Saturday, October 27, 2007

The Strategic Petroleum Reserve – A Review

Do you remember the Strategic Petroleum Reserve (SPR), that reserve of crude oil formed during the Carter administration? There is a lot of talk recently about the SPR, but ultimately it just isn’t that big. Text in bold is my emphasis. From the WSJ:

Lawmakers and oil analysts want to know why the Bush administration, at a time of sky-high oil prices, insists on pumping 50,000 barrels a day of some of the world's most desirable crude into salt caverns in Texas and Louisiana.

The question centers on the country's huge Strategic Petroleum Reserve, which now holds 694 million barrels, or enough to replace 69 days of U.S. crude imports. Critics of the Energy Department argue the administration could ease concerns over lofty prices simply by not pumping additional oil into the reserve and putting the extra barrels on the market instead.

Filling the reserve is the latest wrinkle in a larger debate over its role. Should the U.S. turn to the petroleum stash to calm oil markets, as governments often increase spending when the economy slows? Or should it be used only in times of true crisis, like another war in the Middle East or a massive hurricane like Katrina?

Energy Department officials say it makes sense to keep filling the reserve at the current rate. They say that Bush administration has no intention of changing course, whether to send signals to the market or otherwise.

Megan Barnett, an Energy Department spokeswoman, said the input is "a minute amount compared to over 20 million barrels per day consumed in the U.S. and over 80 million barrels consumed globally every day." The extra oil, she said, "helps to provide an added layer of protection to Americans in the case of a severe supply disruption."

Of particular interest is the growing premium buyers are now paying for low-sulfur crude, the mainstay of what the Energy Department is now pumping into the reserve from suppliers in the Gulf of Mexico. The reserve now contains 276 million barrels of sweet crude, with the rest being the less-desirable heavy, sour variety. "Sweet" crude yields more premium refined products like gasoline.

"Sweet crude is the Château Haut-Brion of oil," says Philip Verleger, an independent energy economist based in Colorado who is clamoring for the government to dip into the reserve.

Larry Goldstein, director of the Energy Policy Research Foundation in Washington, says the crimp in sweet-crude supplies "makes this an opportune time for the government to rethink its policy. This would be a tinkering with the market, not a tampering."

The government isn't paying cash for the oil. Instead, private producers supply the government with oil as part of a royalty-in-kind program to pay for the right to drill in U.S.-controlled offshore waters. About 1.5 million barrels a month of this royalty oil is now flowing into the reserve.

But skeptics argue it would be smarter for the Energy Department to sell the oil and buy up additional reserves when prices subside, as many expect they will next year. Senate Democrats, in their letter to Mr. Bodman, argue that Congress wants the department "to use a market-based approach to determining when to fill the SPR."

U.S. officials say they aren't continuing to fill the reserve with a particular contingency in mind. The U.S. decided to create a petroleum reserve system right after the 1973-74 Arab oil embargo, and began filling the first salt caverns in 1977. The Energy Department now describes the reserve as "a significant deterrent to oil import cutoffs and a key tool of foreign policy."

The reserve has been tapped in the past for emergencies. During the 1990-91 Gulf War, the government pulled 21 million barrels. President Bush opened the spigots in 2005, after Hurricane Katrina caused massive damage to oil facilities in the Gulf of Mexico in 2005, putting another 21 million barrels on the market. The reserve has also offered to swap or loan oil during limited supply disruptions.

But President Clinton in the late 1990s turned to the reserve to address less calamitous needs. Citgo Petroleum Corp., part of Petroleos de Venezuela, and the forerunner of ConocoPhillips together borrowed a million barrels from the reserve in June 2000 when an accident cut off supplies to two of their huge refineries in Louisiana. Twice that same year the administration tapped the reserve to offset surging heating-oil prices in the Northwest.

The Bush administration has been determined to boost the reserve, which stood at 544 million barrels in September 2001. The government expects to fill the reserve to its 723 million-barrel capacity by the end of next year.

At the same time, the Energy Department is moving ahead on plans to eventually expand the reserve to a billion barrels. President Bush in January called for an even greater expansion to 1.5 billion barrels, though it is unclear whether Congress would appropriate the massive sums needed to buy and store that much oil at current prices.

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