by Bill O’Grady | PDF
(NB: Due to the Thanksgiving holiday, the next report will be published on December 6.)
During the 1970s, the world economy suffered through two oil shocks. The first, in 1973, was caused by the Yom Kippur War. The U.S. supported Israel, and the Arab states retaliated with an oil embargo. In 1979-80, the Iranian Revolution and the Iran-Iraq War disrupted oil flows from the Middle East, leading to another oil spike. Due to these events, the OECD, through the auspices of the International Energy Agency (IEA), created a member Strategic Petroleum Reserve (SPR) system. This system was designed to be an emergency backup supply of oil and oil products that could be shared to prevent panic buying of oil and to ensure that the economic damage that was suffered due to the 1973 and 1979 oil shocks would never be repeated.
However, as the world moves away from fossil fuels, these SPRs could be holding inventory that will no longer be needed. Simply put, governments that hold reserves could find themselves with worthless inventory. Merchants often find themselves in this situation; a seasonal item remains on the shelf when a season is winding down. A decision has to be made—cut the price to sell out the item before the season ends and lose margin or hold the good and hope that buying emerges to maintain margin. With the SPRs, governments may face the problem of what to do with this oil in the face of falling demand. The decisions that these governments make will affect oil prices, consumers, and producers in the coming years.
We will begin our analysis with a history of the SPRs, explaining how they work, who has them, and how much oil they contain. From there, we will discuss the difference between a buffer stock and a reserve. Next, we will examine the role of climate change policy on SPR management. How OPEC+ manages its production policy in light of SPR releases will follow. We will close with market ramifications.