It was about 3-1/2 weeks ago, on November 23rd, that President Biden announced the release of 50 million barrels of oil from the Strategic Petroleum Reserve (SPR) for the purpose of lowering gas prices. I knew this release wasn’t going to be immediate, but I didn’t realize it was going to take this long. According to the Department of Energy (DOE), it takes 13 days from the President’s decision for the oil to begin to reach the US market. So by this time, I was expecting some of this oil to be hitting the market. But, we are 26 days in. So what’s the hold-up?
Well, the delivery of oil doesn’t really happen that fast. First, there has to be an agreement in place with the other side of the transaction (i.e., the market). Once oil companies come to an agreement with the US government on the terms of an oil exchange or sale, then the clock starts. But even so, I don’t necessarily have faith that the 13-day delivery time is accurate, nor do I have any expectation that this release will achieve Biden’s objective of lowering gas prices.
The plan for the release of 50 million barrels is through a combination of sales and exchanges:
18 million barrels will be sold to the market. Congress had previously authorized this sale before Biden’s decision, so the start of the sales process is just being accelerated.
The other 32 million barrels are planned to be released through “exchanges” over the next several months. In these exchanges, oil is essentially loaned out to private oil companies at their request. In return, the companies are required to replenish the oil to the SPR with interest (additional barrels) in the years ahead. In theory, this is supposed to result in no cost to the SPR.
The Sale of 18 MMbbl
For the 18 million barrels, the U.S. Department of Energy on Friday, December 17th, released the Notice of Sale to the market. Offers to purchase the oil aren’t due until January 4th, 2022.
The sale will be based on price competition and it’s not known at this time who will be participating in the bids. The base reference price stated in the Notice of Sale for bids is $71.34 per barrel for all SPR crude oil streams.
The Exchange of 32 MMbbl
On December 10th, the DOE announced the first batch of the 32 MMbbl will be 4.8 million barrels with Exxon Mobil Corp. Details of the exchange agreement are unknown and it’s not clear if any other companies submitted proposals for the remaining 27 MMbbl. Proposals were supposedly due two weeks ago on December 6th. See here for the DOE’s request for proposal.
As the DOE claims, deliveries of the crude oil can begin as early as 13 days after the announcement of the exchange or sale, but this is all contingent on scheduling and transportation arrangements falling into perfect alignment.
Expected Delivery
So, when is all of this oil expected to hit the market? The oil awarded under the exchange gets priority delivery over that of the sales. The 4.8 MMbbl exchage oil may start to be delivered any day now, but the agreement details aren’t known. Per the Notice of Sale, the 18 MMbbl isn’t planned for delivery until starting mid-first quarter of 2022:
“The delivery period for this sale shall be from February 1, 2022 to March 31, 2022 from Big Hill, West Hackberry and Bayou Choctaw sites. Delivery from Bryan Mound will be February 1, 2022 to March 15, 2022. Requests for early deliveries in accordance with SSP C.5(c) will be accommodated to the maximum extent possible, terms to be negotiated. Please note that any barrels awarded under the Exchange solicitation DE-RP96-22PO00001 on December 8, 2021 will have scheduling priority over sales cargoes in the February through March 2022 period.”
Impact on Prices
So will the staggered delivery of this SPR oil release have any impact on gas prices? We’ll have to wait and see.
Oil is currently at ~$70.86 and ~$73.52 per barrel for West Texas Intermediate (January contract) and Brent crude (February contract), respectively. Note that the average price the government paid for oil in the reserve was $29.70 per barrel. So, the government now will be selling high when they bought low. Taxpayers always get the shaft.
In the chart above we can see a sharp drop (~$10) in the price occurring on November 26th. Perhaps this drop was a reaction to Biden’s SPR release announcement made 3 days earlier. The price has climbed a bit since then.
So let’s check back in January to see if any further reports come out of this oil hitting the market and if there are any apparent impacts on oil prices.
It is worth noting that aside from Biden’s 50 MMbbl release announcement, there have already been plans to reduce the SPR. The Bipartisan Budget Act of 2018 calls for the sale of more than 160 MMbbl in 2022 through 2027. The recently passed Infrastructure Investment and Jobs Act includes a provision to reduce 87.6 million more barrels from the SPR in 2028 through 2031. Why? This is most likely just to raise revenue for the U.S. Treasury. Otherwise, I don’t know.