Is the Strategic Petroleum Reserve Going Away?

Last year, the Energy Department released a report saying that the U.S. Strategic Petroleum Reserve (SPR) is becoming increasingly effective.

In this clip from Industry Focus: Energy, Motley Fool analysts Sarah Priestley and Taylor Muckerman look at the history of the SPR, why the Energy Department is thinking about nixing the program, and what it could mean for the oil industry if the U.S. eliminates the stores.

A full transcript follows the video.

This video was recorded on Sept. 7, 2017.

Sarah Priestley: The SPR is often in the news when natural disasters happen. But last year, it was in the news not concerning a disaster. The Energy Department released a report, and it said the SPR was increasingly ineffective due to aging infrastructure and a booming domestic oil industry. The report essentially said that the complex infrastructure was getting too old to function efficiently; they needed money from Congress to fix most of the critical infrastructure, for moving crude within the SPR had exceeded its service for life. So it didn't paint a great picture of the infrastructure there. But the thing that I think is interesting is where the large reserves are needed in the U.S. since the recent oil boom. The rules of the IEA were made when the U.S. wasn't producing as much. So what do you make of that?

Taylor Muckerman: Certainly, when you look at the inventory, we just saw crude oil inventories rise by almost 3 million barrels. So that's not necessarily 270 million barrels like we see in the SPR, but at the same time, it's nice to have. And we're not the only country that has one. China has one that I believe is much larger than ours, and as they've started to build that and maintain it, it was actually a pretty nice little driver for demand in the oil markets, because here you are, feeling these vast reserves without even using them. So it's just like a sudden increase in demand. But we've seen that taper off. Not the only country that has it. Nothing special. But I think it's just nice to have. It's kind of interesting. I didn't realize that they were worried about necessarily the quality of the crude within the salt caverns. Because you're right, it's not in its original formations. Technically, oil is several thousands of years old, so you wouldn't think that a few more years in a different area would impact it. But certainly, you could imagine that it's not in such a high-pressure environment, it's not nearly as far down into the Earth anymore, and it has been extracted, so maybe there's some changes going on there. You have to worry about the quality, which I never would have considered.

Priestley: Yeah. They're kept in salt caverns, which are probably the best way that you could keep it, because salt is impervious, it's far down, there's some pressure. But as you said, it's not in its natural state.

Muckerman: Right. And salt caverns are also where a lot of companies will store their wastewater that they inject into fracking wells, or things like that, or they'll store some spare natural gas instead of flaring it. So salt caverns are used for very many reasons.

Priestley: I think, as part of this debate over whether we should have one or not, I think it would be stupid for us to not have one as a country. And also, if you think about the economics of it, I think the per-barrel cost is $27, which even now at the depressed value is a good price.

Muckerman: Yeah, absolutely.

Priestley: And a lot of the exchanges that they do, it's a great way of getting high-quality, very well-priced oil for the U.S. citizens, essentially. And the other thing to factor in is that lawmakers are beginning to see the oil reserves as almost a piggy bank. Congress tapped the oil reserves for funds twice last year. So it may be something that we start to see happen more, but possibly not in this environment.

Muckerman: Yeah, if you think we're strong enough as a producing country now to where there's a little bit more flexibility there versus in the early 2000s, before the fracking boom really kicked in, you could see a steady decline from the 1970, 1971, to 2005 of oil production in the United States. And then, just straight up and to the right in terms of growth. Almost not even straight up to the right, almost just straight up from 2005 until the present. So assuaging a little bit of fears.

Priestley: The bottom line for this is, it sounds like a concerning issue. It sounds like a big thing.

Muckerman: Yeah, Strategic Petroleum Reserve.

Priestley: But it's really not. It's not a big deal. And I guess everybody is going to be keeping their eye on the next three hurricanes.

Muckerman: Yeah. It's interesting, I don't remember a time where a specific company was able to request some oil or make this exchange. I think the last few times was just the country releasing some oil into the general market, probably in an auction format. So kind of interesting to see maybe if that happens again in the future, where a specific company is almost loaned oil, essentially.

Priestley: Yeah. It's like you said, they're probably taking advantage of the situation. And the U.S. is taking advantage of the fact that we now have this glut in production so that we can do that to leverage our position. Which is great to see. It's a good use of that material, I think.