SPR WORTH KEEPING IF MANAGED RIGHT

July 17, 1995
Republicans in the U.S. Congress have thrown down the gauntlet over the Strategic Petroleum Reserve. They have asked whether the U.S. should continue to hoard crude oil as a buffer against supply emergencies. It's a proper question.

Republicans in the U.S. Congress have thrown down the gauntlet over the Strategic Petroleum Reserve. They have asked whether the U.S. should continue to hoard crude oil as a buffer against supply emergencies. It's a proper question.

The Department of Energy unintentionally started this review of SPR's fate. In its budget proposal, DOE asked to close the leaking Weeks Island SPR facility in Louisiana and sell $100 million worth of crude to pay for moving the rest. The Senate Budget Committee then proposed sale of all of the oil to raise $900 million for the Treasury. New Republican members of House took the idea a step further, proposing to dissolve DOE, transfer SPR to the Department of Interior, and consider sale of all strategically stored oil.

The immediate choice, then, is whether to sell some Weeks Island oil and store most of it elsewhere or sell all of it. The broader issue is over continuation of the entire program.

KEEP THE SPR

Subject to conditions, and for two main reasons, the U.S. should keep the SPR. One reason is that a strategic reserve can blunt the effects of a sudden interruption in supply. It thus discourages oil-producing antagonists from using petroleum as a political weapon.

The other reason the U.S. should keep the SPR is that owning a significant oil inventory curbs the government's urge to commandeer markets during crises. A government that owns oil must pay attention to markets. A government that pays attention to markets learns how markets work. A government that learns how markets work is the most likely kind of government to let them work, even in emergencies. As the world saw in the Persian Gulf crisis of 1990-91, oil markets adjust very quickly to supply disruptions and create less havoc than government controls do.

SPR must be managed properly, however, during both emergencies and the periods in between. As an insurance policy, the SPR is very costly. Mismanaged, it returns no value. It would be better to have no SPR than to pay carrying costs on all that oil, for all that time, and ultimately handle it wrong.

DOE has the right idea about emergencies. A policy statement issued last August provides assurance that the department will not wait until it sees a "shortage" before considering sale of SPR crude in a distressed market. Instead, it will recognize price spurts as clear alarms about supply distress-the emergency itself will be unmistakable-and act to ease the consequent economic shock.

Thus the department avoids a trap that can spoil any strategic storage program: withholding the hoard until some physical "shortage" appears. If such a shortage ever really occurs, the economic damage will be well advanced, the release of stored crude too late to be of any use, the accumulated costs wasted. The key is to supplement the market while it still works. That means while it continues to balance, which in a supply crisis it will do at diminishing levels of volume and rising levels of price. In a functioning market, physical shortage never occurs.

MANAGEMENT CONDITIONS

So DOE has emergency management right, which goes a long way toward ratifying continuation of the SPR program. The other condition for continuation is management between emergencies. In the immediate case, a leaky facility, DOE has the best plan. Cashing in Weeks Island crude for a sum insignificant to the federal budget would compromise a valuable program and set the wrong precedent.

Congressional Republicans deserve credit for questioning SPR. The U.S. needs a reminder now and then about why it should spend so much to deter and prepare for petroleum crises. They happen.

Copyright 1995 Oil & Gas Journal. All Rights Reserved.