Here’s the real story behind the record drop in America’s oil reserves

 The U.S. strategic crude stockpiles are dwindling at a record pace and are approaching their lowest in decades — but concerns about slimmer reserves may be overblown.

Steep drawdowns in recent weeks from the Strategic Petroleum Reserve, the federal government’s emergency supply of crude oil, have rattled some economists and investors. They worry that the U.S. could be left too vulnerable to another supply strain, such as a hurricane, and in a tougher spot if the war with Iran drags on through the end of summer.

Others, however, are taking a brighter view. The system is working exactly as intended: Flexing hard, but not breaking. And having a smaller “rainy day” crude fund is just fine when America produces roughly three times as much oil as it did just a few years ago.

“I look at the SPR at this point as a luxury, and as a piece of leverage,” said Jan Stuart, a global energy strategist at investment bank Piper Sandler. “We are an oil-exporting country. We have plenty.”

The U.S. is doing the heavy lifting of keeping the world supplied, through the reserve release as well as exports.

Back in March, the U.S. agreed to release 172 million barrels of crude from its SPR, part of an International Energy Agency-coordinated global release of a collective 400 million barrels from IEA member countries. That was to counter the supply shocks brought by the Iran war and the near-standstill at the Strait of Hormuz, which in peacetime is the conduit for a fifth of the world’s supply of crude and crude products, such as diesel and gasoline.

While it’s true that withdrawals have been hefty, they are proceeding apace and there’s still a ways to go to fulfill that commitment, said Sarah Emerson, president of consulting firm ESAI Energy and an energy expert with four decades in the industry.

So far, the U.S. has released about 50 million barrels of those promised 172 million barrels.

By the end of the cycle, the U.S. will be left with roughly 300 million barrels of crude in the SPR, the lowest since the 1980s. It may be less of a buffer, but “that’s still a hefty amount of oil,” Emerson said. “We need to think of strategic stocks in context.”

Kevin Liu, an oil and gas analyst with Bloomberg Intelligence, compared the SPR releases as a painkillers for the oil market. “It helps relieve the immediate pressure, but it does not solve the underlying supply tension,” he said.

It adds barrels to a tight prompt-month market, helps smooth out price spikes and “it buys time,” Liu said. But it’s nowhere close to offsetting the lost physical supply if the underlying disruption persists, he added.

Oil futures this week are responding to some optimism that a deal that would eventually reopen the Strait of Hormuz might be in the offing, hovering around $90 a barrel and down about 15% in May.

But a “protracted conflict” scenario is not off the table just yet, given the mixed messages on the negotiation front, Bloomberg Intelligence’s Liu said. And Esai’s Emerson warned that prices could reach $140 to $150 a barrel if the strait’s near-standstill persists through August.

Record drawdowns

The SPR’s most recent drawdown, covering the week ended May 22, shows a drop of 9.1 million barrels, leaving the reserves at 365 million barrels. The previous weekly drawdown, covering the week of May 15, was its steepest on record — the U.S. withdrew 9.92 million barrels from the SPR then.

Before that record-breaking decline, the largest weekly drop in the SPR’s history occurred in the week ended Oct. 7, 2022, when the reserves dropped by 7.41 million barrels, and was connected to the war in Ukraine.

The SPR has a storage capacity of 714 million barrels, and it last stayed close to that level in the 2010s.

“We have to remember that the U.S. used to produce around 5.5 million barrels of oil a day back then, instead of the over 13 million barrels of oil a day it does today,” said Jaime Brito, executive director of refining and oil products at Dow Jones Energy.

Whether the U.S. would return to those near-full SPR levels around 700 million barrels remains to be seen.

An argument can be made that the U.S. does not necessarily need to return to those same SPR levels to have a sense of being better prepared for unexpected issues, Brito said.

For one, it would be expensive to replenish reserves to capacity, turning it into a political football in Washington — a line item on budget negotiations rife with potential for disputes, Emerson said.

“I’d think we’d build it back up, but maybe not all the way,” she said.

“Refilling the SPR will depend on if — or how — Congress decides to provide the funds to replenish it. Even if it does, it will likely take years to refill the SPR,” said Jason Bordoff, founding director at Columbia University’s Center on Global Energy Policy and a former Obama administration adviser.

The calculations around the reserve have changed as the so-called shale revolution picked up speed in the 2010s, Piper Sandler’s Stuart said.

The U.S. unlocked oil previously trapped in shale rock, using technology not entirely new but applied in a much larger scale at that time. America has been a net exporter of combined crude and crude products since 2020, and just last month became a net crude-oil exporter.

It’s an asymmetric trade, because the country still imports some gasoline, for example. “But the bottom line is, we export [crude],” Stuart said. “We have no strategic vulnerability in regards to oil,” nor in regards to natural gas or coal, he said.

And that’s not counting on Canada, the other energy powerhouse next door and a close U.S. ally, Stuart added.

There have been dozens of sales and exchanges from the SPR over its many years of existence, but emergencies drawdowns have been few and far between: Before this year’s tap, there was the 2022 one, used to counter retail-gasoline spikes and supply disruptions following Russia’s invasion of Ukraine and also coordinated through the International Energy Agency. Recent drawdowns include smaller taps in the 2011 due to the Libyan crisis and in 2005 after Hurricane Katrina.

The SPR was created in 1975, two years after the Arab oil embargo and crisis of 1973.

Oil stocks to the rescue

The U.S. SPR is effectively structured as an exchange. The original volume of oil taken, plus additional barrels, must be returned to the reserve. Energy Secretary Chris Wright said in March that the oil removed from the reserve would be replaced by even more oil — about 200 million barrels within the next year.

It would take about 120 days to release the total promised 172 million barrels, Wright said. That’s because the SPR can only release oil at a maximum rate of 4.4 million barrels per day for up to 90 days, due to capacity constraints.

The reserve’s oil is held in storage in 60 underground salt caverns in four locations in Texas and Louisiana. The facilities are connected to the nation’s commercial oil transport network via a pipeline distribution system, according to the Energy Department.

The caverns offer “the best security and the most affordable means of storage,” it said, compared with above-ground tanks.

The SPR reached its top capacity in 2009. In 2022, it dipped below 400 million barrels for the first time since in May 1984, according to Energy Information Administration data.

Following the shale boom, many people thought that the U.S. no longer needed a SPR at all, said Robert McNally, president at Rapidan Energy Group and a former energy adviser to President George W. Bush.

“That was very shortsighted,” he said. The U.S. is the largest oil producer in the world, but it is vulnerable to shocks, like the loss of oil-tanker transit through of the Strait of Hormuz drove home.

“An oil-supply disruption anywhere leads to a price shock everywhere, including here,” McNally said. “For that reason we need to keep a large emergency stockpile and coordinate with allies in using it to absorb the shock of emergency disruptions.”