By John Kemp
LONDON Oct 4 Now that domestic oil production
is rising and imports are falling, should the United States
reduce the amount of emergency oil it holds in giant salt
caverns along the coast of Louisiana, or at least switch from
stockpiling crude to holding refined products like gasoline, jet
fuel and diesel?
"The United States will soon start selling oil from its
Strategic Petroleum Reserve (SPR)," predicted leading energy
analyst Phil Verleger in a thought-provoking article for
"Petroleum Intelligence Weekly" last month ("Major SPR oil sales
likely over next few years" Sep 17).
"The sales will occur not because prices are too high or too
low, but rather because the U.S. now holds more oil than
required under International Energy Agency (IEA) obligations,"
Verleger wrote. "Rising U.S. production combined with falling
use will make roughly 100 million barrels superfluous every year
until 2020. This means the U.S. government will be putting
200,000 barrels every day or more on the market."
Facing the urgent need to cut government spending or raise
revenue, Verleger argues SPR sales will be an irresistible
target for the president and Congress as they grapple with the
Based on the declining import trend, Verleger estimates that
the United States could cut the amount of crude stored in the
SPR from its current level of 696 million barrels to 630 million
barrels by September 2013 and 530 million by September 2014,
while still meeting its IEA obligation to hold stocks equivalent
to 90 days worth of net imports.
The temptation for a cash-strapped Congress is obvious. And
there is a good precedent. Following the end of the Cold War,
the Department of Defense determined that over 99 percent of the
formerly critical and strategic materials held in the National
Defense Stockpile (NDS) were excess to its requirements.
At its height, the stockpile was valued at more than $11
billion, and included more than 70 minerals like diamonds,
metals like tantalum and copper, and even agricultural products,
like the anti-malarial agent quinine.
But from 1993 onwards, Congress has authorised a programme
of gradual sales. Sales from the NDS have raised billions of
While some of the proceeds have been used to cover the
continuing costs of running the stockpile, including the
environmental cleanup, most of the surplus has been credited to
the U.S. Treasury, or applied to other parts of the budget.
SWITCHING TO PRODUCTS
Congress could raise tens of billions of dollars by
disposing of excess stocks from the SPR and apply them to
Alternatively, the crude oil in the SPR could be sold or
swapped for refined products. "The U.S. could gain flexibility
in its response to disruption in commercial supplies by changing
the content of its reserves to contain both crude and refined
products," explained Javier Blas in an illuminating piece in the
"Financial Times" this week ("The limitations of America's
petroleum reserve" Oct 2).
Blas points out that the European members of the IEA already
hold the majority of their emergency stocks in the form of
refined products. The United States is unusual in holding
virtually all its emergency stocks in the form of unrefined
In 2005, when the hurricanes Katrina and Rita wreaked havoc
in the Gulf of Mexico, it was storm damage to refineries and the
resulting shortfall in gasoline and diesel, not crude, that were
the main problem. "The U.S. had to ask its European allies to
release their gasoline and diesel-rich emergency reserves to
make up for the shortage," Blas explains.
In 2012, many observers blamed upward pressure on U.S. pump
prices on a shortage of gasoline, especially the reformulated
sort used heavily in the Northeast, rather than any shortfall in
crude oil supplies. Releasing crude from the SPR would not
relieve the shortage of reformulated gasoline available around
New York and New Jersey.
CONTINUING TO HOLD CRUDE
Rising domestic oil production as a result of fracking in
North Dakota and Texas, as well as falling domestic fuel
consumption stemming from more efficient vehicles and increased
ethanol blending, could allow the United States to lower the
amount of petroleum it holds in reserve, and switch some of its
holdings from crude to refined products.
But policymakers should not rush to dispose of the crude
stockpile or convert it to products. Even with rising domestic
production, the United States will remain a net importer for
some years, and it remains most vulnerable to a disruption of
crude supplies from the Middle East or Venezuela, rather than
refined products from Europe.
Notwithstanding occasional refinery outages, the majority of
the volatility in gasoline and heating oil prices experienced by
U.S. businesses and consumers stems from instability in the
crude oil market, not refinery capacity and margins ().
It would only make sense to stockpile products if
policymakers were primarily concerned about the availability of
refining capacity rather than crude oil inputs.
But after the fleeting shortages of refinery capacity during
the "golden age of refining", which lasted from just 2005 to
2008, the United States now has plenty of refining capacity to
convert even the toughest crudes into high-quality products.
Refinery capacity is set to improve even further owing to
continued improvements in vehicle fuel economy.
SPR TO STOP ECONOMIC COERCION
The United States obtains around 40 percent of its oil
imports from neighbouring Canada and Mexico, and that proportion
is set to grow. The remaining oil comes from a fairly
diversified group of countries, with less than 25 percent from
the volatile Mideast Gulf region.
Nevertheless, oil trades in a global market. Any disruption
to Middle East crude supplies would inevitably drive up the
price paid by U.S. fuel consumers.
While the U.S. maintains unchallenged naval and air
superiority, the primary threat which the SPR guards against is
economic (the damage wrought by spiking oil prices) rather than
physical (shortages of gasoline at filling stations).
The SPR was established to ensure the United States could
never again be coerced by the threat to withhold crude supplies.
The president and Congress have a unique opportunity to render
it more effective simply by leaving stocks unchanged.
It is a mistake to assume the SPR contains a lot of surplus
oil. The 1975 Energy Policy and Conservation Act envisaged a
reserve of up to 1 billion barrels. The SPR has never held
anything like that amount. For most of its life, the SPR held
less than 600 million, before being increased to 727 million
between 2002 and 2009.
In fact, for most of the time since 1994, the SPR held fewer
barrels than needed to meet the IEA's 90-day obligation. In
2005, the SPR held 685 million, when the 90-day obligation
implied 1.129 billion. Even this year, after net imports have
fallen, the SPR still does not contain enough crude to cover the
90-day obligation completely ().
In future, if net imports continue to decline, the SPR may
contain more than enough crude to satisfy the IEA obligation.
But that is no reason to reduce it.
It has taken decades to build up a reserve of 700 million
barrels. Stock building tends to push up crude prices. The
United States should not rush to dispose of a stockpile it might
need again in future if circumstances change.
The rise in import cover also gives the president important
flexibility. Unlike Germany and many other European IEA members,
who replaced emergency reserves released during the summer of
2011 by the end of the year or early 2012, the United States has
not tried to replenish the 30 million barrels sold last year.
The rising ratio of SPR stocks to net imports ensures the
president is under no pressure to reverse a stock release
quickly, making the stockpile a more effective deterrent.
Rather than realise a one-off gain by selling barrels from
the reserve, which would make only a tiny dent in the projected
budget deficit, Congress and the president should retain the
full volume as an important tool for ensuring the United States
is not susceptible to coercion.