U.S. MUST PROTECT INVESTMENT IN SPR

While Congress debates an energy tax and the Department of Energy studies oil and gas policy, someone should ask a question or two about the Strategic Petroleum Reserve. DOE proposes to spend $173 million on SPR in the fiscal year beginning Oct. 1, close to this year's authorization. It also will consider, by congressional mandate, spending more in the future to expand SPR capacity to 1 billion bbl from 750 million bbl.

May 24, 1993

3 min read

While Congress debates an energy tax and the Department of Energy studies oil and gas policy, someone should ask a question or two about the Strategic Petroleum Reserve.

DOE proposes to spend $173 million on SPR in the fiscal year beginning Oct. 1, close to this year's authorization. It also will consider, by congressional mandate, spending more in the future to expand SPR capacity to 1 billion bbl from 750 million bbl.

Now $173 million doesn't cast much shadow in a federal budget measured in trillions of dollars. But it represents money that taxpayers spend on security of oil supply. Since they may soon have to spend more for the same purpose via the BTU levy's supplemental oil tax it's reasonable to ask whether they get their full money's worth. The question has international implications.

TIMING QUESTIONS

As energy policies go, SPR has been remarkably immune to controversy. The SPR fill rate once could start a fight on Capitol Hill, especially around budget time. That's not the case now, with more than 577 million bbl of crude safely underground. And fretful lawmakers once tried to spell out conditions that would warrant exercise of the presidential authority to withdraw SPR crude. That they failed is fortunate. Presidents need flexibility in dealing with oil supply emergencies. Toward that end, the question about timing of SPR withdrawals might best be left unasked.

But international agreements complicate things. With SPR, the U.S. satisfies a condition of participation in the International Energy Agency's oil sharing agreement. Participants must maintain strategic crude reserves and share oil with others whenever any member experiences a 7% shortfall. SPR, then, exists not just as a domestic oil hoard but also as the source of U.S. contributions to the oil consuming world's response to emergency shortage. U.S. spending on SPR thus gives Americans a vested interest in the international machinery that would effect such a response.

As it happens, the IEA agreement needs work. Iraq's invasion of Kuwait in August 1990 and a retaliatory embargo of Iraqi and Kuwaiti exports reduced oil in international trade by 14%. A consequent price jump cut worldwide oil demand in fourth quarter 1990 by 2 million b/d relative to projections made before the invasion. Yet when then-U.S. President George Bush offered small volumes of SPR crude for sale, IEA stood fast, claiming it saw no shortage. By the time IEA saw fit to authorize withdrawals-when the allied counterattack began against Iraqi troops in Kuwait-the market had contracted and no longer needed the oil.

So the question lingers: If the 1990 supply interruption did not warrant withdrawal of strategically stored crude, what on earth would? Until IEA provides a better answer than it has so far, countries, such as the U.S., that meet IEA requirements with government-owned physical storage must doubt the value of participation and of their investments in strategic reserves.

CONCEPT OF SHORTAGE

The problem is the concept of shortage that IEA used to rationalize inaction in the gulf crisis. Despite a huge market adjustment, IEA officials said they saw no shortage, as though there could be a measurable deficiency of supply relative to demand. IEA officials know that free markets don't work like that. Free markets contract to seek balance with diminishing levels of supply.

The U.S. and other countries with public investments in strategic storage should pressure IEA to clarify and repair its policies. If the oil sharing scheme remains as hazy as it is now, they may just be pouring money into very large holes.