DOE recently released a congressionally-mandated report, Long Term Strategic Review of the Strategic Petroleum Reserve (SPR). Among other things, it documents a number of problems with logistics and maintenance of the petroleum reserve. In June, in an interview with Platts, the DOE official responsible for the SPR admitted that the “infrastructure, which currently stores 695 million barrels at four sites along the U.S. Gulf Coast, is nearing the end of its design life and is in need of a roughly $2 billion makeover.” He also admitted that there had been “several significant equipment failures over the last couple years that have affected our operational capability.”
Created in response to the 1973 oil embargo, the SPR was seen as a way to prevent producing countries from embargoing oil sales to the United States. In 1973, the oil embargo was made worse by government decisions involving excessive meddling in the oil market. These resulted in steep price increases and rationing that made shortages worse by creating long lines at service stations.
The national goal was to store at least a 90-day supply to offset a disruption of indeterminate duration. Currently, the SPR has enough oil to offset about a 71-day loss of imports. In 1973, the concern was about control and dominance of Persian Gulf producers. Today, Persian Gulf producers are less of a concern because sources of supply have shifted, imports have declined, and U.S. production has reached levels not seen since 1973. At the same time, imports have dropped from over 9.million barrels a day to 7.3 million in 2015. Today, our leading sources of imports are Canada and Mexico.
The creation of the SPR was an ill-considered overreaction to the 1973 embargo. Its continued existence validates Ronald Reagan’s observation that the closest thing to perpetual life is a government program. The embargo lasted from October 1973 until March 1974 and imports from OPEC countries were reduced from 2.6 million barrels a day in October1973 to 1.4 million in February 1974. While the loss of over 1 million barrels a day is not trivial, it was a gradual reduction, not an immediate cutoff.
If the market had been allowed to work, tanker traffic carrying oil would have been adjusted to reallocate the destinations of OPEC oil, since the embargo only applied to the United States, Denmark, and the Netherlands. Since oil is a fungible commodity, Saudi oil, for example, that would have gone to the United States could have been rerouted to a non-embargoed country and oil going to that country could have gone to the United States. Costs would have been higher because of this but it is doubtful they would have been as high or persisted as long as the effects of the government created problems.
In the EU, responsibility for meeting stockpiling obligations was largely delegated to oil companies. There is no reason why the same approach could not be followed in the United States. Indeed, oil companies have every financial incentive to hold sufficient reserves to accommodate a potential interruption. That is just good business planning. According to the Energy Information Administration, private crude oil inventories stand at 511 million barrels. Absent the SPR, investors and oil companies would be able to handle most if not all but the most extreme disruptions, such as closing the Straits of Hormuz.
The existence of the SPR leads to political pressures to use it anytime there is a spike in prices. In 1996, President Clinton used it to counter rising gasoline prices and again two months before the 2000 election to help Democratic presidential candidate Vice President Al Gore. Over its 40-year existence, however, it has only been used five times.
A decision to shut down the SPR would have to be done gradually so as to not disrupt markets. The billions obtained from the sale of SPR oil would be a good down payment to deficit reduction.
The lesson of the SPR, which the government never seems to learn, is that policies adopted during times of crisis are often wrongheaded and should be put in place with a fixed duration rather than in perpetuity.
William O'Keefe is the President of Solutions Consulting. You can follow him on Twitter here.
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