LONDON (Reuters) - “The Strategic Petroleum Reserve is not an ATM,” Lisa Murkowski, chair of the Energy and Natural Resources Committee warned the Senate this week. “It is certainly not the petty cash drawer for Congress.”
The senator from Alaska was criticizing a proposal to sell 101 million barrels of crude from the government’s stocks to offset a shortfall in funding in the highway trust fund.
“Others are potentially looking to our Strategic Petroleum Reserve as nothing more than a piggybank,” Murkowski admonished her colleagues in a floor speech delivered on Wednesday.
There is nothing new or particularly surprising about Congress raiding pots of apparently surplus assets to pay for short-term spending priorities.
Between fiscal 1993 and fiscal 2005, almost $6 billion worth of raw materials, previously considered critical, were sold from the national defense stockpile and the revenues used to meet spending needs elsewhere.
The stockpile sold a range of materials from aluminum oxide and chromium to cobalt, iodine, platinum group metals and tin.
Sale receipts were used to pay for everything from armed forces readiness to the provision of military equipment to foreign countries, a hospital trust fund and a memorial to the veterans of World War Two.
There have even been minor SPR sales before to raise funding for the federal budget in fiscal 1996 and 1997. In total, 23 million barrels were sold to reduce the budget deficit on the instructions of Congress.
In Washington, where legislators are always looking for ways to spend money without raising taxes, seemingly underutilized assets and unspent funding offer an irresistible target.
Recycling funding from old and outdated program to meet new and pressing requirement is not necessarily wrong.
Some of the oil stored in the SPR may be surplus to current requirements as a result of the U.S. shale revolution.
But it would be a mistake to sell SPR oil before Congress has conducted a proper debate about the stockpile’s future role in energy security.
The United States is obliged to hold stocks equivalent to 90 days net imports in government or private stocks as part of an agreement with its partners in the International Energy Agency.
As recently as 2005, U.S. government stocks were equivalent to only 55 days worth of net imports, which were then running at 12.5 million barrels per day (bpd).
But thanks to shale, net imports have fallen to just 5 million bpd, while the stockpile has remained largely unchanged, pushing up the amount of import cover enormously.
At the end of 2014, the SPR’s was storing almost 691 million barrels of crude in giant salt caverns along the U.S. Gulf Coast. Stocks were equivalent to 137 days’ worth of net imports of crude and refined products (link.reuters.com/ruf35w).
The IEA allows commercial stocks of crude oil and major refined products to be counted in the calculations, which pushes net import cover to more than 380 days (link.reuters.com/xuf35w).
In theory, the United States could sell up to 240 million barrels of crude from government stocks and still comply with the requirement to hold stocks equivalent to at least 90 days worth of net imports, even excluding private stocks.
If all those barrels could be sold at the current market price of around $50, the government could raise up to $12 billion from the sale of surplus oil.
There have been three major releases from the SPR since it was established in the 1970s.
The first drawdown came in response to the beginning of Operation Desert Storm when the U.S. and its allies moved to oust Iraqi troops from Kuwait in 1991.
The second drawdown was ordered in response to Hurricane Katrina in 2005. And the third came in June 2011 in reaction to unrest in Libya and other Arab countries disrupting oil supplies.
The amount of crude released on each occasion was relatively small. There have been other minor sales to test the release procedure and meet operational shortages.
As a matter of law, the SPR was established to counter any “severe energy supply interruption” which could have a major adverse impact on national security or the national economy.
But its real purpose has been to protect the United States and its allies from attempted political blackmail by oil-exporting countries.
In 1973, Saudi Arabia and a number of other Arab countries cut oil production and banned the sale of crude to the United States in protest U.S. support for Israel.
The SPR was meant to ensure the United States could never be threatened in this way again by ensuring there was always enough crude on hand to enable it to withstand an attempted economic siege.
The SPR’s effectiveness should be measured not by the number of releases or their volume but by the fact it has so rarely been needed.
Never again has there been a serious attempt to cut oil supplies to the United States to alter its foreign policy.
The federal government has spent a total of $20.7 billion buying oil for the SPR over the last four decades at an average price of $29.70 per barrel, according to the Department of Energy.
The SPR therefore looks like a fairly cheap insurance policy, especially since costs are basically sunk (most of the oil was originally purchased in the 1980s).
While there have been occasional calls for Arab countries to wield the “oil weapon” to influence U.S. policy, there have been no serious attempts since the 1970s.
How much of this has been due to the deterrent effect of the SPR rather than other changes in the oil market and the Middle East is impossible to say.
A new generation of Arab leaders who took power after 1973 were much closer to the United States. Iran’s revolution fundamentally altered the key relationships between Washington, Riyadh and Tehran and pushed the U.S. and Saudi Arabia closer together.
The rise of competing oil supplies from outside the Middle East, including from the North Sea, Alaska, the U.S. Gulf and the Soviet Union, radically changed the balance of power between OPEC and the consumer countries in the 1980s and 1990s.
And since 2008, the shale revolution has almost doubled indigenous oil supplies within the United States and given it a much higher degree of energy independence, or at least self-confidence.
But the SPR has likely played a deterrent role. The SPR has acted as an effective “oil shield” which has given the U.S. government more freedom and confidence to face down threats and turmoil in the Middle East and other exporting regions.
There does need to be a proper debate about the future of the SPR. Everyone agrees on this point, including the U.S. Department of Energy and the Government Accountability Office (the congressional spending watchdog).
“The Strategic Petroleum Reserve must be modernized for the 21st century,” Murkowski told her Senate colleagues this week. “Its size, its geographic disposition, the quality of the oil it stores ... these are all issues that merit further attention but we need to have a deliberative process ... what we do not need is a spur-of-the-moment deal”.
The Department of Energy is already conducting a review. Some reduction in the stockpile may be desirable in the medium term.
But the strategy rethink should precede any sales, not the other way around. In the 1990s, the sale of formerly critical materials from the defense stockpile came only after the Department of Defense concluded they were no longer needed, not as a revenue raising measure.
There is a legitimate debate to be held about the future size, shape and role of the SPR. In the meantime, however, Congress should resist the temptation to make a short-sighted raid on the nation’s emergency crude reserves.
Editing by William Hardy