Oil Lobbyists Call on Trump to Buy the Dip for Strategic Reserve

Source: By Ari Natter, Bloomberg • Posted: Wednesday, March 11, 2020

America’s emergency oil reserves have been used in the past to provide relief from price spikes caused by wars or hurricanes. Now, they could be deployed to help oil drillers reeling from the worst market rout in nearly 30 years.

Under a novel plan that’s been pitched by some industry lobbyists, the Trump administration would take advantage of the recent collapse in prices to snap up barrels on the cheap, according to three people familiar with the matter who asked for anonymity to detail private deliberations.

The idea of replenishing the Strategic Petroleum Reserve — which comes as the Trump administration considers a broad coronavirus relief package — would enable the government to take at least 78 million barrels off the world market and provide a modest bump in prices.

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Trump administration officials are seriously considering a separate idea to help some oil companies by lowering royalty rates for oil and natural gas extracted from federal land, according to two people familiar with the matter. Those rates are currently at 12.5% — a rate established in 1920. The size and duration of the reduction being considered by the administration was not immediately clear.

It could be bitterly opposed in Congress, where Democrats and even some Republicans have criticized current royalty rates as too low, since they are often below what states and private landholders charge. Last month, Senator Chuck Grassley, a Republican from Iowa, joined Democratic Senator Tom Udall of New Mexico in advancing legislation to hike royalties and other payments for oil companies plumbing federal land.

Related: Saudis Escalate Price War With Huge Output Hike, Russia Follows

Earlier: U.S. Suspends Sale From Strategic Oil Reserve on Price Rout

The industry is also pitching the idea of low interest loans to aid producers.

It’s not clear administration officials are giving significant weight to the idea of replenishing the oil reserve, which would be a dramatic shift in the way the government has long relied on the facility. Oil has generally been released from the reserve in times of emergencies rather than added to it to calm turmoil.

But it has at least been advanced by some industry representatives and is being discussed, according to the people.

Congress has increasingly turned to the SPR as a kind of piggy bank, using sales of stockpiled crude to fund unrelated programs, including the 2017 tax cut. In that sense, buying crude at ultra-low prices could be a savvy investment strategy, enabling the U.S. to turn a profit the next time lawmakers order a sale.

Earlier on Tuesday, the administration suspended a planned sale of 12 million barrels from the reserve due to take place this month, citing current market conditions.

The oil reserve, set up after the Arab oil embargo in the 1970s, has previously been tapped in response to emergencies, such as Hurricane Katrina. While the oil reserve has a storage capacity of 713.5 million barrels, it currently comprises 635 million barrels buried in underground salt caverns along the U.S. Gulf Coast.

The Energy Department — which is responsible for managing the reserves on a day-to-day basis — didn’t respond to a request for comment.