Treasury Secretary Steven Mnuchin on Thursday backed a plan to spend as much as $20 billion to buy crude oil to prop up U.S. oil companies and fill the nation’s Strategic Petroleum Reserve.
The Strategic Petroleum Reserve, held in salt caverns in four locations near the Gulf of Mexico, can store as much as 727 million barrels. The Energy Department said filling it would require the purchase of 77 million barrels. At today’s price of roughly $24 a barrel, that works out to $1.85 billion.
The purchases would help U.S. firms indirectly by driving up oil prices, if only modestly. Scott Sheffield, chief executive of Pioneer Natural Resources, said in an email last week that buying crude for the reserve “is a short-term fix. Keeps oil from going into the $20s for a few weeks.”
“Great time for government to buy oil since it’s so cheap,” Sheffield said.
But analysts said the purchases would be insufficient to turn around an oil market dealing with a downturn in consumption because of the coronavirus pandemic and a surge in supplies resulting from a price war between Saudi Arabia and Russia.
Fitch Ratings, which evaluates corporate debt, cut its short- and medium-term oil and natural gas price assumptions in expectation of a large market oversupply in 2020. “We assume the market will gradually rebalance in the next two to three years, but we have also trimmed our long-term assumptions to reflect continued efficiency gains, low break-even oil prices of many greenfield projects and a potential for demand to slow due to energy transition,” the firm said in a statement.
Mnuchin’s remarks were made on Fox Business Network’s show anchored by Maria Bartiromo. He said, “I haven’t heard [of] a worse time” for the oil market.
“There is no question that there is both supply problems as well as this demand problem,” he said. “I’m going to tell the president that my recommendation is that he goes to Congress and asks for a lot more money to fill the strategic reserve at $22 for [West Texas Intermediate] crude. We should be filling up the reserve for the next 10 years.”
Mnuchin also said, “Let’s go out and buy $10 or $20 billion of oil, fill up the reserves.” He said that the “oil market has nothing to do with the coronavirus … other than there’s just a lot less demand at this point.”
On Thursday, the Energy Department announced it would seek to buy 30 million barrels.
At the lower end of the range, the government’s purchases of crude oil will leave many domestic drillers in tough straits. Many oil companies are seeking to refinance their debts before loans come due later this year.
“Despite the renewed enthusiasm, we find that the economic packages that central banks and governments are bringing forward will be insufficient to keep demand from falling sharply,” Paola Rodriguez-Masiu, oil market analyst at the Norwegian firm Rystad Energy, said in an email. “Our current balances suggest that prices will have to drop further, likely to $10 per barrel, or even below in the worst case.”
Environmentalists condemned Mnuchin’s proposal.
“The Trump administration’s proposal to spend $20 billion for their oil industry buddies is as tone deaf as it is morally bankrupt,” said Brett Hartl, government affairs director at the Center for Biological Diversity. “People are suffering and dying, but all Trump and Mnuchin care about is keeping the fossil fuel industry rich while our planet’s climate unravels and a global pandemic rages.”
But President Trump, speaking Thursday, defended aid to corporations. “Sometimes for the worker to benefit you have to go through the company. … If the company goes out of business through no fault of their own,” the workers can’t get a check, he said.
Republican members of the House Energy and Commerce Committee issued a statement on Twitter on Thursday, saying, “American energy independence is vital for our national security. We are stronger & safer because of it.”