Energy debate: Keeping oil reserve ‘strategic’

NEW YORK: Even as a domestic energy boom shrinks US dependence on imported crude to the lowest in decades, few question the need to maintain a government-controlled reserve of oil, a vital tool to guard against damaging global price spikes.
Beyond its existence, almost everything is up for debate: the size, location, composition and usage of the 696-million-barrel Strategic Petroleum Reserve are under discussion among oil industry advisers and administration officials.
Michelle Patron, who became senior energy adviser for President Barack Obama this year, had previously advocated re-positioning the reserve to allow for exporting crude in the event of a global disruption. Such exports are now effectively prohibited by the 1975 US law that created the SPR, but Patron argued for the change in a book published before she took office.
Others suggest the reserve should include more refined fuels, and perhaps be shifted to the East Coast, a region still scarred by the gasoline shortages that emerged after Superstorm Sandy.
Some say the reserve’s make-up needs to be adjusted to reduce the over one-third share of light-sweet crude, the sort now saturating the Gulf Coast region due to unyielding production growth from the Eagle Ford shale.
With overall US domestic oil stockpiles swelling to their highest level ever relative to imports, the SPR joins a list of energy policy questions arising from the shale oil revolution. More pressing issues include the safety of hydraulic fracturing, the future of the Keystone oil pipeline and the whether surplus crude should be exported.
“There are lots of issues in the energy space that... deserve some new analysis and examination in the context of what is now an energy world that looks nothing like the 1970s,” Energy Secretary Ernest Moniz said at the Platts Global Energy Outlook Forum in New York recently.
He referred specifically to the SPR as one such example.
“I think there certainly is a need for a reserve,” he said, but added that there are issues related to “how the reserve is managed” that may need to be reexamined.
US oil imports are forecast to shrink to a low of just 25 percent of consumption by 2016, from more than 60 percent at a peak in 2005.
But because oil prices are set globally, the increase in supply will do little to reduce America’s exposure to world oil spikes.
The White House, as a rule, does not discuss SPR policy. A senior administration official, when asked about potential changes in oil reserve policy, said there were many positive ramifications of the surge in domestic oil and gas production, but said he had no specific direction on the SPR to share.
The SPR is a child of the 1973 Arab oil embargo that shocked US motorists with empty fuel pumps and high prices. The Energy Policy and Conservation Act of 1975 required the US to have enough oil on hand to replace 90 days worth of imports. The reserve should be used only in the event of a “severe energy supply interruption.”
That orthodox interpretation has given way toward the idea of using the SPR to temper damaging price spikes, experts say, a shift most evident under Obama, who led the campaign to release global reserves in 2011.
“The days when we were principally concerned with a physical loss of imports are very far behind us,” said Richard Newell, a former administrator of the US Energy Information Administration, now a professor at Duke University.
“The way to think about the SPR and its use has much more to do with protecting the economy from the economic dislocation caused by significant global oil price shocks.”
Meanwhile, in recent years US oil consumption has fallen and shale-led domestic output has risen to 25-year high, dramatically reducing US dependence on imports. The volume of oil in the SPR has remained essentially unchanged.
As of September, the US had some 210 days worth of oil stockpiled in both private and government-controlled reserves, according to calculations by the International Energy Agency, the global watchdog that coordinates reserve policy. Four years ago, stockpiles were equal to 140 days of imports.
The SPR alone holds 93 days’ worth, according to US data based on 2012 imports, down from highs of 118 days in 1985 — but still more than all but five other IEA members. In Europe, where many countries rely on commercial stocks, publicly held inventories total only 54 days of net imports, IEA data show.
The Gulf Coast region, where half of all US refiners and all four vast salt caverns that hold the US SPR are located, is now saturated with light, low-sulfur “sweet” crude oil originating in the Texas Eagle Ford and North Dakota Bakken fields. Pipelines that were once geared toward shipping imported crude to the Midwest are instead pumping oil south from Canada.
As a result, imports of that variety are shrinking rapidly, and may cease almost entirely by the end of next year. That has raised questions about retaining the 262 million barrels of sweet crude in those caverns, experts say.
“Over time the balance should shift as our refinery mix changes,” says David Goldwyn, who headed international energy affairs at the State Department until early 2011.
In an era of tight budgets, liquidating those barrels, or swapping for cheaper, heavier crudes that are still being imported from Saudi Arabia and elsewhere, may have appeal.
“The US could sell 250 million barrels of that for about $25 billion without jeopardizing energy security,” said Ed Morse, managing director of commodity research at Citi.
Last year’s Superstorm Sandy also showed that emergency crude stored in Gulf caverns is not very helpful in getting motor fuel to a major coastal consuming region facing a logistical supply crisis.
That has revived interest in the idea of a refined fuel reserve first raised after Hurricanes Katrina and Rita in 2005. In 2011, Sen. Edward Markey put forward a bill that would have swapped 30 million barrels of SPR crude for refined fuels instead — an idea that remains popular, experts say.
Bush administration officials considered building capacity to store refined fuels in a new Mississippi cavern that would have expanded the SPR’s total capacity, says John Shages, who ran the SPR program at the Department of Energy until 2007 and is now a private consultant. The expansion never happened.
Unlike crude, oil products must generally be stored in above-ground tanks and recycled frequently to avoid spoiling, a costly process likely out-sourced to commercial companies.
SPR crude stored in the salt caverns costs just over 20 cents per barrel per year to maintain; by comparison the small Northeast Home Heating Oil Reserve cost some $4.80 a barrel, according to a Department of Energy estimate from 2009.
Patron, a former private oil analyst who now works at the White House’s National Security Council, has advocated coordination on reserves with China and increasing cooperation with countries in the West.
In a 2013 book “Energy and Security: Strategies for a World in Transition,” Patron and Goldwyn recommended exporting SPR oil and weighing whether some emergency reserves should be relocated to the high-demand West and East Coasts to get oil to market more quickly when needed. Failure to act could trap oil in the US and make prices more volatile, she wrote.
The White House declined a request for an interview with Patron.
For the moment, exports of domestic crude to countries other than Canada is effectively off-limits, although that decades-old policy is always coming under renewed scrutiny.