Strategic Petroleum Reserve protects against supply disruptions that could cause price spike
This week’s budget deal between the White House and top lawmakers sells off a chunk of oil in the Strategic Petroleum Reserve (SPR) to raise general revenue for the government’s coffers and offset part of the budget deal’s cost.
Like many, I have argued that the SPR remains a critical energy security asset, notwithstanding the sharp drop in U.S. oil imports, and should not be used like an ATM. On balance, however, this budget deal bolsters U.S. energy security because it allows the Department of Energy to ensure that we can actually use the SPR, albeit a slightly smaller one, in the event of a true emergency.
For months, several leading members of the House and Senate have proposed selling crude oil from the Strategic Petroleum Reserve to pay for everything from highways to streamlined FDA drug approvals. Such efforts are misguided, even though the U.S. oil imports—the metric the International Energy Agency uses to set requirements for strategic stock levels—are declining.
Given how oil markets have changed since the SPR was set up 40 years ago, a supply disruption anywhere raises prices everywhere. The Strategic Petroleum Reserve is thus guarding against a supply interruption that causes U.S. prices to spike regardless of whether it actually cuts off feedstock to U.S. refineries.
The budget deal sells 58 million barrels of oil from the Reserve to raise around $5 billion of general revenue, ramping up from 5 million barrels per year in 2018 to 10 million by 2025. Given the evolving role of the Strategic Petroleum Reserve in the oil market, there are very good reasons to undertake analysis of whether and how it should be reformed. But the decision about whether to reduce (or increase) the size of the SPR should be based on a prudent analysis, not driven by an imperative to fill a budget hole, no matter how meritorious the intended use.
However, the budget deal also authorizes the Department of Energy (DOE) to spend up to $2 billion from additional SPR oil sales to ensure the SPR’s oil can reach the market in an emergency—and this is an urgent priority.
Since the purpose of the Strategic Petroleum Reserve today is effectively to temper price shocks from global supply disruptions, not just replace barrels to a particular refinery, it must be able to add to the total world supply.
That means when SPR crude is delivered to U.S. refineries, foreign oil that they would have otherwise imported must be freed up to be used elsewhere. Changes in U.S. production and infrastructure have made that harder to achieve for Midwest refineries, the historic destination for Strategic Petroleum Reserve crude. That oil now needs to move by water to east and west coast refineries.
Yet the U.S. oil boom has left very little unused capacity at Gulf Coast marine facilities, so if these docks were used in an emergency to load Strategic Petroleum Reserve crude, other commercial supply would just be displaced. Investments are needed in marine capacity to allow the SPR to add incremental barrels in an emergency, as confirmed by the DOE’s March 2014 SPR test sale.
This is an issue of oil flow, not oil stocks. The SPR’s intended drawdown rate is 4.4 million barrels per day, but today we cannot release anywhere close to that rate.
Addressing this Strategic Petroleum Reserve bottleneck is an even more pressing priority now that Saudi Arabia has opted to carry only a narrow margin of “spare capacity” to offset future global supply disruptions. For years, Saudi Arabia had been the only country producing significantly less oil than it economically could, enabling it to quickly bring new oil supply onto the market to compensate for losses elsewhere.
In a world with very narrow spare capacity providing a buffer to markets, any disruption to global supply can have an outsized impact on price. Although the collapse in oil prices over the past year has caused a swell in global inventories that offers some additional protection, it has also threatened the economies of major oil exporters to the degree that it has added significant geopolitical risk.
A recent Columbia University Center on Global Energy Policy study, for example, found significantly higher geopolitical risks in OPEC producer Venezuela following the oil price collapse. The Strategic Petroleum Reserve remains an important tool against these risks.
Ideally, Congress would authorize the $1.5-$2 billion DOE estimates is needed to modernize the SPR’s infrastructure, and separately analyze if and how the size of the Strategic Petroleum Reserve should be adjusted to respond to the new risks in oil markets.
But if selling a fraction of the SPR’s 694 million barrels is the only way to make sure the SPR can be accessed, it’s better than doing nothing. However much oil we have in the Strategic Petroleum Reserve, it won’t matter if we can’t actually use it in an emergency.
Jason Bordoff, a former energy adviser to President Obama, is professor of professional practice in international and public affairs and founding director of the Center on Global Energy Policy at Columbia University. This op-ed first appeared on The Hill on Oct 29, 2015.