US House passes bill to ban US strategic oil reserve sales to China; Senate path unclear

The US House of Representatives advanced legislation Jan. 12 aimed at preventing crude oil from the US Strategic Petroleum Reserve from ending up in China, sending the measure to the Senate where odds of passage are murkier.

Currently, the US Department of Energy is obligated by law to accept the highest bids at SPR auctions, with exceptions to decline to sell crude only made for entities sanctioned by US authorities. As such, nearly 1 million barrels from the SPR were awarded last year to Unipec America, a subsidiary of the Chinese state-owned oil company Sinopec, drawing intense criticism from Republicans.

The bill (H.R. 22), passed in a bipartisan 331-97 vote, would bar the DOE from selling oil from the SPR to entities under the ownership, control or influence of the Chinese Communist Party, and adds a condition to all SPR sales that oil may not be exported to China.

"China now likely controls the world's largest government-controlled stockpile of oil, with almost a billion barrels, at the expense of American taxpayers and our energy security," House Energy and Commerce Committee Chair Cathy McMorris Rodgers, Republican-Washington, said on the House floor ahead of the vote on H.R. 22. "America's SPR is meant for true energy supply disruptions, like those caused by hurricanes and natural disasters, not to help China."

'Political theater'

Republicans have accused the Biden administration of draining the country's strategic oil reserves for political purposes following an unprecedented 180-million-barrel release over several months to combat energy price hikes spurred by Russia's invasion of Ukraine.

Crude volumes at the SPR stood at 371.58 million barrels the week ended Jan. 6, according to the Energy Information Administration, the lowest level since December 1983.

Efforts to replenish the SPR have yet to pan out. The DOE earlier in the month declined to accept any offers it received as part of a solicitation to repurchase up to 3 million barrels of sour crude, pointing to high prices as a factor in scuttling the first test of its SPR refill plan.

Though President Joe Biden in November satisfied his historic commitment to release 180 million barrels, he has signaled further releases from the SPR are possible as his administration considers options for stabilizing global oil markets and addressing pain at the pump domestically.

But at present the only SPR releases scheduled through September 2027 are 26 million barrels of congressionally mandated sales in fiscal 2023.

"This is a relative drop in the bucket when considering overall export volumes from the US," Paul Sheldon, chief geopolitical advisor at S&P Global Commodity Insights, said. "So at this point, I view the debate to be more political theater than a market moving event, regardless of the fate of the bill."

Senate prospects

The politicization of the SPR is expected to remain a central focus of House Republicans, according to Height Capital Markets' Benjamin Salisbury, with plans already underway to take up a measure banning non-emergency SPR drawdowns unless a plan is published to increase energy production on federal lands.

But Salisbury asserted in a research note that "legislative fixes are challenging, given that the emergency nature of the reserve requires a degree of executive discretion."

"We expect House Republican efforts early in the year to focus on messaging bills highlighting the differences between the parties," Salisbury said. "But to get legislation into law will require tough compromises with the Democrat-controlled Senate, which would typically wait until the summer at best, in our experience."

Analysts at Rapidan Energy Group were firm that "Senate Democrats will kill" the matter tying SPR releases to output on federal lands if it advances but saw opportunities for bipartisan support on the House-passed bill to end SPR sales to China.

Democrats in the House were split on the matter, with 113 voting in favor and 97 opposing the legislation, prompting Rodgers to flag it as "one of the most bipartisan votes on an energy bill in many years and multiple Congresses."

Narrow margins in the Senate could see the matter go either way, but Senate Energy and Natural Resources Committee Ranking Member John Barrasso, Republican-Wyoming, was eager to get moving, saying in a statement, "Now that the House has acted, the Senate should move to take up legislation to ban such sales."

Barrasso last July introduced a bill (S. 4651) to eliminate the sale and export of petroleum products from the SPR to countries that violate religious freedoms, including China, and bar SPR sales to state-owned entities that have purchased oil from sanctioned countries.

Partisan differences

Democrats blasted Republicans for making such a "minor step" their first energy priority after regaining control of the House, and applauded Biden's use of the SPR to lower prices at the pump, which have fallen an average $1.90/gal from their peak in June.

House Energy and Commerce Committee Ranking Member Frank Pallone, Democrat-New Jersey, agreed that US crude should not be exported to China but took issue with the bill's narrow focus, especially given that a bipartisan bill introduced last Congress was overlooked that would have also prevented SPR sales to Russia, North Korea and Iran.

"I want to stress that this bill could have been improved through bipartisan cooperation, regular order, and committee consideration," Pallone said on the House floor. "If Republicans hope to actually enact legislation, this is not a pathway to success."

He also criticized Republicans for opening the door to US crude oil exports to China when a Republican-led Congress in 2015 lifted a 40-year ban on US oil exports. He contended that 500,000 b/d of US crude made its way to China during the last year of the Trump administration.

"If Republicans were serious about addressing this issue, they would have brought forward a bill that banned all oil exports to China," Pallone said. "SPR barrels sold to Chinese firms represented only 2% of all the oil we sent to China last year. If we truly want to address China using American oil to build its reserves, let's actually take a serious look at that, rather than skirt around the issue because Republicans are scared of Big Oil's wrath."