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Brace for impact: The U.S. is running out of a cushion reserved for oil shocks.

The U.S. Energy Information Administration said Wednesday that the Strategic Petroleum Reserve declined by nearly 7 million barrels in the week ended Sept. 16, leaving it at roughly 427 million barrels—the lowest since 1984. For the first time since 1983, the SPR now holds less oil than commercial storage.

The U.S. has been drawing from the reserve at a rapid pace this year. The Energy Department on Monday said it has released roughly 155 million barrels of crude oil since President Biden authorized a draw of up to 180 million barrels on March 31. That implies a draw of slightly less than 900,000 barrels a day, or nearly 1% of global oil demand. The DOE on Monday said it plans to sell up to 10 million barrels from the SPR in November, extending the SPR draw beyond the initial October target. That would leave only about 15 million barrels that could be sold under the emergency authorization.

[Blockierte Grafik: https://images.wsj.net/im-628405?width=600]

For Mr. Biden, who was looking to use the emergency authorization to lower pump prices, the move has been a near-term success, at least in the critical time leading up to the November midterm elections. Gasoline prices have declined steadily in the past three months and average $3.66 a gallon, down from a high of $5.03 in mid-June, according to GasBuddy.

Arguably, though, the release didn’t turn out to be necessary for energy security—the SPR’s stated purpose. The International Energy Agency initially thought Russia’s oil production would be cut by 3 million barrels a day after its invasion of Ukraine. Back then, there was at least a “perceived supply emergency” posed by Russia, said Bob McNally, president of the energy-consulting firm Rapidan Energy Group. That turned out to be a wild overestimate. As of August, Russia’s exports were down just 400,000 to 450,000 barrels a day from prewar levels, according to the latest IEA report. As Dan Pickering, chief investment officer at Pickering Energy Partners, puts it, “High prices are inconvenient. Lack of availability is a crisis.”

Depleted SPR levels leave the U.S. with fewer options in case of supply disruptions, which remain possible. To begin with, Russia’s oil exports will become a real wild card after Dec. 5, when the European Union’s import ban on Russian oil takes effect. By February 2023, the IEA expects Russia’s daily oil output to be 1.9 million barrels below preinvasion levels. While the Group of Seven nations agree on some form of price cap on Russian oil, what that mechanism will actually look like and how it will affect Russian supply are uncertain. On top of that, the Organization of the Petroleum Exporting Countries has repeatedly signaled that it will cut output if prices fall. It already did so—albeit in a symbolic way—earlier this month, pulling back 100,000 barrels a day. And then there are also demand-side risks in the form of a potential recession and further lockdowns in China.

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Subscribe Now With so many hazards just around the bend, the U.S. needs a fully functioning air bag. Alas, this one comes with diminished cushioning capacity. Though the president can technically authorize more SPR drawdowns, there will be a limit, given that the IEA has a minimum stockholding obligation for participating members. RBC Capital Markets previously pegged that number for the U.S. at roughly 315 million barrels. And the DOE will eventually have to replenish the SPR by the same amount that it drew this year, increasing future oil demand. A DOE spokesperson said replenishment won’t likely occur until September 2023.
Besides the short-term political gain, the SPR draw could turn out to have been a losing strategy however the supply-demand balance shakes out. If there is an actual oil shock and not enough oil in the SPR to cushion it, it would be a painful lesson on why the reserve exists in the first place. If there is no such shock, this year’s SPR draw might have set a precedent for politicized use in the future.