oil markets during war or when hurricanes hit oil infrastructure along the US Gulf of Mexico.

The reserve currently holds about 586 million barrels in dozens of caverns in four heavily guarded locations on the Louisiana and Texas coasts. The country also maintains small heating oil and gasoline reserves in the US Northeast.

How does SPR oil reach the market?

Because of its location near big US refining or petrochemical centres, the SPR can ship as much as 4.4 million barrels per day. It can take only 13 days from a presidential decision for the first oil to enter the country’s market, according to the US Department of Energy.

Under a sale, the Energy Department usually holds an online auction in which energy companies bid on the oil. Under a swap, oil companies take crude but are required to return it, plus interest.

Prior to the last six months, US presidents have authorised emergency sales from the SPR three times, most recently in 2011 during a war in Libya, an OPEC member. Sales also took place during the Gulf War in 1991 and after Hurricane Katrina in 2005.

Oil swaps have taken place more frequently, with the last exchange held in September after Hurricane Ida.

What other countries have strategic reserves?

The US is responsible for about half of the world’s strategic petroleum reserves.

The US and other IEA member countries including Germany, Japan, Australia and the United Kingdom are required to hold oil in emergency reserves equivalent to 90 days of net oil imports. Japan has one of the largest reserves after China and the US.

China, an associate member of the IEA and the world’s second-leading oil consumer, created its SPR 15 years ago and held its first oil reserve auction in September. Another IEA associate member, India, the third-biggest oil importer and consumer, also maintains a reserve.

State storage across the Organisation for Economic Co-operation and Development, most of whose members belong to IEA, came to nearly 1.2 billion barrels of crude as of January, according to the IEA.

Source: Reuters