America’s newly abundant onshore energy supplies are rekindling debate over whether there is too much crude oil, or the right kind, held in the nation’s Strategic Petroleum Reserve.
Crude oil is the lifeblood of the global economy, and the Strategic Petroleum Reserve is designed to ensure that the equivalent of 90 days of oil usage is always held in storage for the United States. That’s to guard against supply shocks such as hurricanes along the U.S. Gulf Coast or conflict in the Middle East or elsewhere.
As recently as 2008, the United States produced about 5 million barrels per day and imported about 60 percent of the oil consumed by Americans. By this April, U.S. production had reached 8.4 million barrels a day, with imports at their lowest level in nearly 20 years.
Given the increased production capabilities, does the United States actually need $73 billion worth of oil held in storage?
A new report from the Government Accountability Office calls on the Department of Energy to answer that, rethinking the size and nature of the reserve.
“If DOE were to assess the appropriate size of the SPR and find that it held excess crude oil, the excess oil could be sold to fund other national priorities,” the report said.
Energy analysts such as Kevin Book, managing director of ClearView Energy Partners, support the GAO call for a new look
“The short answer is that the (Strategic Petroleum Reserve) is an insurance policy, and it is utterly appropriate to re-evaluate one’s insurance coverage on a periodic basis to assess whether or not it meets the set of risks against which one wants to insure,” said Book.
But he cautioned that the supply and demand for oil changes over time.
“The supply surpluses of the present don’t necessarily obviate the reserve at some future point, especially as demand is likely to recover and production can always fall on unexpectedly lean times,” Book said.
As a member of the International Energy Agency, the United States must maintain reserves of crude oil or petroleum products equaling at least 90 days of net imports. But the Strategic Petroleum Reserve today holds enough oil to replace 106 days, and an additional 141 days of oil is being held in private American reserves. That’s a total of 247 days, the GAO report said, approaching three times the required amount.
The report, “Changing Crude Oil Markets,” was requested by Sen. Lisa Murkowski of Alaska, the top Republican on the Energy and Natural Resources Committee. She’s still reviewing it and has no position on the right amount of oil in reserve, said spokesman Robert Dillon.
Murkowski wants to lift the 1970s-era ban on export of U.S. crude oil. The GAO report concluded that in theory exporting lighter grades of oil should bring down the international price of oil, on which U.S. gasoline is priced. But it also said that if exports hurt the profitability of refineries, that could lead to closures, lower production and higher pump prices.
America’s energy boom is a result of oil drilled from under shale rock in a process called fracking. It produces a light, sweet crude oil, while the nation’s main refinery capacity on the Gulf Coast is mostly geared toward handling heavier grades of oil.
The surge in light oil means the U.S. is importing far less of it from African nations but is still reliant on imports of heavier crudes from neighbors Mexico and Canada. Consequently, some refiners told the GAO that the reserve should have more heavy oil in case of import supply disruptions.
“That’s true, but they can also run middle and light crudes. It just depends on the blending and the structure,” said Charles Drevna, head of American Fuel & Petrochemical Manufacturers, the trade association for refiners. “That does not mean they’re going to flip a switch and go all hog wild and do all light sweet crude.”
Drevna wants the government to open up more federal lands and lift restrictions on foreign vessels moving crude between U.S. ports. But he also supports a narrower look at the reserve.
“I think we can all agree that the domestic crude oil situation certainly has changed since 2005,” Drevna said. “I think you should look at the SPR, what was it intended to do and is that reason still valid?”
The Energy Department remains wary about changing the mix of oil in the reserve, because placing heavy crude in the reserve could hurt America’s ability to respond to disruptions in, for example, medium sour crude that’s imported from Saudi Arabia.
The GAO report also raised questions about the Gulf Coast location of the reserve. With increases in crude oil production in North Dakota and Montana and more imports from Canada, oil is increasingly flowing from north to south, with new pipelines and terminals being designed in that direction.
“Such changes may make it more difficult to move crude oil from the SPR to refineries in certain regions of the United States, such as the Midwest, where almost 20 percent of the nation’s refining capacity is located,” the GAO report concluded, suggesting that some reserve oil go to storage in Western states that lack pipeline connections to the Gulf Coast.