Volatile crude oil prices damage production capacity and economic growth and cause volatile consumer price inflation.
At the height of the 2020 pandemic, Nymex WTI crude oil prices fell to an unprecedented low of -$13.10 per barrel as demand dried up and oil storage facilities reached capacity. Producers faced a dilemma: either shut down wells or sell at a loss, effectively paying end users to consume their oil.
The Department of Energy failed to capitalize on this opportunity to replenish the Strategic Petroleum Reserve (SPR), buying only 21 million barrels of crude over four months. US field production fell from 13 million to below 10 million barrels per day as shale producers shut wells rather than produce at below cost. The damage done to balance sheets meant that it took several years to restore production as prices recovered.
Russia’s invasion of Ukraine in February 2022 caused a spike in crude oil prices, with WTI crude peaking at close to $125 per barrel. In response, the Biden administration released 290 million barrels from the SPR. This tipped the oil market into surplus despite OPEC+ production cuts, with Nymex crude prices falling below $75 per barrel.
Shrinking demand from China and rising non-OPEC production, led by the US, has maintained prices at close to $75 per barrel. Now, hostilities between Israel and Iran threaten to escalate to the point that crude oil supplies from the Middle East could be affected.
Joseph Webster from the Atlantic Council argues that the DoE should not hesitate to make further releases from the SPR to stabilize prices in the event of a supply threat. Net crude imports to the US (blue below) have shrunk to 2 million barrels daily from 8 million in 2017, meaning the SPR provides more than 23 weeks of cover if all imports were to be terminated.
Further releases from the SPR would not only help to keep prices low but also stabilize them, which can be highly profitable for the US government. SPR releases under the Biden administration, at an average of close to $90 per barrel, will net about $20 per barrel if the SPR is replenished at current prices—a profit of nearly $600 million.
Conclusion
Releases from the Strategic Petroleum Reserve (SPR) should be used to stabilize crude oil prices in case of an interruption to crude oil imports. This would likely have four benefits:
First, SPR releases would ensure an interrupted supply to industry and minimize the impact on the economy.
Second, replenishing reserves when prices are low would help to maintain a floor under prices and support shale producers, avoiding the shut-down of wells when prices fall too low to cover operating costs.
Third, stabilizing energy prices can be achieved at no cost to the taxpayer. Selling when prices are high and buying when prices are low will likely show a profit.
Lastly, SPR releases would help to keep a lid on inflation. Energy prices impact the consumer price index directly through gasoline and heating prices to the consumer but more significantly through the energy cost component of goods and services. The chart below shows how energy CPI (orange) increased ahead of headline CPI in 2021 and similarly led the decrease in 2022-2023.
