Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

One way for the U.S. to prove its energy dominance is to dump the most prominent manifestation of its dependence on others: the Strategic Petroleum Reserve.

The proposal to sell off half the country's emergency stockpile of 688 million barrels, contained within the White House's budget proposal, has more to do with raising cash. Still, the symbolism of casting off a vestige of America's energy crisis of the 1970s can't be lost entirely on the administration.

From a security perspective, there is a good argument that the SPR, at least at its current scale, is surplus to requirements.

The International Energy Agency requires its members, including the U.S., to maintain enough oil stocks to cover 90 days of imports. The combination of rising domestic production and stagnating demand means the U.S. is already far above that level -- and rising.

The chart below shows how many days of trailing net imports of crude oil and petroleum products the SPR covers. For 2017 and 2018, I've assumed the president's plan kicks in immediately, resulting in roughly 34 million barrels being sold off every year for a decade, and used the Department of Energy's forecasts for net imports:

Less Is Still More
Even under the proposal to cut the size of the SPR, America's falling net imports would mean the strategic reserve's coverage would rise
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Data for 2017 and 2018 are implied by assuming sales of 34.4 million barrels of strategic reserves each year and using government estimates of U.S. net oil imports.

Even if net imports stayed flat at 2018's estimated level of 3.4 million barrels a day, draining half of the SPR over the course of a decade would still leave 101 days of coverage by the end of 2026. And net imports are likely to keep shrinking anyway (China is in the opposite position, which is why it has been filling its strategic tanks).

Meanwhile, there is another 1.3 billion barrels of U.S. commercial stocks on top of the SPR, offering more than 300 days of extra cover based on anticipated net imports this year. Moreover, as I argued here, once you take Canada and Mexico out of the equation -- given how closely they are tied to the U.S. market anyway -- America's direct reliance on other sources of oil imports dwindles to almost nothing.

That the plan has surfaced in between President Trump's lavish welcome in Saudi Arabia and OPEC's ministerial meeting on Thursday seems as well- or as badly timed as anything these days. I'll go with humorous.

In one sense, oil producers need hardly worry: Those extra barrels, spread evenly over 10 years, would amount to about 94,000 barrels dribbling out each day. That is roughly 0.1 percent of current global oil consumption.

We can all agree that 0.1 percent of anything doesn't sound like much. However, in a market where OPEC is having to sweet-talk the Kremlin (along with its own members) into holding supply off the market, an extra 94,000 barrels a day matters a bit more. 

What OPEC really needs is for commercial inventories -- 3 billion barrels in the OECD at the end of March -- to drain quickly and let near-dated oil futures rise. The glacial pace of this process is why OPEC now talks of extending its cuts into 2018. Adding previously sterilized strategic barrels would only slow it further. 

Beyond this, there is what the SPR's sale would signify. I don't mean energy dominance (whatever that means). Rather, a fundamental shift in the global oil market.

The impact of shale and efforts to boost efficiency on the supply side and technologies eroding demand growth have combined to change the calculus around oil resources. They have made it harder to hold markets hostage, as in the 1970s, and are forcing oil companies, and oil-revenue-dependent states, to compete on such banal things as cost.

For example, it could be argued that cutting the strategic stockpile is reckless given the potential for supply shocks emanating from, say, Venezuela. Indeed, at the margin, it could make a crisis more likely by putting further pressure on oil prices and, therefore, shaky oil-based economies.

Against that, though, we also know that a loss of Venezuelan barrels would quickly prompt liquidation from commercial inventories, along with higher production not merely from U.S. E&P companies, but also other OPEC members such as Saudi Arabia and Iraq, as well as Russia.

The latter might quietly enjoy the windfall provided by higher prices stemming from Venezuela's misfortunes. But they would also know that those higher prices would generate more competing supply and antipathy from consumers.

Selling half the SPR doesn't really move the needle; it just confirms the direction in which it is pointing.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net