The country’s move to become a net oil and gas exporter is sparking questions about the future of a 40-year-old policy requiring the government to stockpile petroleum to guard against a Saudi oil embargo that appears will never come.
The Strategic Petroleum Reserve was created when the country was literally being hung over a barrel.
The reserve was developed in response to the Arab oil embargo of the 1970s, stockpiling large amounts of oil in the event that the Saudis, or its partners in the Organization of the Petroleum Exporting Countries, sought to withhold oil from reaching U.S. shores.
But the days of threats from Mideast oil embargoes are long gone. Most of the United States’s imports come from Canada and Mexico now, making the risk of supply disruptions unlikely.
More importantly, government projections show the nation becoming a net oil exporter in the next few years, as dependence on imports continues to fall. Increased oil production from hydraulic fracturing and the shale boom has placed the U.S. in a much better place to negotiate its energy destiny as a top oil and gas producer, analysts say.
But that raises questions about the future of the oil reserve.
The country has to figure out “if it still makes sense … in its current configuration,” says Guy Caruso, former head of the Energy Information Administration under President George W. Bush. Although some lawmakers have proposed “getting rid” of the oil reserve, it makes more sense to ask “how you make it more logistically relevant.”
Caruso is heading a study of the petroleum stockpile as senior adviser at the Center for Strategic and International Studies think tank in Washington. He is scheduled to hold a conference Wednesday with the Energy Department to consider the hurdles ahead for the reserve.
Many of the ways to move oil envisioned under the original 1975 policy don’t work, according to Caruso. For example, the moving oil north from the Gulf of Mexico, where much of the reserves are stored, is not possible. More oil is flowing south from shale oil being pumped from North Dakota to refineries on the Gulf Coast and pipeline companies are not building the infrastructure needed to move crude from where the reserve is stored. That makes it difficult to move the reserve’s oil to parts of the country where it would be needed in an emergency.
That leaves shipping it by tanker, but there are a limited number of specially designated ships that can haul crude oil under the Jones Act. The 1920 law mandates that all tankers used to ship oil in the U.S. must be made in the United States. But most large cargo vessels are no longer made in the U.S., and the few vessels that comply with the law are aging. Caruso recommends lawmakers seriously consider revisions to the law, but observers say Congress has been unwilling to address the issue for years, instead focusing on pipelines to move crude.
John Felmy, chief economist for the American Petroleum Institute, says the industry is treading carefully on any restructuring of the reserve. He says the Obama administration is “recommending more flexibility in terms of the use” of the reserve, but “the devils are in the details.” The institute is waiting to see what the administration will propose based on its Quadrennial Energy Review released last month.
He says past attempts at using the reserve to help lower the price of oil have backfired. The result of using the reserve could actually create more harm than good by putting too much oil on the market.
The reserve is a “large tool and it has to be used properly,” Felmy said. At the same time, “it was an expensive asset to put together … and it hasn’t been used.” Given the changing energy situation, the reserve’s size should be examined, he said. Its structure “is something we should always be looking at in terms of the right size.” It “can be an important tool” in cases of emergency when hurricanes and other severe weather harm production and supply.
The reserve has been used a few times in the last 10 years in response to severe weather on the Gulf Coast. More than 20 million barrels of oil were released in response to Hurricane Katrina in 2005. Other releases were made in 2008 after Hurricane Ike. The most recent government estimates show the reserve containing as much as 700 million barrels, making it one of the largest reserves in the world.
The oil group is reviewing recommendations the administration issued in the Quadrennial Energy Review, which devotes the first half of a chapter on energy security to “modernizing” the reserve. The Energy Department is also conducting a review. And House Republicans are examining the need to update the reserve.
The other area of concern for the industry is a 1970s ban on oil exports. Analysts predict that the export ban will have to be lifted with increased production making it obsolete. Republicans have made removal of the ban a key piece of their energy agenda.
The administration says the increase in oil and gas production from shale has hurt the ability of the reserve to guard against future supply disruptions.
“Changes in the U.S. midstream (for example, competing commercial demands and pipeline reversals) and lower U.S. dependence on imported oil have created challenges to effectively distributing oil from the reserve,” the study says, agreeing in many aspects with Caruso. “This diminishes the capacity of the Strategic Petroleum Reserve to protect the U.S. economy from severe economic harm in the event of a global supply emergency and associated oil price spike.”
The report recommends funding the reserve at increased levels to upgrade the hardware needed to allow it to work effectively. Caruso said the reserve makes less sense if you cannot move the oil from where it is stored to where it is needed, which is the reserve’s current predicament.
“We are looking at a different world now. We have to think where we will be in five to 10 years,” he said. “Getting rid of it will be imprudent” at this point, he said, adding that projections say oil production could level off in the next decade.
