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Trump's reversal on emergency oil reserves is not without merit: Bousso

Trump's budget drastically reduces the planned expenditure on SPR

Stocks of emergency supplies at 56% capacity

Trump has pledged to fill the storage "right to top"

Ron Bousso

LONDON, 10 July - The signature budget bill of U.S. president Donald Trump slashed the funding for replenishing U.S. oil reserves in an emergency, breaking his earlier promise to "fill them right to the top". This sudden change of heart raises questions about whether the U.S. needs its Strategic Petroleum Reserve. When full, the American SPR can hold 714,000,000 barrels of oil, which is equivalent to 35 days' worth of U.S. consumption. According to data from the government, it only contained 403 million barrels as of July 4. This is far below 2010's record of 727 millions barrels.

In July 2023, SPR levels fell to their lowest level in 40 years. This was after Trump's predecessor Joe Biden made several SPR sales in order to lower rising oil prices.

At current benchmark U.S. oil prices, filling the SPR up to capacity would be over $21 billion and take many years. The "Big Beautiful Bill", which Trump signed on July 4, reduced the planned spending for SPR repurchases between 2025-2029 to $171 millions, down from $1.3 billion. Another $218 million was earmarked for maintenance.

Trump stated on July 1, that he plans to fill up the SPR when market conditions are favorable. Congress could theoretically allocate additional funds for oil purchases.

Does the United States need to replenish its enormous oil reserves? Answer: Probably not, considering the dramatic changes that the energy sector in the United States has experienced over the past few years.

NET EXPORTER

SPR was created in 1975 by President Gerald Ford to address supply disruptions as a response to the Arab oil embargo imposed by members of the Organization of Petroleum Exporting Countries on Western governments that supported Israel during the Yom Kippur War in 1973. The oil embargo imposed by Arab members of the Organization of Petroleum Exporting Countries on Western governments supporting Israel in 1973 Yom Kippur War led to severe fuel shortages, and an increase in oil prices that quadrupled.

The SPR was created in 1974 at the same time as the International Energy Agency, which had the goal of coordinating the energy security of Western governments, including by implementing a mechanism of collective action to respond to disruptions of supply.

The IEA requires that member states including the United States hold strategic reserves of at least 90 days' worth of net crude oil imports and refined products. However, countries who export more oil than import are exempt from this requirement.

In October 2019, the United States became the net exporter for crude oil and refined products, for the first since 1973.

This historical shift was largely due to the rapid increase in shale drilling in the U.S. which has made it the top oil producing country in the world in 2018. According to IEA data, the U.S. is expected to produce 13.5 million barrels of crude oil per day in 2018. This will be a new record.

According to the IEA, U.S. crude oil and refined products such as gasoline, diesel and other fuels will reach new records in 2024. They are expected to be 4.1 million bpd apiece and 6.6 millions bpd respectively. The U.S. exports of fuels and crude oil will be 2.3 million barrels per day in 2024.

What is 'Right to the Top'?

It is unlikely that the United States will completely abandon its emergency energy reserves even though it is no longer required as a net oil exporter to keep reserves.

The country imports significant amounts of crude oil primarily due to its quality standards. Last year, it imported 6.6 millions bpd of crude oil. Over half came from Canada. The U.S. imports refined products to areas with limited refinery capacity.

The SPR website states that the SPR is a "significant deterrent against oil import cuts and a key instrument in foreign policy" because of its size. The SPR could also be seen by some as a symbol of American pride and power, as part of Trump’s vision for American energy dominance.

The country's abundant domestic crude production, extensive refinery operations, and decreasing reliance on imported fuel mean that Trump and any future administrations do not need to rush to fill up emergency storage.

Global energy markets have been dominated by the scale of buying-and-selling involved in managing these huge storage facilities. Reduced size of America's storage facilities could have a major impact on oil price.

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(source: Reuters)