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Last month, the United States Strategic Petroleum Reserve (SPR) it fell to its lowest level since 1983 while renewed tensions between the United States and Iran raised concerns about global oil stability and prices.
US President Donald Trump admitted to reporters on Wednesday that every time the US strikes Iran, oil prices go up.
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And they did. Brent futures rose sharply from June 19 on Wednesday. Brent futures settled at $78.02 a barrel, up 5.2 percent from yesterday.
Meanwhile, SPR fell by 6.2 million barrels in the week ended July 3 to 319.5 million barrels, according to Energy Department data, marking the worst drop since the Reagan administration. It has a storage capacity of 713.5 million barrels, a level that was last close to the 2010s.
Today, the US produces more oil than any other country in the world and exports more oil. About 60 percent of US crude oil comes from domestic sources. The remaining 40 percent is imported, of which about 60 percent comes from Canada and another 7 percent from Mexico. Only about 7 percent of the country’s crude oil consumption passes through the Strait of Hormuz.
So why does the conflict with Iran still affect prices at the US oil pumps?
Crude oil is not expensive based on where it is produced but at international prices that reflect global supply and demand.
“Independence does not mean price protection or price independence because oil is a global commodity and all markets are interrelated,” Maksim Sonin, head of energy working with Stanford University’s Center for Fuels of the Future, told Al Jazeera.
If several million barrels of oil are suddenly at risk because exports through the Strait of Hormuz are disrupted, global buyers will begin to compete for supplies from other countries. This increased competition drives international prices higher, raising costs for US refiners and, ultimately, consumers.
“Historically, information databases were supposed to be a short-term solution to buy governments time to deal with the problem, not a silver bullet or a complete solution. Long-term problems, consistent governments have their own databases,” said Sonin.
Cheap prices go far beyond just going to the gas pump. Airlines pay more for fuel, car companies spend more on diesel, and drive up food costs. High transportation costs are passed on to consumers through expensive purchases, goods and travel.
In early March, the US began striking the SPR following an earlier strike on Iran. Despite this, consumer prices remained high.
On February 28, the day the US and Israel struck Iran for the first time, the price of a gallon of Gasoline was $2.98 ($0.79 per liter) and by mid-May rose to $4.48 ($1.18 per liter), according to the American Automobile Association (AAA), which tracks fuel prices daily in the US.
What is the Strategic Petroleum Reserve?
The Strategic Petroleum Reserve is the world’s largest reserve of crude oil. SPR is a mix of foreign and domestic foods that are sweet and sour.
The US established the reserve in 1975 following the Arab oil embargo when several Middle Eastern producers stopped exporting to the US, causing an oil shortage and exposing the country’s dependence on imported energy. The push to build a storage facility began decades earlier, beginning in 1944.
Today, hundreds of barrels of food are stored underground in salt caves at four locations along the US Gulf Coast and can be released in the event of a major disaster. They can be distributed to about half of US refineries using pipelines or barges. Once extracted, the oil is refined and sold around the world to offset the remaining shortages.
Unlike commercial enterprises that have private companies, the SPR is there for extraordinary events such as wars and natural disasters. It was created after Hurricane Katrina in 2005 after the Category 5 hurricane devastated the Gulf Coast, which drained 50 percent of the country’s oil reserves. The US government also entered into it for six months after the Russian invasion of Ukraine, in addition to the release itself, which began in March and was carried out in cooperation with the International Energy Agency, an alliance of 28 countries that supports energy security through the cooperation of the energy policy.
“It’s shocks like this; it’s about conflicts, major offshore disruptions, losses, etc. That’s the point. The point is to have a buffer, an emergency fund, to support prices and protect assets from disruption,” Abhi Rajendran, non-resident at Rice University’s Center for Energy Studies (CES, Texas) told Alzeera in Houston.
Why does it matter if most US oil does not pass through the Strait of Hormuz?
The Strait of Hormuz remains one of the world’s most important energy hubs, with nearly a fifth of the world’s oil flowing through the narrow and strategic strait connecting the Gulf with the Gulf of Oman.
Although the US is importing less oil because of the crisis, many of its allies and trading partners, including South Korea and India, are heavily dependent on those imports.
When shipments to Hormuz were halted, those countries had to stockpile some barrels elsewhere, prompting global buyers to source supplies from producers including the US. That puts stress on the trees.
The competition tightens the global market and raises prices, even in countries that export little Middle Eastern oil directly.
“We have been clearing our reserves, including SPR, and exporting them to support the global market. This should not be sustainable for long,” said Rajendran.
Why are these reserves so low?
Prior to its recent release, SPR had hit record lows a few years ago due to an emergency release following Russia’s invasion of Ukraine, which threatened supplies from one of the world’s largest oil exporters.
A series of sanctions on Russian oil exports fueled fears that a large part of the oil could end up on global markets, pushing Brent crude above $130 a barrel in March 2022. The average US oil price rose to record highs. $5 per gallon ($1.32 per liter) for the first time on record.
At the time, former President Joe Biden’s administration approved the largest release in history of 180 million barrels, helping to stabilize global markets and curb rising oil prices. Congress also ordered additional sales from the reserve in 2023.
The releases helped lower oil prices, but they greatly reduced the government’s emergency budget. Since then, the Department of Energy has been gradually buying back fuel to replenish the stockpiles as conditions permit.
What would happen if the US stopped producing oil?
The SPR serves two purposes. They provide emergency relief when material shortages emerge, but also reassure financial markets that governments are equipped to deal with major disruptions.
“If the US decides not to release oil from the oil reserves, it will affect the supply and demand because it will be less. It will also affect the market sentiment, as the markets expect the US to sell its reserves. If this does not happen, it will send a signal that the situation is more difficult than expected. This would have an increasing effect on oil prices worldwide,” said Sonin.
Knowing millions of barrels can be released during a crisis can help stabilize markets and reduce the fraudulent buying that often exacerbates inflation. Small reserves help policymakers to soften the blow if the debate continues.
That guarantee has become less important as reserves have declined.
Eric Nuttall, chief operating officer at Ninepoint Partners, has warned that storage facilities are approaching their lowest point in terms of X.
Mr. Rajendran is also concerned that half of the 319.5 million barrels in storage cannot be used.
“Some of the crude has been around for a long time. It’s in old storage caves and stuff, so I think you could argue that maybe 100 to 150 million barrels of what’s left can’t be used for modern refiners and exports,” Rajendran added.
