One of the benefits of having a well-stocked Strategic Petroleum Reserve (SPR) is that it makes it harder for oil-exporting countries to wage economic war on the U.S. by manipulating oil prices. One of the worst bear markets in U.S. history was precipitated by an oil embargo by the Organization of Arab Petroleum Exporting Countries (OAPEC).
In October 1973, OAPEC (the Arab members of OPEC, led by Saudi Arabia) declared an oil embargo against the United States and several of our allies. The embargo was a response to support for Israel during the Yom Kippur War.
U.S. oil production had been in decline for three years at that point, and we were importing about 6 million barrels per day (bpd) of oil and finished products. When the embargo was implemented, the U.S. had limited ability to react. Oil prices quadrupled, and there were widespread shortages of gasoline and other petroleum products. The resulting recession impacted many countries, including the U.S.
The 1973 oil embargo was a wake-up call for the world. It showed the economic power of oil-producing countries, and it led to a new era of global economic instability. But it also led to many changes designed to reduce dependence on foreign oil. One of those changes was creation of the SPR in 1975.
But the SPR only works as a deterrent against high oil prices if it is well-stocked. Last year, in response to rising oil prices caused by the Russian invasion of Ukraine, the Biden Administration announced the largest SPR release in history. Since President Biden took office, the SPR has been reduced from 638 million barrels to 371 million barrels. That puts the SPR at the lowest level since 1983.
Last year’s release arguably helped stem the rise in the price of oil, but it wasn’t a sustainable solution. As long as demand remains high, the price rise will resume. But, in addition to that, a depleted SPR means that OPEC is in a stronger position to boost oil prices by cutting production. Last week, that’s exactly what happened.
On April 2, 2023 OPEC+ — a group of oil-producing countries led by Saudi Arabia and Russia — announced that it would cut production starting in May and extending through the end of the year. This marks the first time OPEC+ has cut production since 2018. Analysts have pegged the overall production cuts at 1.66 million bpd. At that rate, by year-end about 400 million barrels will have been removed from the market, more than offsetting last year’s SPR releases.
The White House is obviously unhappy about the cuts, as they will certainly cause prices to rise again. A spokesperson for the National Security Council said “We don’t think cuts are advisable at this moment given market uncertainty — and we’ve made that clear.”
Oil prices have already risen more than 10% since the cuts were announced.
These events highlight the risks of using the SPR for purposes other than emergency. Last year’s price rise was politically problematic, but it wasn’t a real emergency. But now that the SPR is substantially depleted, OPEC has been given far more pricing power than it had a year ago.
The U.S. can’t respond to the OPEC cuts in the short term, which means that oil prices in the intermediate future will be dictated by OPEC’s decisions. That is a consequence of last year’s decision to deplete the SPR.