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Does the government still need to hoard crude oil?

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The U.S. government is getting ready to sell millions and millions of barrels of crude oil.

On Wednesday, the House voted to pass a budget deal to increase the country’s borrowing limit. As part of the plan to raise funding, the budget includes a provision to sell 58 million barrels of oil from the Strategic Petroleum Reserve between 2018 and 2025, to go into the general fund of the Treasury.

Additionally, to fund the Energy Security and Infrastructure Modernization Fund, the government plans to sell another $2 billion in reserves between 2017 and 2020.

The Strategic Petroleum Reserve, or SPR, was created as an emergency stockpile after the U.S. experienced economic strain from an oil embargo from 1973 to 1974. Since 1977, the SPR has grown from 2.6 million barrels to 695 million barrels in July 2015.

But Robert McNally, energy market consultant and president of The Rapidan Group, said using the SPR to raise government funds could turn into a slippery slope.

“Washington has a history of zigging when they should zag when it comes to oil,” he said Wednesday in a phone interview with CNBC.

McNally says that in addition to the sales already planned, the government has been eyeing the SPR to fund another government project — highway funding and transportation.

“If this turns into a feeding frenzy and we sell down our entire reserve, that’s where it could become a market issue,” McNally said. “We better be sure we’ll be at peace, and I wouldn’t make that bet.”

However, the current market remained unconcerned as crude oil jumped 6 percent on Wednesday.

The big story of 2015, however, is that prices for the commodity have tumbled as U.S. crude production has soared, even as global demand has not nearly kept pace. According to the most recent data from the U.S. Energy Information Administration, stockpiles of crude increased for the fifth-straight week on Oct. 23 to a total of 480 million barrels.

Despite low oil prices and a continued supply glut, McNally said the industry can still turn very quickly.

“It’s not a huge game changer right away,” McNally said. “But if we assume that the oil industry is tight and disrupted, and we realize the oil industry has dealt enormous surprises, then that will look like folly.”

On the other hand, the global head of energy analysis at Oil Price Information Service, Tom Kloza, says the government should have started selling years ago.

“The SPR is, without question, an anachronism,” Kloza said in a phone interview Wednesday.

According to Kloza, the SPR has become irrelevant for several reasons. It has dramatically decreased in value compared to several years ago, and crude oil markets have become exponentially larger. Even putting U.S. production aside, an oil embargo from overseas would be less worrisome today than in 1973, Kloza pointed out, since most oil imports come from Canada.

The barrels set to be sold are “hardly even a blip on the screen,” he said. “Down the road it will have an impact [on oil prices], but not as much as other macro elements.”

Energy economist Philip Verleger said that although he once called for increasing U.S. reserves, the need for the SPR has now disappeared.

“We were a net importer, and we were exposed. That situation has changed. The U.S. has a long history of disposing of strategic stocks,” Verleger said, including supplies of horses, tin and helium. “This is just part of the evolution of the economy.”

www.cnbc.com

 

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