The US should resist congressional calls to sell part of its Strategic Petroleum Reserve to raise money for other federal programs, and concentrate instead on thoroughly analyzing where the SPR fits within dramatically different global markets than existed 40 years ago when it was established, witnesses told the US Senate Energy and Natural Resources Committee.
“Beyond the international obligations, I think it’s in our best interest to have a strong petroleum reserve,” US Energy Sec. Ernest G. Moniz said. “It gives us the flexibility to respond if there’s a major disruption. The risks of that, and multiple disruptions, still are there. We are in a situation with a diminished global reserve capacity. It’s still important to be able to rapidly use government stocks to minimize harm.”
Questions over how released crude would be transported to refineries beyond available pipeline capacity have emerged, Moniz said during the Oct. 6 hearing. “Sixty percent of the oil Americans consume arrives in a US port, including all of Alaska’s crude,” Moniz said. “The surge in waterborne and rail shipments of crude may be a factor in delays at some inland and coastal ports where traffic is expected to grow over the next decades.”
Today’s low crude prices, increased domestic production, and reduced US oil import dependence have led some to conclude that selling large volumes of SPR crude for purposes not related to energy security would have no impact on the reserve’s security benefits, Moniz said. “This view fails to recognize that the SPR remains an extremely powerful and valuable energy security tool.”
But the SPR also requires additional investment to enhance its security value, Moniz noted. Funds for its maintenance have been deferred repeatedly by both Congress and the administration, steps to extend its life need to be taken now, and its operation must be modernized to increase its incremental distribution capacity by adding dedicated marine loading dock capacity at its Gulf Coast terminus, the energy secretary said.
Necessary investments
Moniz also said he considers it essential for the US to conduct and complete a full review of the SPR’s purpose within current global markets and a changed domestic production and transportation systems.
“As outlined in the [Quadrennial Energy Review], investments for life extension and modernization in the $1.5-2 billion range are necessary to ensure the SPR is able to protect the US economy in an energy supply emergency,” Moniz said. “Of this amount, approximately $800 million is needed for life extension and $1.2 billion for adding dedicated docks and terminals to ensure that in an emergency, the SPR can put sufficient incremental barrels of oil into the market.”
Four other witnesses also advocated fully evaluating and modernizing the reserve. “Policymakers should take advantage of currently lower oil prices to modernize and update the SPR,” urged Retired US Navy Adm. Dennis C. Blair, who co-chairs the Energy and Geopolitics Commission at Securing America’s Future Energy.
“Just having the petroleum in the salt caverns is not enough,” Blair said. “The flows of crude oil have changed over the last 40 years. We have to be able to deliver that oil to the right places over an increasingly complex delivery system.”
Kevin Book, managing director at ClearView Energy Partners LLC, said the SPR is one element of 1970s US energy policy that has stood the test of time. “Demand isn’t likely to stay weak forever,” he said. “It usually isn’t a good idea to liquidate long-term assets for short-term financing. It also doesn’t work well to buy high and sell low.”
Recommends caution
Jason Bordoff, founding director of Columbia University’s Center for Global Energy Policy, meanwhile, said, “In today’s oil market, a supply disruption anywhere leads to higher domestic prices, even though we don’t import as much oil and products as we once did. We should be especially cautious about selling oil from the SPR as the global oil markets enter uncharted territory.”
Sarah Ladislaw, who directs the Energy and National Security Program at the Center for Strategic and International Studies, said that policymakers should consider how a changed oil production profile in the US has led to pipeline flow reversals which potentially could make it harder to get released SPR crude to refiners.
Markets have changed, so have the players, and oil plays a different role in the global economy than it did in 1974, she noted. “Oil is increasingly driven east to markets from production centers,” Ladislaw said.
Committee members appeared receptive to the idea that an SPR drawdown to raise money for other federal programs would be a big mistake. “We have this mindset now in Congress that this is no more than a cash machine,” said Chair Lisa Murkowski (R-Alas.). “This is wrong and irresponsible. We need to make sure that as we move to modernize and keep a strong asset, we don’t move prematurely and take away its security. We need to determine what we need, and how we can be smart about it.”
Elizabeth Warren (D-Mass.), meanwhile, said, “I just want to be clear about what’s happening with these proposals. Mandating an inefficient sale of oil from the reserve is simply letting some members of Congress avoid having to really address financing for highways or medical research, and ignore broader issues such as continuing special tax breaks for millionaires.”
Contact Nick Snow at [email protected].
