Oil Markets Brace As U.S. Looks To Sell 100 Million Barrels From SPR

Submitted by Nick Cunningham via OilPrice.com,

Aging infrastructure could render the U.S. strategic petroleum reserve (SPR) increasingly ineffective, according to a new report from the Department of Energy.

The U.S. has stored roughly 700 million barrels of crude oil in salt caverns in Texas and Louisiana for decades. The SPR was established in the aftermath of the Arab oil embargo in 1973, which painfully revealed U.S. oil dependence as high prices drove up inflation, created fuel shortages and lines at gas stations, and rocked the American economy. The SPR was setup to stash 90 days’ worth of supply into storage for safekeeping, meant to be used in the event of a supply outage.

Decades of wear and tear mean that the infrastructure is now in desperate need of an upgrade. The DOE says Congress needs to cough up $375.4 million to make repairs, otherwise the SPR may not be all that effective. “Most of the critical infrastructure for moving crude within the SPR has exceeded its serviceable life, increasing maintenance costs and decreasing system reliability,” the report concludes.

For the SPR to last decades into the future, DOE argues, investment in the system is needed. But the SPR’s value and purpose is also starting to wane; the U.S. no longer needs the SPR like it once did. High levels of domestic oil production and flat demand mean that the U.S. is not quite as dependent on crude as it once was, at least in terms of the size of the American economy. Five years ago, U.S. oil imports routinely topped 10 million barrels per day. By 2014 that number had shrunk to below 7 million barrels per day. Imports have crept back up a bit as production has declined because of low oil prices, but the U.S. is still far less dependent on imported oil than it used to be.

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There is another problem with the SPR in 2016 that was less of an issue in the past. The SPR was designed to release oil from the Gulf Coast region, and pump it to the rest of the country. But most of the pipeline infrastructure completed in recent years was designed to flow from north to south, allowing huge volumes of newly produced oil to flow towards the Gulf for refining. The larger north-to-south oil flow means that the SPR would struggle to actually service the country in the event of an outage. Instead of the 4.4 million barrels the SPR is supposed to be able to release each day, it might only be able to move 2 million barrels per day because of pipeline congestion. The DOE report says that the U.S. should have marine terminals dedicated to the use of emergency distribution from the SPR.

The SPR was once a sort of sacrosanct cornerstone of American energy security policy. Both political parties observed the importance of the SPR, and refrained from using oil from the reserve except in the most unusual of circumstances. It has only been used a handful of times, such as during the Persian Gulf War and in the aftermath of Hurricane Katrina.

But President Obama also authorized the sale of 30 million barrels of oil in 2011 during the uprisings across the Middle East, collectively known as the Arab Spring. That sale was much more controversial, with critics pointing out that global supplies had not been materially impacted, and the sale was more aimed at addressing prices. The sale, Obama’s opponents allege, was a political move.

Nevertheless, the sale went through, and a few years on, things have changed in Washington. The U.S. is one of the largest oil producers in the world and its fleet of vehicles has become increasingly fuel-efficient. Imports are down and energy security is no longer the hot topic inside the beltway that it once was. More importantly, the collapse of oil prices acts as a sedative for those politicians once concerned about energy security. With oil prices below $50 per barrel, and shale drillers still pumping out vast volumes of oil in Texas, why does the U.S. need 700 million barrels of oil stashed away in salt caverns, especially when it is becoming more costly to maintain it?

The DOE report says that instead of the nearly 700 million barrels the U.S. currently stockpiles, an SPR along the lines of 530 to 600 million barrels would be more appropriate. That would equate to about 60 days’ worth of supply.

In 2015, Congress authorized the DOE to sell $2 billion worth of oil from the SPR between 2017 and 2020 and use the proceeds to make infrastructure upgrades. The language was an acknowledgement from Congress that the SPR is no longer needed in its current form. The latest DOE report, which came at the behest of Congress, cautions against drawing down the reserve below the 530 million barrel threshold, which would leave the U.S. more vulnerable to price spikes.

It remains to be seen how Congress responds, but one thing that is certain is that both political parties no longer see the SPR as important as they once did. At a time when China and India are building up their SPRs, the U.S. is poised to shrink its crude oil stockpile.