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By Geoffrey Styles on Aug 29, 2013 with 2 responses

How Falling Imports Doubled the Strategic Petroleum Reserve

The SPR Grew Without Buying A Barrel

Although mainly focused on the oil market’s current jitters over Syria, Liam Denning’s Wednesday “Heard on the Street” column in the Wall St. Journal neatly highlights the extraordinary degree to which resurgent US oil production and weaker US demand have boosted the effectiveness of US oil inventories, including the US Strategic Petroleum Reserve (SPR). Without adding a drop — the SPR actually shrank a bit in 2011 — the reserve’s potential to replace daily imports in a crisis has soared as those imports have declined.

In the near term this could prove extremely helpful should expected US-led reprisals against the Syrian government result in a regional disruption of oil flows. Longer term, it serves as a further reminder that the existing SPR was designed for another era and is overdue for a major rethink.

An Imperfect Backstop

Having 700 million barrels of oil in federal facilities along the Gulf Coast has tempted presidents and other politicians, who saw opportunities to benefit from using it to attempt to crush periodic gasoline price spikes. However, the current situation comes much closer to the scenarios the SPR was intended to address when it was begun during the Ford administration, to provide a backstop for our vital energy supplies in emergencies involving a physical interruption of supply. When it comes to uses of the SPR, I’ve always been a purist, perhaps because I can recall sitting in gas lines and participating involuntarily in the bizarre “odd-even” rationing-by-license-plate scheme introduced during the oil crisis following the Iranian Revolution in 1979.

Here’s how the benefits of tapping the SPR in an actual crisis have improved, based on the rapid recent drop in US oil imports. In 2007, the SPR could have replaced just over half of our crude oil imports from countries other than Canada or Mexico for 165 days, at its maximum draw-down rate of 4.25 million barrels per day (MBD). With its current inventory and this year’s average crude oil imports through May running at around 7.6 MBD, the SPR could substitute for 100% of our non-North American imports for 163 days. The value of such an insurance policy is rarely appreciated until it is needed.

Of course in practice the situation would be more complicated, mainly for reasons that support the case for rethinking the current 1970s-vintage reserve. One problem is that the oil stored in caverns near the Gulf of Mexico wouldn’t provide much immediate assistance for east coast refineries or for the West Coast, which has become increasingly dependent on imports as production in both Alaska and California declined steadily. Then there’s the issue of quality. Nearly 40% of the SPR oil is light and sweet (low in sulfur), while much of the oil we still import is heavy and sour (higher sulfur), to match the requirements of current refinery configurations. With production of light sweet crude in Texas and North Dakota booming, releasing sweet crude from the SPR could compound regional imbalances and possibly result in reduced refinery utilization. Any redesign of the SPR should take these important shifts into account.

Conclusions – No Free Lunch from the SPR

With oil prices jumping at the thought of a looming cruise missile attack on Syria, it’s worth recalling what a back-up supply from the SPR can and can’t do. It can buffer the US economy from the impact of a serious interruption in the flow of crude oil cargoes from the Middle East or elsewhere, for some months. US refineries would continue to operate, as would the planes, trains, trucks and ships they fuel, and on which commerce depends. However, consumers wouldn’t be insulated from the price increases that would accompany any major disruption in Middle East oil exports, because the SPR oil must be auctioned to refiners at market prices. The resulting situation at gas stations might look a lot like price-gouging, with social media spreading outrage and conspiracy theories at the speed of light. The fallout from that could be disruptive, too, if somewhat less so than widespread fuel shortages and “out of gas” signs.

  1. By GalSitty on August 30, 2013 at 4:58 pm

    Given that we aren’t able to use other fuels to reduce oil consumption in transportation, the SPR, at any size, still seems highly relevant. The fact it, we are not, and we cannot, domestically produce enough affordable oil to power our transportation. Should imports end, even with current high levels of oil production, we would only be able to produce about half of our demand.

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    • By Geoffrey Styles on September 3, 2013 at 12:03 pm

      That’s roughly correct, though it strongly begs the question of what would bring such a scenario about, particularly with regard to our current imports from Canada. Even during the Arab Oil embargo of the 1970s, we were still importing oil from a variety of other sources.

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