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How Falling Oil Imports Doubled the US Strategic Petroleum Reserve

Geoffrey Styles's picture
GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

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  • Sep 23, 2013 9:30 pm GMT
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  • Falling oil imports have greatly expanded the capability of the US Strategic Petroleum Reserve to replace oil imports in a crisis, although prices would still rise.

  • The SPR remains an imperfect backstop. Post-Syria, it is high time for Congress and the White House to address its gaps after four decades of change.

Oil Imports

Last week’s deal between the US and Russia defused the threat of an attack on Syria’s military installations, along with the risks of unintended consequences for Mideast oil exports. However, we shouldn’t lose sight of an important energy-related observation in the Wall St. Journal’s “Heard on the Street” column as the crisis was peaking. It concerned the extraordinary degree to which reviving US oil production and weaker US energy 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 oil imports in a crisis has soared as those imports have declined. This could prove extremely helpful should the complex talks over securing Syria’s chemical weapons break down, and the US and France proceed with missile or air strikes. Longer term, it serves as a further reminder that the existing SPR was designed for another era and is overdue for a major rethink.

Having 700 million barrels of oil available 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 recent situation came 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 the 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. With its current inventory and this year’s average crude oil imports through June running at around 7.6 million barrels per day, 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.

Oil prices jumped just at the thought of a cruise missile attack on Syria, so 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 rapidly spreading outrage and conspiracy theories. The fallout from that could be disruptive, too, if somewhat less so than widespread fuel shortages and “out of gas” signs.

A different version of this posting was previously published on Energy Trends Insider.

Photo Credit: Oil Imports/shutterstock

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John Miller's picture
John Miller on Sep 24, 2013

Geoffrey, good post.  Some added information you are probably well aware of:  Due to the remoteness to accessing the Gulf Coast SPR the U.S. East Coast (PADD 1) and particularly the West Coast (PADD 5) are clearly at greatest risk to disruption of Persian Gulf and other crude oil imports.  PADD 5 is most disadvantaged due to the longer distance and Panama Canal vessel size restrictions to accessing the SPR.  To help mitigate part of the impacts from SPR access constraints, PADD 1 installed a ‘heating oil reserve’ or a second SPR.  PADD 5, led by California, has historically relied on ANS, CA domestic production, and significant Canadian imports; including natural gas (PADD 5 consumes natural gas instead of heating oil).

Since the 1980’s, West Coast and ANS crude crude oil production have declined substantially which has increased the amount of PADD 5 petroleum oil consumed that must be supplied by imports from 10% (early 1990’s) up to 48% the past couple years.  In contrast, East Coast PADD 1 petroleum oil consumption and supplied by imports declined from 50% (1990) to 39% (2012).  If the Strait of Hormuz were to be shutdown about 40% of total World (marine) supplied crude oil would be lost, creating a global energy crisis without precedence.  Impact of such a disastrous event would be quite onerous on most World nations.  The U.S. Gulf Coast and Mid-Continent (PADD’s 2-4) would be protected due to increased domestic production and good access to the SPR.  The East Coast would be significantly impacted until required marine shipping becomes available (Jones Act U.S. port-to-port constraint).  The West Coast will unfortunately be subjected to the worst petroleum and energy crisis ever experienced by any region within the U.S.

Geoffrey Styles's picture
Geoffrey Styles on Sep 24, 2013

John,

And it won’t be for lack of resources, either, but largely as a consequence of choices made over the last two decades. In a limited sense, California’s vulnerability might be mitigated by its increasing reliance on renewables, with a target of 33% of the state’s electricity to come from renewable sources by 2020. Of course practically none of California’s electricity is currently generated from oil, so renewables largely displace other domestic resources and don’t have much bearing on a future oil crisis, except to the extent they energize EVs. With the highest rate of EV sales in the country–still only a few % of all new cars–is California making a bet that it can shift away from oil before such a crisis might occur? Or will the enormous potential resources of the Monterey shale be developed in time to close this gap?

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