US oil reserves fall to their lowest level in four decades

While the United States has maintained its leading status as the world’s largest oil
producer, pumping out 13.5 million barrels of crude oil per day, the stock of its crude oil in
the U.S. Strategic Petroleum Reserves fell by a reported 5.1 million barrels to 311.4 million
barrels last week, its lowest level since March of 1983, according to the Department of
Energy.
The drop in reserves stems largely from a U.S. pledge to release 172 million barrels from
the reserve at the onset of the conflict with Iran. According to reports, SPR inventories have
dropped as much as 104.4 million barrels since the conflict began on February 28.
On March 11, the Trump administration announced the 172-million-barrel release would
counter any potential supply disruptions caused by the conflict, mainly the disruption of

shipping through the Strait of Hormuz. The U.S. release was part of a broader 400-million-
barrel release coordinated by the International Energy Agency and including 32 nations.

However, there is a difference in the execution of this action compared to past efforts of the
SPR. Rather than a straight up sale, the government is lending crude to companies that
must repay the same volume with an added premium at a future date. Since mid-March,
the Department of Energy has contracted out more than 133 million barrels with repayment
premiums on individual deals running as high as 28%, and no lower than 18%. According to
U.S. Energy Secretary Chris Wright, the U.S. will be receiving 1.2 barrels in return for every
barrel released.
As of July 10, when commercial and SPR holdings were combined, total U.S. crude
inventories stood at 726.2 million barrels, down 129 million barrels, again the lightest since
1984.

Additionally, there have been issues regarding the physical condition of the reserves. For
starters, as reported by S&P Global, a Government Accountability Office reported in July
that SPR could draw down oil at only about 61% of its original intended rate, while its
capacity to accept returning crude was just 56% of design specifications.
“The SPR’s operational capability to meet mission demands is at risk,” the GAO report
said.

The GAO also found that the $1.4 billion Life Extension Phase 2 overhaul has slipped
behind schedule and shrunk in scope after more than a decade in the works.
No update to the Department of Energy’s SPR strategy has been issued in nearly a decade.
With 311.4 million barrels in reserve, the SPR still remains above the statutory minimum of
252.4 million barrels, which restricts certain limited drawdowns under the Energy Policy
and Conservation Act.
Created after the energy crunch of the 1970s, the Strategic Petroleum Reserves store crude
in underground Gulf Coast salt caverns and has a nominal capacity of about 714 million
barrels.