Will the strategic oil reserves save us?

A stray acquaintance recently cornered us with oil market questions because they’re now gambling investing their life savings in the sector, so here’s what we told them:

What’s this about tapping our strategic petroleum reserve (SPR)?

With Iran squeezing the Strait of Hormuz (aka 20% of global oil exports), prices are soaring and governments are panicking, so the 32 countries in the Paris-based International Energy Agency (IEA) have agreed to release 400 million barrels of oil from their strategic reserves — it’s the biggest injection in the organisation’s history.

Strategic oil reserves, you say? 

The IEA itself was a product of the 1973 oil crisis, when Middle Eastern oil exporters refused to supply anyone that backed Israel during the Yom Kippur War (aka the surprise Egypt/Syria-led attack on Israel to reclaim territories they lost in 1967).

A core IEA membership requirement has long been to hold strategic oil reserves: emergency supplies equivalent to at least 90 days of net oil imports. It can take different forms, whether refineries, terminals, or just huge tanks in random places. Two fun facts:

• The US reserves are in salt caverns along the Texas and Louisiana coasts, and

• New Zealand stores some of its reserves in Italy! That sounds impractical, but the point is often not to use the reserves yourself, but to meet your collective duty, and it’s cheaper for NZ to do that via Italy than build tanks at home.

Anyway, IEA members theoretically coordinate the timing and size of any release to smooth out oil shocks and help stabilise their economies and societies.

How much oil are we talking?

IEA members now store ~1.2 billion barrels, with another 600 million barrels of private oil held under government obligation.

So this historic 400 million barrel release sounds big until you consider the but: we mostly don’t know exactly when, or at what rate — it’s like getting told your salary will be $1,000. Per year? Illegal. Per hour? Sign us up.

We do, however, know the two biggest moves:

• The US is releasing 172M barrels over 120 days. That’s almost half its reserve, so a big deal in one sense, but at 1.4 million barrels per day (realistically slower), we’re talking not even 10% of the Hormuz hit, and maybe 1% of global daily consumption. Yet releasing directly into the US, it’ll more than cover the direct US exposure to Hormuz (~0.5M barrels), which is presumably the aim. Meanwhile…

• Japan is releasing 80M barrels (17% of its total) to begin as early as this Monday, though Tokyo hasn’t clarified its daily rate. The country is highly Hormuz-dependent, and will realistically prioritise rapid relief for its own key refineries.

What about China?

It’s not a full IEA member, though has been secretly amassing its own vast reserves for years, and is seemingly the one buyer still getting Hormuz oil thanks to its regime friends.

And sure, world oil markets clearly benefit from the second-largest economy not running out of oil, but China’s broader record is mixed: after Putin invaded Ukraine, China agreed to join the US in tapping its own reserves — but not only did that not happen, China actually ended up boosting its own reserves, and even bought a million barrels from the US release! The US ended up banning SPR sales to China as a result.

So will all this lower oil prices?

Any extra oil inevitably helps with market tightness, but keep three more things in mind.

First, there are logistical constraints — in addition to America’s traditional daily SPR ceiling, it takes 13 days for that US crude to actually hit the markets.

Second, markets are people, and people are emotional — if your Caribbean cruise gets a little rocky and the crew starts readying the life rafts, are you… relieved? What about when the crew reveals they’re resorting to the biggest life rafts in history…?

And third, will Hormuz be back to full flow by the time that 120-day US release finishes? Or does the US have to start replenishing its reserves at $100+ per barrel?

Maybe that’s all why the day of the IEA announcement, oil prices actually closed up 5%.