US oil: Why can’t the country pump the reserves?

Image copyright Reuters Image caption President Trump believes US production is producing more oil than needed

Critics have called for the US to use its vast oil reserves to offset the geopolitical tensions caused by rising oil prices.

The largest reserve in the world is said to be between 5bn and 7bn barrels in total. That’s worth around $180bn at today’s prices.

US President Donald Trump on Wednesday said that production was “higher than ever before”, adding that the country “has an abundant supply of very high quality, inexpensive oil”.

His comments came as oil prices rose to their highest in three years.

Explaining the rise, Jerry Elsasser, president of the International Association of Oil and Gas Producers told the BBC that demand was strong around the world and that supply was not enough to cover demand.

He said that’s why oil prices are going up and that the US should tap into its reserves to meet any shortfall in supply.

“At some point, you have to give the market a little relief and that’s the place where it’s going to come from,” he said.

Mr Elsasser pointed out that other countries have strategic reserves.

What are the reserves and who controls them?

The US holds the largest oil reserves in the world, which can be tapped into at any time, they are located in the Strategic Petroleum Reserve (SPR)

The SPR is a stockpile of oil stored in ice-filled underground caverns.

It can be used as a last resort during times of international economic crisis, war, natural disaster or a proliferation of thefts of oil

Before oil prices reached $60 a barrel earlier this week, President Trump had suggested that US production was more than enough to meet domestic demand, on which oil prices are mostly based.

However, as soon as oil prices soared, a chorus of voices have grown calling for the US to release more oil to meet demand

The president previously proposed selling $5bn in oil from the SPR but his administration could struggle to find the funds to pay for the increase.

In 2010 the US was selling 745,000 barrels of oil per day from the SPR. But around the same time, the plan to draw down the SPR, a move that critics said would release reserves when the oil price was low, was blocked by President Obama.

While there’s certainly no talk of a significant increase in the scale of the sale, there are big stakes involved.

The US, which is not a member of the Organisation of the Petroleum Exporting Countries (Opec), is a net exporter of oil and is therefore not part of Opec.

The United States government’s office of the energy secretary said if it decided to tap into its oil reserves, it would leave options open “to adjust and ramp up or down this tap depending on market conditions”.

Rising fuel prices: How high could they go?

That said, there are few economists who think tapping into the reserves would be effective

“Crude oil imports have averaged 14.7 million barrels per day [mtd] from all sources during the first 10 months of 2018 and could exceed 15.2 mbd in November,” said Sujan Hajee, an analyst at London’s City Index.

And Morgan Stanley analysts say they are unsure that “there is any advantage for the US to release a large amount of oil in the form of emergency releases” because they could ultimately have a “neutral impact on oil prices”.

Along with other analysts, this means the US could be within its rights to decide not to release oil from the SPR in the near term.

But Professor Forrest Mitchell, director of the strategic planning and policy centre at Oxford University, says that there’s potential for President Trump to “stand his ground” by tapering his support for US oil producers if it comes at the cost of the country’s strategic reserve.

“It’s not the time to be unwilling to tap the reserve. If you don’t have the oil, you can’t pump it,” he said.

At the end of 2018 the SPR had capacity to store 75.8m barrels of oil

The International Energy Agency estimates that oil stockpiles fell by a cumulative 8.4m barrels in the first seven months of 2018 – a 1.3m barrel decline.

In its monthly oil market report, it said the recent decline “probably reflected a small increase in the US Strategic Petroleum Reserve since early September, as well as small changes in other countries’ inventories”.

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