Reacting to crisis without benefit of policy, the U.S. Department of Energy may be headed for a trap with regard to crude oil inventories. DOE last week pointed confidently to commercial stocks as a ready source of near term supply and kept the Strategic Petroleum Reserve on the sidelines. Embargo of Iraqi and Kuwaiti crude exports hasn't created a U.S. disruption sufficient to warrant SPR withdrawals, the agency said.
It's an odd call. In a matter of days this month, the international market lost 4.2 million b/d of crude supply. Prices have shot up $10/bbl. Shortages loom. In DOE's view, the disruption justifies government efforts to nudge environmentally stymied Point Arguello oil field onto production off California, to squeeze more output from Alaska's Prudhoe Bay field, and to persuade motorists to put more air in their vehicle tires and buy gasohol. But it doesn't warrant sales of SPR crude. Not yet, anyway. Mid-September maybe.
GUESSING GAME
DOE should not play this sort of guessing game with 587 million bbl of crude in strategic storage. It may indeed be too early to start SPR withdrawals. But a panicky market needs to know the degree of disruption that will change DOE's mind. A little certainty goes a long way in a crisis.
Furthermore, DOE should put the role of commercial stocks in better perspective. At best, they represent a temporary, marginal supply. Even if they're drawn down quickly, company stocks can supplement supply only for the few weeks it takes Saudi Arabia, Venezuela, and other countries with excess capacity to boost output. The military embargo of Kuwait and Iraq seems destined to last longer than that, and the new production won't replace all export volumes lost to the crisis.
Oil companies can help by reminding policy makers that the "days' supply" figures common in inventory analyses don't represent usable volumes. Inventories must remain at certain levels just to keep distribution systems running. Even with stocks at their recently high levels, margins above minimum operating levels provide little comfort.
U.S. crude oil stocks the week of Aug. 10 totaled 379.2 million bbl--26 days' supply relative to average refinery crude runs this year. The crude stock minimum operating level is 300 million bbl. The excess covers crude runs for 5 1/2 days. That doesn't mean usable stocks will vanish in less than a week; new inventory draws never account for more than a fraction of refinery runs. It does mean that commercial stocks add up to a fairly thin cushion against the prospect of shortage. That cushion will look even thinner next quarter, when projected demand for OPEC crude outruns the group's available production capacity.
FOCUS ON SPR
So the inventory focus must shift to SPR soon. DOE correctly disdains SPR withdrawals undertaken solely to keep gasoline cheap. Sudden price jumps nevertheless are symptoms of the type of supply disruption that's supposed to trigger SPR sales. That the current price rise will hurt the economy and that physical shortage is within view are reasons enough to consider employing an asset in which the U.S. has invested $19.4 billion. As Petroleum Industry Research Foundation (Pirinc) pointed out at midmonth, the government needn't withdraw SPR at the 3.5 million b/d maximum rate; Pirinc suggests 750,000 b/d.
If it's too soon to tap SPR even at minimum rates, it's certainly not too soon for DOE to advise the market of circumstances under which it would recommend that the President approve SPR crude sales. SPR is a crucial and expensive ace in the hole. It shouldn't be played like a wild card.
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