Explainer: what is the emergency oil supply Biden can use to fight inflation?

WASHINGTON, Nov. 15 (Reuters) – The Biden administration is considering tapping the U.S. strategic petroleum reserve to cool oil prices, pushing fuel prices up and inflation soaring.

Such a move may have no long-term effect on dampening US oil prices, which hit a seven-year high above $85 a barrel in late October, analysts say. read more

But releasing oil could allow the Biden administration to fend off criticism ahead of the 2022 midterm elections that it has done little to stem rising prices. It could also enable Biden to say he took action after Saudi Arabia and Russia, members of the OPEC+ manufacturing group, resisted US calls to pump more oil into global markets.

These are the issues surrounding the use of the SPR.

WHY IS THE SPR MADE?

The United States created the SPR in 1975 after the Arab oil embargo pushed gasoline prices up and hurt the US economy. Presidents have tapped into the supply to calm oil markets during war or when hurricanes hit oil infrastructure along the US Gulf of Mexico.

HOW MUCH OIL DOES THE SPR CONTAIN?

The reservation currently contains about 606 million barrels in dozens of caves in four heavily guarded locations on the coasts of Louisiana and Texas. That’s enough oil to meet US demand for more than a month.

Fluor Corp (FLR.N), a Texas engineering and construction company, manages and operates the SPR.

The country also has small reserves of fuel oil and gasoline in the northeastern US.

HOW DOES THE SPRAY GET OIL ON THE MARKET?

Due to its location near major U.S. refining or petrochemical centers, the SPR can ship as many as 4.4 million barrels per day. According to the Department of Energy, it could take just 13 days from a presidential decision for the first oil to hit the US market.

During an auction, the Energy Department usually holds an online auction in which energy companies bid for the oil. In a swap, oil companies take crude oil but are required to return it, plus interest.

US presidents have authorized emergency sales of the SPR three times, most recently in 2011 during a war in OPEC member Libya. The sale also took place during the Gulf War in 1991 and after Hurricane Katrina in 2005.

Oil swaps have taken place more often, the last exchange taking place in September after Hurricane Ida.

HOW CAN THIS TIME BE DIFFERENT?

Congress passed two laws in recent years calling for sales from the reserve to help pay for government programs and a modernization of the SPR, which is constantly exposed to moist, salty air that can damage pumps, pipes and compressors.

Rather than hold an emergency sale, the Biden administration could simply sell oil from the reserve by pre-sells that Congress has already mandated. The SPR is set to sell 30 million barrels between now and September 2025, but Congress has not specified exactly when the oil should be sold.

By making sales in this way, the Biden administration can fend off environmentalists’ criticism that the president is selling oil while also calling on the global economy to cut greenhouse gas emissions. But front-loading sales could also leave the administration vulnerable to criticism, as it rushed the transactions for political reasons.

WHICH OTHER COUNTRIES HAVE STRATEGIC RESERVES?

In addition to the United States, the other 29 member states of the International Energy Agency, including the United Kingdom, Germany, Japan and Australia, are required to hold oil in emergency reserves equivalent to 90 days of net oil imports.

China, an associate member of the IEA and the world’s second largest oil consumer, created its SPR 15 years ago and held its first oil reserve auction in September. Another associate member of the IEA, India, the third largest oil importer and consumer, also holds a reserve.

U.S. presidents may also coordinate an SPR release with reserve withdrawals by other IEA members.

Reporting by Timothy Gardner in Washington; Editing by Lisa Shumaker

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