The ongoing US oil boom has compelled some lawmakers and analysts to question the need to keep so much crude stockpiled and sparked speculation that a government sale of tens of millions of barrels could be imminent. But could new rationale for how much crude the US keeps in its Strategic Petroleum Reserve actually increase the amount of crude in the US stockpile?
Is the Obama administration moving away from the conventional thinking on future reserves of US crude?
Judging from recent comments from US Energy Secretary Ernest Moniz, and a litany of conjecture from market and policy analysts, it’s certainly possible.
First, a little background:
The Strategic Petroleum Reserve, or SPR, was set up in response to the 1973-1974 oil embargo and is now the world’s largest reserve of government-owned emergency crude. The stockpile is stored at four underground sites along the Texas and Louisiana Gulf Coasts and has a total capacity of 727 million barrels, which it reached in December 2009.
As of June 12, the SPR held 692.9 million barrels, including 263.9 million barrels of sweet crude and 429 million barrels of sour crude, according to the DOE.
The size of the SPR has always been broadly based on an International Energy Agency agreement to hold 90 days of import protection, meaning the equivalent of 90 days of crude imports.
But growth in US production, a reduction in import levels and dramatic changes in the world oil market have made this basis for the SPR’s size somewhat outdated, Moniz said at last week’s Energy Information Administration conference in Washington.
“Harm to the US economy from a global oil disruption is no longer measured by days of import protection, as it was when the [SPR] was established in the 1970s,” Moniz said.
Instead of being based on imports, Moniz said, the size of the SPR should be based on the impact of a potential supply disruption, such as a loss of exports out of the Middle East.
“Unless disrupted oil supplies are replaced, world oil prices will skyrocket and the global economy will be harmed,” Moniz said, pointing out that US refiners would be equally impacted by a global supply disruption even if they imported no foreign crude. “The ultimate size of SPR needs to be much more closely tied to the size of the potential disruptions as well as the nature and magnitude of the collective security response.”
This raises a number of questions, not the least of which is how the US government can determine how much of an impact a given future disruption might have. In addition, it’s unclear how a domestic crude reserve level could be determined from such a potentially wide-ranging number.
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Moniz said the administration is working with world leaders on a possible new international agreement on crude stockpiles which would be based on the impact of a supply disruption, rather than import levels.
“We need to measure our reserves against the likely collective response to a disruption of scale, not by how many days of US oil imports it represents, so that we can harvest the fruit of our previous taxpayer investments,” he said. “By this measure the [SPR] may be more important today than it has ever been.”
Moniz said how this will be measured was still being examined and said it was unclear whether it would increase the overall size of the SPR.
Moniz’s comments are particularly relevant as some lawmakers are looking to downsize the SPR, which many argue is excessive in light of the glut of US supply. Recently, Michigan Representative Fred Upton, a Republican and the chairman of the House Energy and Commerce Committee, proposed selling 64 million barrels from the SPR to partially offset the cost of a bipartisan healthcare bill unanimously backed by his committee.
Moniz, who is against any plan to sell oil from the SPR that would not be used to fund energy security efforts, said it was unclear at this point if the changes to how the size of the SPR is determined will ultimately mean the SPR would hold more oil at a time when many expect it will hold far less.
It all depends on how large a supply disruption administration officials may deem the US needs to prepare for.
Melanie Kenderdine, director of energy policy and systems analysis at DOE and energy counselor to Moniz, said the US will still be bound by the IEA agreement to hold 90 days of imports.
It should be noted, however, that the agreement counts both public and private stocks and, as of the most recent count, the SPR is well above the agreed threshold.
Using the 90 day net import calculation, the SPR is currently running a surplus of 240 million barrels, due largely to reductions in imports amid the ongoing growth in US crude supply.