As Crude Imports Rise Again, US Plans to Sell Off Strategic Oil Reserves

Although the US have become the world’s largest oil producer this year, their still-significant dependence on energy imports might force Washington to sell crude from the Strategic Petroleum Reserves, thus helping the domestic market while also narrowing the fiscal deficit gap.

Kristian Rouz – Albeit the massive increase in US oil production in the recent years has diminished America’s dependence on imported crude twofold, oil imports are increasing again.

An unlikely scenario is coming true at first glance, however, but a decrease in the US oil output coupled with an accelerating demand for fuels dictated by low prices are good news for overseas oil producers, who can expect a subsequent rise in prices.

Washington, however, does not seem to be ready and willing to give in to market pressure that easy. The budget agreement struck on Monday by the Obama administration and top representatives from both parties of Capitol Hill provides a massive crude selloff from the US Strategic Petroleum Reserve in order to prevent imported oil from increasing its presence in the US market.

The US has been excessively reliant on imported fuels for two-and-a-half decades: after the ‘oil bust’ of 1986 when domestic production collapsed dramatically.

Low oil prices throughout most of the 1990s diminished the importance of energy imports, but in the noughties, as fuel prices jumped, environmental concerns associated with traditional oil extraction methods prevented the expansion of domestic US crude output.

Consequently, in 2005, the share of imported oil in the US market peaked at 60%. Afterwards, as the financial crisis undermined demand, and shale technologies enhanced supply, US reliance on imported crude dropped below 30% in late 2014.

Now, after roughly twelve months of persistently low oil prices, the expansion in productivity of the US oil industry has stalled, whilst its cost-efficiency has deteriorated. US crude output is not increasing, but low prices have spurred a greater demand for fuels: more people can now afford SUVs and longer distance trips in their automobiles, while US manufacturing is expanding robustly and consuming more fuels as well. Higher demand and stagnant domestic production have resulted in rising oil imports.

US crude imports stood at 6.85 mln bpd in January this year, and, after bottoming out at 6.5 mln bpd in early May, have rebounded to the current 7.5 mln bpd.

Meanwhile, US oil production peaked in April at 9.6 mln bpd, stalling and slightly decreasing afterwards to 9.358 mln in July, according to the Energy Information Administration (EIA) data. The downward trend is persistent as low prices are taking their toll on productivity.

Subsequently, US imports of Nigerian oil, after collapsing in late 2014, are on the rebound: during April to July, shipments doubled to 130,000 bpd.

Although the US became the world’s largest oil producer this year, surpassing the likes of Russia and Saudi Arabia, the scale of US oil consumption is truly immense: whilst global oil production rose above 93 mln bpd in 2015, consumption in the US alone rose above 20 mln bpd, or 21.5% of global output.

The US share in global oil production is still below 12%, hence the persistent reliance on imports.

Addressing this challenge, the White House and Congress, amid a distinctive bipartisan compromise, coordinated a crude selloff from the Strategic Petroleum Reserve (SPR) over the period from 2018 through to 2025. A part of the budget deal, the crude selloff is a tool of the White House’s fiscal maneuver, allowing the US to further narrow the budget deficit while simultaneously diminishing the domestic energy market’s exposure to overseas risks.

The project published via the White House website suggests the sales would commence in 2018 with 5 mln barrels, increasing to 10 mln by 2023. In total, the US would sell 58 mln barrels, depositing the revenue into the Treasury. Is it worth noting, the previous sales for the SPR took place during the energy crisis of 1973-1974, and were aimed at diminishing the risks stemming from the price manipulations by Arab countries.

The US might sell an additional $2 bln worth of oil in 2017-2020 in order to raise cash to modernize the SPR infrastructure.

According to data by the US Energy Department, the US government paid an average $29.70 for each barrel of oil currently held in reserves. In case the average crude price during 2017-2025 in above that, the deal looks profitable. However, inflation-adjusted price of each barrel of SPR oil is $74, as calculated by the Washington-based ClearView Energy Partners. That said, either Washington expects energy prices to rise above $75/bbl by 2018 and beyond, or their financial planning is not thorough enough.

Meanwhile, other world’s major oil importers, most prominently, mainland China and Indian, are building up their crude reserves. Beijing has stockpiled some 200 mln bbl by now and is planning to increase the reserves to 500 mln bbl by 2020. Most European nations, along with Japan and South Korea, are also increasing their reserves.

The US, however, is rapidly running out of oil storage space, and this might be another reason for the planned SPR oil selloff. All in all, however, before the actual sales take place, the possible lucrativeness of the entire deal might be reviewed given the ever-changing situation in the global energy market.