The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties.
The proposed sale, included in a bill posted on the White House website, equates to more than 8 percent of the 695 million barrels of reserves, held in four sites along the Gulf of Mexico coast. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period. The proceeds will be “deposited into the general fund of the Treasury,” according to the bill.
The sale is the second time the U.S. has raised cash from the reserve, created as a counter-balance to the power of Arab producers after the first oil crisis of 1973-74. The U.S. may sell also additional barrels to cover a $2 billion program from 2017 to 2020 to modernize the strategic reserve, including building new pipelines.
The White House on Tuesday urged lawmakers to support the budget deal, including the proposed partial sale of the SPR, saying it was “a responsible agreement that is paid for in a balanced way.”
Supporters of the sale argue the U.S. doesn’t require such a big emergency reserve as rising domestic production on the back of the shale boom offsets the need for imports. Critics, including oil analysts and former U.S. energy officials, say using the underground reserve as a piggy bank makes it less effective in meeting its intended purpose: combating a “severe energy disruption.” What’s more, the government would be selling at a time when oil is unlikely to have recovered from its slump over the past 18 months.
The Energy Department, which oversees the reserve, says on average the U.S. paid about $29.70 a barrel for the oil. But after adjusting for inflation and other items, the average cost rises to $74 a barrel, according to ClearView Energy Partners, a Washington-based energy research firm. On Tuesday, West Texas Intermediate, the U.S. oil benchmark, traded at less than $44 a barrel.
At current prices, the extra sales to fund the modernization of the strategic reserve would be equal to 45 million barrels and bring the draw-down to almost 15 percent of the total.
The draft bill states that “the age and condition” of the reserve “have diminished its value” as an energy-security asset, requiring its modernization. “Global oil markets and the location and amount of United States oil production and refining capacity have dramatically changed in the 40 years since the establishment of the Strategic Petroleum Reserve,” it said.
The sale comes as countries including China and India build their own reserves, buying crude in the market to fill up huge tank facilities. The International Energy Agency estimates that China has already stockpiled 200 million barrels and will add nearly 20 million more this year. Beijing plans to increase the size of its reserve to 500 million by 2020. Germany, Japan, South Korea, France, Spain, Italy and other big importers also have their own strategic oil reserves.
Washington has released crude from the strategic reserve three times in supply emergencies: in 1991 during the Gulf War to liberate Kuwait from Iraq, in 2005 after hurricane Katrina crippled Gulf of Mexico production, and in 2011 after the war in Libya cut supplies. Between 1996 and 1997, Washington also sold 28 million barrels to reduce the federal deficit.
The U.S. imported 9.5 million barrels of crude in July — the latest monthly data available — down 35 percent from a record of 14.7 million in August 2006.
The Bipartisan Budget Act of 2015 will extend the government’s borrowing authority until March 2017 and also include a two-year deal on spending, party aides said.