The Harmful Effects of Rising Energy Prices on the Logistics Industry

Can the Strategic Petroleum Reserve Provide Relief from Skyrocketing Fuel Prices?

On March 31, 2022, President Biden announced an unprecedented release of oil from the Strategic Petroleum Reserve (SPR). His order of the release of 1 million barrels of oil per day for 6 months came in response to skyrocketing oil prices. That comes to an astounding 180 million barrels of oil.

Biden’s stated aim for this extraordinary measure is to stem the spiraling rise in energy prices. Biden said, “The bottom line is if we want lower gas prices we need to have more oil supply right now.”

Energy prices are contributing to inflation with disruptive impacts on supply chains. Given the continuing issues from pandemic-induced supply chain disruptions, rising and uncontrolled fuel prices could strangle a return to normalcy.

Background of the Strategic Petroleum Reserve

Congress created the SPR in 1982. That helped to counter a severe disruption in the global oil supply. According to the Department of Energy (DOE), the SPR is a buffer against supply disruptions for over six months.

The maximum removal rate is 4.4 million barrels per day, so the proposed withdrawal rate is well below the high end. While the SPR is a safety net, it also has an important role to play in emergency response policies.

The SPR is stored in strategic locations around the country. The current proposal is to hold 30 million barrels of product stocks. That comes to less than 3 days of consumption. The SPR can be a potent insurance policy, but it can irritate energy end-users and traders of crude oil. OPEC already considered delaying its promised output increases when the U.S. and its allies released oil from their reserves late last year..

The SPR holds 577.5 million barrels of light crude oil. Refineries can then produce gasoline, diesel, heating oil, jet fuel, and other products. Despite the size of the SPR, the maximum capacity was never reached.

In December 2009, the SPR was at 727 million barrels. The SPR has never been at its full capacity, but it is now a good idea to store enough to meet the needs of the U.S. and the world.

Looking at History: When and Why the SPR Was Previously Used

The SPR has been in place for 45 years, and it has already served its purpose. Its size has fluctuated over the years due to emergencies, including war and hurricanes. More recently, supply chain disruptions have affected fuel prices.

In the past, U.S. presidents have used the SPR three times in response to disruptive external events. Let’s look at the history of its use.

  1. On January 16, 1991, President George H. W. Bush ordered the release of 17.3 million barrels of oil as a result of the Gulf War.
  2. On September 1, 2005, President George W. Bush ordered the release of 20.0 million barrels of oil over 30 days. He directed the release of oil until September 30, 2005, in response to Hurricane Katrina.
  3. On June 23, 2011, President Obama released 30.6 million barrels of oil for three months. He withdrew reserves from the SPR due to oil production disruptions in the Middle East.

If they are ever needed, the SPR is a good option for them. Keeping the SPR at full capacity is crucial for the U.S.

Case in point: using the SPR can also provide relief in times of supply disruptions. The U.S. refinery sector cannot maintain a full slate of products during a supply interruption. So, it must maintain an inventory of some of the most critical petroleum products.

The SPR could also offer a unique opportunity for the U.S. to increase its security of supply. A strong oil production and refining industry are the primary drivers of high prices, and a robust reserve of such products can help ease the situation.

The U.S. sells SPR stocks to private companies as a loan to their companies in times of disasters. The government has the mandate to make its oil available to all sectors of the economy.

It is essential to have adequate reserves in times of disaster. Thus, the SPR is a potent source of energy for contingencies.

Tapping SPR Stocks Does Not Come Without Unexpected Costs 

Before leveraging the SPR, the government must state that a shortage of any fuel or oil product in any given month may cause a crisis. This policy may help protect consumers, but it is not sufficient.

Releasing SPR stocks has costs and benefits. In assessing the costs and benefits, we’ll look at macro- and micro-effects.

The obvious benefit is short-term relief in prices, according to Stewart Glickman, oil analyst at CFRA. That said, he compares these benefits to “taking some Advil for a headache.”

By that, he means Biden’s order does not address the root cause of rising prices/inflation. He believes, “… the root cause of the headache is probably still going to be there after the medicine wears off”.

Let’s break down the advantages and disadvantages.

Relief and Adverse Effects on the Logistics Industry

Not Addressing the Root Cause. Releasing 180 million barrels of oil from the SPR seems like a massive move. On its face, solving the problem of rising oil prices seems realistic. In terms of providing relief, Biden’s order will likely stem, but not stop, the rise of oil prices. One drawback of this measure is that this fails to address production.

Today’s production comes to 11.3 million barrels per day compared to 11.1 million bpd last year. This appears balanced, but it fails to consider demand (see below).

Without increasing production over the long-term, it seems Glickman’s critique is spot-on.

Over the long-term, prices will continue to rise, affecting both wholesale and retail goods’ prices. Rising transportation costs will contribute to the rise in consumer goods. Another harmful effect is that high fuel prices may curtail demand for some goods and lead to shortages of others.

Increasing Demand. Demand will increase before it decreases. The government should also consider the implications of increased demand. Flooding the market with SPR reserves will artificially support demand. The SPR exists to provide certainty to the American people in times of shortage.

There are practical concerns with implementing the SPR. As the focus appears to be on the short-term (in the run-up to the mid-term elections), disregarding the long-term effects could lead to greater price instability.

Depleting Inventories. Because tapping reserves depletes inventories, this measure is only a short-term fix. This gets at U.S. production levels and capabilities. Biden previously released stocks from the SPR that had a negligible effect on oil prices.

If this measure has an incidental effect, the withdrawal could be harmful in the long-run. After six months of drawing stocks down, the SPR’s inventory would be at 388 million barrels. That represents the lowest amount since 1984.

As the name implies, SPR is a strategic tool/resource. But this directive seems to fall short or addressing the strategic aspect of rising energy prices. If that’s true, it would impair our national strategy, weakening U.S.’ ability to influence energy markets with our allies and OPEC.

Moreover, this would also affect industry and consumers alike as they vie for scarce supplies of oil and gas. Increased competition for scarce resources would further drive prices higher. That could lead to more inflation or stagflation.

Too Big to Solve Alone. To Glickman’s point, rising and uncontrollable energy prices are an international issue. So, fixing this problem requires the cooperation of many stakeholders.

Thus, Biden has asked allies to release their strategic reserves as well. According to Reuters, European countries’ reserves are at their lowest levels since 2005. Whether this is successful remains open to question. Given the changing dynamic of the geo-political order, full cooperation may be elusive.

The U.S. cannot resolve this issue in a vacuum. It will take an internationally coordinated effort to get meaningful results.

There are at least four major reasons leveraging the SPR alone is inadvisable. As a single remedy, it falls short of addressing the root cause. Combined with other measures, this could prove to be effective. The most obvious measure would be addressing the production side of this issue. Sen. Daines, R, Mt. characterized this as nothing more than “a Band-Aid, on a bullet.”

Regardless, any negative effects in the short-term might benefit from the Daines’ band-aid. The long-term, on the other hand, is when the band-aid comes off and reveals an unhealed wound.

What Next Steps You Should Take

The effects of releasing stocks from the SPR are not certain. Since Biden’s announcement, oil prices have dropped two percent. That’s a weak response as European countries have not released the size of their releases.

In the short-run, oil prices might decline to benefit industry and consumers alike. In a best-case scenario, we can expect some short-term relief.

In the long-run, the effects are murkier. Once the drawdown terminates, we will likely see upward pressure on prices. That would reflect the failure to address production. It appears this historic release of SPR stocks won’t provide long-term relief.

This conclusion suggests an unstable price environment. And don’t forget the war, whose outcome remains uncertain. Planning with those thoughts in mind should help guide your next steps.

If you’re not sure what to do next, that’s understandable. You don’t have to decide alone. You have options.

Contact American Global Logistics to discuss your short-and long-term challenges. Partnering with an experienced 3PL could be the answer you’re looking for.

Contact us today. We’re standing by to help you return to normalcy in the face of rising fuel prices. We have proven performance in up- and down-markets.