As US Crude-Oil Reserve Fills, Questions Abound

NEW YORK (Dow Jones), Dec. 22, 2009

In coming days, a 500,000-barrel delivery of crude oil will push the U.S. government's emergency stockpile to capacity. What happens to the Strategic Petroleum Reserve beyond that is far from clear.

Federal law passed in 2005 requires expansion of the rainy-day reserve by 38% from near 727 million barrels now to one billion barrels of capacity. That was enacted when the government forecasted a decades-long surge in oil demand requiring steadily rising imports.

The Energy Department in 2005 saw U.S. oil use rising 40% to 28 million barrels a day in 2025 from 20 million barrels a day in 2003, with imports meeting 68% of demand. Now, DOE sees oil use stable at 19 million barrels a day through 2035 and biofuels contributing the needed four million barrels a day of extra fuel. Improved fuel mileage and increased efficiencies will cut reliance on imported oil to about 45%. That suggests the current size of the reserve would provide adequate insurance against supply disruptions until 2035.

"There is no doubt that the Obama administration does not have an interest in spending capital on an expansion of the facilities," said John Shages, an Energy Department SPR official for 22 years before retiring two years ago. "Even if SPR had empty capacity...there is no way that the Congress would appropriate funds for oil acquisition. So expansion is out for the foreseeable future," he said.

The cost to expand the reserve--held underground in salt caverns along the Texas and Louisiana Gulf Coast--was estimated in 2007 at $3.7 billion, exclude the oil to fill it. Some lawmakers see that as a lot of money to pour into a hole in the ground, but some token funding is needed to keep existing sites operational. Environmental studies continue at a Richton, Miss., site that is part of the nine-year expansion plan.

Top congressional Democrats favor creating a stockpile of petroleum products, such as gasoline and diesel fuel, under government control, especially after supply problems when hurricanes Gustav and Ike hit the Gulf Coast in September 2008. The storms not only cut output from the vital Gulf refineries, but also disrupted pipeline flow of crude oil and products to other regions, triggering price spikes in the Midwest and Southwest. Many countries, especially in Europe, have emergency reserves comprised of petroleum products, but, unlike crude, the refined oil has a limited shelf life and inventory must be cycled out of storage every few months, creating broad and costly logistical issues.

The Strategic Petroleum Reserve was set up in 1975 under an International Energy Agency plan for big oil importers to create a buffer against price shocks caused by supply shortages, such as the Arab Oil Embargo of 1973. The U.S., like other major industrial nations in the IEA, aims to have on hand, in commercial and government-owned storage, enough oil to cover 90 days of net imports. Over the years, the reserve has been tapped, including in January 1981 as Operation Desert Storm began, and occasional loans to refiners have taken place in supply crunches.

The Obama campaign favored selling high value, light crude from the SPR and replacing it with cheaper, heavy crude, but such a plan hasn't taken shape and it's unclear if the economics would work, given the rising price of heavy crude. "The administration has been very quiet about using the SPR or stating any type of policy," Shages said. But as comprehensive energy and climate-change policies move forward, it may soon have to do so.

Copyright (c) 2009 Dow Jones & Company, Inc.

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