Releasing the SPR: A Threat, with What Goal?

Earlier this week, the Department of Energy announced that it was conducting a “test” release of crude oil from the nation’s Strategic Petroleum Reserve (SPR). Five million barrels, roughly 1 percent of collected supplies, will be released. The U.S. Strategic Petroleum Reserve was created in The Energy Policy and Conservation Act of 1975, which required the country to have enough oil on hand to replace 90 days’ worth of imports. As of September 2013, the nation had some 210 days’ worth of oil stockpiled in both private and government-controlled reserves, according to calculations by the International Energy Agency. All IEA member nations must maintain 90 day spare reserves—a policy developed in the aftermath of the OPEC oil embargo of 1973, which made the United States and much of the developed world profoundly aware of its vulnerability to disruptions in oil supply. From the time the President makes the decision to tap into the SPR, it takes 13 days for the oil to reach the U.S. market. The Energy Department said the test sale had been planned for months, and was timed to meet demand from refiners coming out of annual maintenance cycles. "By law, the Department of Energy is required to conduct continual evaluation of the Strategic Petroleum Reserve system's drawdown and sales procedures," said DOE spokesman Bill Gibbons. "Due to the recent dramatic increase in domestic crude oil production, significant changes in the system have occurred - including pipeline expansion, construction of new infrastructure, reversed flow of existing pipelines and increased use of domestic crude oil terminals." But oil traders and analysts aren’t buying it, and have confidently concluded that the test is a direct response to Russia’s invasion of Crimea. According to one source quoted by Platts when asked if the test was a message to Russia: “It’s like cleaning the shotgun on the porch when your daughter has a date coming over.” Others concurred. In the Financial Times, Michael Wittner, head of global oil research at Société Générale in New York said, “The timing of this makes it seem like a warning shot across the bow towards the Russians.” This sale is probably the first time in history that the reserve, initially developed to insulate the United States from geopolitical turmoil, has been used to send a political message, let alone a threat. Looking at the timeline of SPR releases, it has been used in the past to offset disruptions such as the Libyan civil war, and Hurricanes Katrina, Gustav, and Issac. But if this test release is a threat, what is it a threat of? The release of 5 million SPR barrels is trivial in the context of the massive global market—equivalent to approximately 1.5 hours of global consumption. Steve Levine, an energy analyst at Quartz, echoes economist Philip Verlager and argues that President Obama should use the United States’ oil supply and strategic reserves as the weapon of choice against Putin to drive down oil prices and take the wind out of his sails. Immediately after the initial invasion, Levine wrote:
“Verleger argues that if the US were to ship just 500,000 barrels a day of oil onto the market, it would drive down prices by about $10 a barrel and cost Russia about $40 billion in annual sales. The US could keep doing this for years, he says. “[Russia's] GDP might drop 4%, which would certainly count as a ‘consequence,’” he says. Half would come from lower oil prices and half from gas sales, whose prices Russia indexes to oil. “Verleger notes that Saudi Arabia, the current market-maker, would have to go along with the strategy and not cut back production. But he thinks that, given Putin’s detested support of Syrian leader Bashar al-Assad, the Saudis would likely agree. “The idea has history behind it. In 1985, Saudi Arabia decided to pump a lot more oil and increase its share of global oil sales. As a result, oil prices plunged by more than half, at one point in 1986 reaching $13 a barrel. The primary, unintended victim was the Soviet Union. “The Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive,” wrote former Russian prime minister Yegor Gaidar. The economy went into a tailspin, as then did the politics, and in 1991, the Soviet Union was no more. “Which makes oil the most fearsome weapon of all.”
Is the SPR test release a threat to use this strategy? Levine and Verlager do have a point that releasing SPR supplies could be a way to ding Russia’s economy without requiring the multilateral cooperation required for meaningful sanctions. Yet, the proposal still raises more questions than answers. Using the SPR to strategically manipulate oil prices is pretty far outside the reserve’s founding charter, and won’t even necessarily be effective. History has shown again and again that the global oil market is far too mercurial and volatile to be meaningfully impacted by small maneuvers, and any meaty disruption—such as the currently worsening protests in Venezuela—will just send prices spiraling upwards again, and money back into Putin’s pocket. This would waste whatever political capital was used to get stakeholders on board with the plan to begin with. But let’s say, hypothetically, the plan was deemed politically feasible. First, how willing will Saudi Arabia actually be to trim production without the usual benefit of higher prices? While it’s true that Russian/Saudi relations are in a wretched state due to Putin’s support of Syria’s Assad, U.S.-Saudi relations also took a serious hit in the fall of 2013 when the United States declined to intervene against Assad. Saudi Arabia is already coping with a surge in Iraqi oil production, which recently reached 30-year highs, and the continued resurgence of exports from Iran. Second, between climbing OPEC oil supplies and rising marginal costs of shale oil production, a conscious effort to drive down oil prices is unlikely to fly with American shale oil producers. More than simply hurting their bottom lines, a sustained $10 dip in oil prices will discourage companies from making the upstream investments required to sustain the shale boom. Ed Crooks, Energy Editor of the Financial Times, seems to dismiss the possibility that the United States will take such an approach. He tweeted that the release is a signal that the United States is “not so much a threat to tank the oil price, more a promise to respond if price spikes.” It’s still fairly unclear what such a response would look like.