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US Strategic Reserve May Be Past Its Prime: Analysts

Wednesday, 20 Mar 2013 | 2:50 PM ET
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Has the U.S. government's emergency oil stockpile outlived its usefulness, especially with the country on a fast track toward energy independence?

Created in 1975, the strategic petroleum reserve (SPR) is a network of storage facilities in key oil-producing states. It has a capacity of 727 million barrels, designed hold about a 90-day supply in the event of a severe oil market disruption.

Yet as the world's largest energy consumer produces more of its own energy supplies and imports less foreign oil, a growing number of energy experts believe the SPR concept may be past its prime. In a CNBC interview on Tuesday, alternative energy advocate T. Boone Pickens called for its abolition.

"Things have changed. Resources are better understood," the BP Capital chief said. Without killing the SPR, he said, the government still needs to acquire and store the oil more efficiently.

(Read More: US Doesn't Need an Oil Reserve--Get Rid of It: Pickens)

Additionally, critics argue that a federal oil sale smacks of market manipulation or domestic political calculations. According to information from Department of Energy, the SPR has sold oil five times since 1985. Of those occasions, only two—in the 1990 Gulf War and the 2011 invasion of Libya—were to offset a disruption in the global supply chain.

The SPR is "useless," said Philip Verleger, an energy analyst who served as a senior staff economist on the Council of Economic Advisers when the SPR was created.

"We store the oil in the Gulf Coast, and much of the design was planned to move oil inland," he said, adding that the logistics of moving crude from the South to the North make it hard to distribute in the event of a crisis.

Although the government should be careful not to liquidate oil in a way that disrupts markets, Verleger said, the SPR "is an asset that we don't need anymore. If we are producing enough crude oil, we don't need a strategic reserve."

In order to fulfill its obligations to the International Energy Agency, the U.S. must maintain 90 days of crude stocks. Verleger, however, said that Canada—a fully energy-independent country—"doesn't hold it because they don't import anything."

(Read More: Power Shift: Energy Boom Dawning in America)

Still, doing away with a touchstone of U.S. energy policy may be easier said than done, other analysts say.

In a world where oil-producing countries are in turmoil and domestic producers are subject to extreme weather that can wreak havoc on domestic production and create supply bottlenecks, there are compelling strategic reasons to stockpile oil.

In the event of a hurricane or a supply shock "government can supply oil and enter markets to stabilize prices," said Peter Hartley, an energy economist at Rice University. Indeed, in 2005 the government sold oil to offset the impact of Hurricane Katrina on production in the Gulf Coast.

"Because prices will spike, having oil to sell at those times would pay for having extra reserves available," he added.

Hartley also said the country's massive military needs made having an emergency stockpile useful, especially in the event of a 1970s-style OPEC embargo. However, he added that a big flaw in the SPR's maintenance was that the government often fails to time its oil purchases with the ebb and flow of world prices.

"A private firm would have to buy cheap and sell high," Hartley said. "Unfortunately the government doesn't do that." In particular, he cited instances during President George W. Bush's administration, when the SPR inexplicably bought oil when crude was surging.

To be certain, the U.S. would be taking a gamble by not holding its own reserves, which could leave it at the mercy of foreign countries like Saudi Arabia. Still, Hartley argues there would be one added benefit.

"If the government wasn't in [the oil market], the private sector would have incentive to hold more reserves itself," he said. Maintaining the SPR indefinitely "could end up destabilizing markets rather than stabilizing them, and ruin the incentive for private agents to have their own storage facilities."

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