By Gustavo Coronel | March 31, 2011
The Concept of Energy Security
During the last five years the issue of U.S. energy security has fluctuated from being a top priority (2006-2008) to being less important (2009-2010) and, again, to becoming a top priority (2011). This shifting emphasis has depended upon the level of gasoline prices at the pump, which, in turn, are driven by real or imaginary expectations of disruption in the world oil supply.
The “benefits that might accrue from release of oil” from the U.S. Strategic Petroleum Reserve (SPR) to alleviate high gasoline prices is marginal at best. According to the March 2011 Congressional Budget Office (CBO) report, “the government’s ability to smooth oil prices by selling oil from the SPR at times of increased world oil prices, or by purchasing oil for the SPR when world oil prices are declining, may be limited because SPR sales or purchases would represent only a very small fraction of world oil consumption.”
The Current Situation
At this moment in time there is a moderate disruption of the world oil and gas markets due to the political unrest in the Middle East. So far the countries involved are not significant oil and gas producers, with the exception of Libya. This country is in the midst of serious political turmoil and, as a result, most of its 1.3 million barrels per day/bpd of oil exports have temporarily been lost to the market. Libya, however, only exports token volumes of oil to the U.S., some 25,000 barrels per day and ranks 9th among OPEC producers. The dependence on high quality Libyan light sweet crude derives largely from Europe, particularly Italy. Therefore the interruption of its oil exports poses no direct problems to the security of the U.S. supply. Furthermore, the loss of Libyan exports appears as only a moderate disruption since there are significant volumes of closed-in oil production in other major oil producers. These closed-in volumes are on the order of almost four million barrels per day, mainly in Saudi Arabia.
In a March 3rd letter to President Obama, Senator Jay Rockefeller asked for the release of oil reserves to help lower gas prices. “Dramatic shifts in the U.S. and world oil market, ongoing turmoil in Libya and throughout the oil-dominated Middle East and North Africa, prompt me to write today to urge you to prepare for timely release of oil from the Strategic Petroleum Reserve (SPR) in the face of further supply disruptions.”
In response to the Libyan situation President Obama has said that the government stands ready to use the SPR, which holds some 720 billion barrels of oil. At a White House press conference on Friday, March 11th the president stated, “Here at home, everybody should know that should the situation demand it, we are prepared to tap the significant stockpile of oil that we have in the Strategic Petroleum Reserve.”
This declaration, however, is premature and strategically undesirable, as it converts the SPR into a first line of defense against a moderate oil market disruption. The most immediate and efficient approach to restoring the balance in the world oil market in the near term would be the tapping of alternate sources of supply available from major oil producing countries such as Saudi Arabia, which stand ready and willing to close the temporary gap created by Libya.
Nature and Past Use of the U.S. Strategic Petroleum Reserve
The SPR is an emergency stockpile of crude oil managed by the Office of Petroleum Reserves at the Department of Energy (DOE) insuring against severe supply disruption. Established in 1975 following the 1973 Arab oil embargo shock, the SPR is intended to provide an emergency reserve.
According to DOE’s annual report for calendar year 2009, “The Strategic Petroleum Reserve program provides the United States with energy and economic security through its emergency stockpile of crude oil.” Given the U.S. consumes approximately 19-20 million barrels of oil per day and imports approximately 10-11 million bpd, the SPR holds from 66 to 73 days of reserves at its current capacity.
Although the office is authorized to hold up to one billion barrels, the current inventory, as of November 2010, is about 727 million barrels, distributed among four major underground storage caverns along the Gulf coast:
- Bryan Mound-Texas Site holds 254 MMB in 20 caverns – 78 MMB sweet (low sulfur content) and 176 MMB sour (higher sulfur content).
- Big Hill-Texas Site holds 170.1 MMB in 14 caverns – 73 MMB sweet and 98 MMB sour.
- West Hackberry- Louisiana Site holds 228.2 MMB in 22 caverns – 120 MMB sweet and 108 MMB sour.
- Bayou Choctaw-Louisiana Site holds 73.2 MMB in 6 caverns – 22 MMB sweet and 52 MMB sour.
The store of crude oil can be drawn down at a maximum rate of 4.4 million barrels per day “or about 44 percent of average daily U.S. oil imports and about 22 percent of average daily U.S. petroleum consumption,” according to CBO’s report. It will reach the U.S. market in less than two weeks after a presidential decision has been made to use it, once it has been refined, hence the SPR’s proximity to major Gulf Coast refineries. The SPR provides the President of the United States with a powerful response option in case a major disruption of commercial oil supplies threatens the nation’s economy.
The inventory of oil in the SPR is acquired on the basis of (a), minimum costs; (b), minimization of the nation’s vulnerability to severe energy disruptions; (c) minimal impact of these acquisitions on the world market and, (d), encouragement of competition among potential suppliers.
DOE’s annual report describes the SPR acquisition and receipt of crude oil as a combination of the “Royalty-In-Kind fill program with the Department of Interior” and the “repayment of crude oil from the emergency test exchanges that followed Hurricanes Gustov and Ike in 2008, and direct purchase.”
The SPR has been utilized as an “emergency” response in only two instances: During the 1991 Operation Desert Storm in Iraq, when some 17 million barrels of oil were released and in the aftermath of the 2005 Hurricane Katrina disaster, which affected refinery operations in the Gulf Coast area, when some 11 million barrels of oil were released. It has also been utilized in ten other minor instances in exchanges or loans of oil to private companies.
Authorization for SPR expansion to one billion barrels was a result of the passage by Congress of theEnergy Policy Act of 2005 signed into law by President George W. Bush, although he had proposed doubling capacity from 727 million barrels to 1.5 billion barrels. The proposed inland site along the Gulf of Mexico is located in Richton, Mississippi, just east of Bayou Choctaw in Louisiana.
The SPR should ideally be used as a flexible, second line of defense against significant disruptions or, at any rate, simultaneously with the acquisition of alternate sources of supply from oil exporters. The concept of energy security also exists for exporting countries, which are normally interested in gaining new markets. As such they are willing to step in, to compensate for temporary disruptions, in order to increase their reputation for reliability. This is the case of Saudi Arabia, the country that has the largest closed-in volumes of oil at this point in time. A joint announcement of this type of solution by Saudi Arabia and the United States, for example, would go farther to calm consumers than to call for the immediate use of the SPR.
Further Political Considerations
Senator Chuck Schumer (NY), chairman of the Democratic Policy Committee has declared, May 17, 2010, that the rise in gasoline prices threatens the fragile economic recovery of the United States and that this justifies the use of the SPR. Schumer reportedly has a history of calling for SPR oil release going back to the Clinton era when oil reached an all time high of $25 per barrel.
Tennessee Republican Senator Lamar Alexander appearing on CNN’s State of the Union program on Sunday, March 6th said that “What we need to do is find more of our own energy, and that means exploring offshore. That means exploring in federal lands for oil and natural gas and it means exploring in Alaska.” The simple announcement of such a major shift in U.S. energy policy would likely have a greater and more immediate impact on the price of gasoline than the announced use of the SPR.
However, there is no real shortage of supply in the market, only psychological expectations of future scarcity. The preferred answer to these fears would be the expressed willingness of oil producers to maintain the normal levels of supply, rather than the use of the SPR by the U.S.
A premature use of the SPR simply in order to hold down gasoline prices might actually interfere with the normal action of market forces. Since the current price increase is not due to a real shortage of supply but to expectations of future scarcity, the use of the SPR at this time would amount to responding to a mirage, not to a real crisis. Holding gasoline prices down at the expense of the oil saved in the SPR would tend to promote excessive energy consumption.
Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to