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US Strategic Oil Reserve Becomes Hot-Button Issue

Now that the Bush Administration is at loggerheads with Democrats--and an increasing number of Republicans--on whether to suspend adding to the country’s emergency petroleum store, known as the Strategic Petroleum Reserve (SPR), it’s a good time to review what investors need to know about this stockpile.

An oil refinery in Norco, La. next to the Mississippi River is seen from the window of Air Force One as President Bush approaches Louis Armstrong International Airport in Kenner, La. just outside New Orleans Thursday, April 27, 2006. He was heading to visit Hurricane Katrina rebuilding efforts in Mississippi and Louisiana (AP Photo/Gerald Herbert)
Gerald Herbert
An oil refinery in Norco, La. next to the Mississippi River is seen from the window of Air Force One as President Bush approaches Louis Armstrong International Airport in Kenner, La. just outside New Orleans Thursday, April 27, 2006. He was heading to visit Hurricane Katrina rebuilding efforts in Mississippi and Louisiana (AP Photo/Gerald Herbert)

The current showdown pits the president, responsible for the broad national interest, against Congress, which is closer to more tangible constituency interests, such as the caravan of truckers who protested against high prices in Washington earlier this week.

“We are in extreme circumstance,” wrote Kay Bailey Hutchison, a Texas Republican and potential running mate to Sen. John McCain, in a letter to the president.

But at his most recent news conference, President Bush cited an Al-Qaeda attack on oil facilities, as the appropriate type of scenario that would justify tapping into the SPR. In his 2007 State of the Union address, Bush called for a significant expansion of the SPR but Congress is still short-shrifting on funds needed for the $5 billion undertaking, according to SPR director David Johnson.

A proposal led by Senator Byron Dorgan (D- N.D.), to halt additional SPR purchases for one year or until oil drops to $75 a barrel, now has the support of 16 Republicans, giving the measure a potentially veto-proof majority.

Here's a look at the SPR and its role in both the marketplace and US energy policy.

What’s the basis of the controversy?

The main issue is the stock piling's effect on pump prices. Those favoring suspending SPR purchases say it could trim 5 to 24 cents a gallon off retail gasoline prices.

“I have analyzed the issue, and I don't think it would affect price,” President Bush maintains.

He says the government is adding up to 68,000 barrels of oil per day, but notes that this is one-tenth of one percent of current global demand of about 85 million barrels a day. Two years ago the president ordered a one-year suspension to stabilize prices but it is unclear exactly what impact this had.

What is the Administration’s current objectives for the SPR?

The SPR is a creature of crisis. It was created in response to the 1973-4 oil embargo which accompanied the birth of OPEC.

It was authorized to stockpile up to one billion barrels, but an initial target was set at half that. Two months after 9/11, President Bush ordered an increase to 700 million barrels. At the time, the SPR contained 545 million barrels.

The Energy Policy Act of 2005 called for a pool of one billion barrels. It is currently at a little over 701 million barrels, the most ever, worth $19.9 billion based on market prices.

The Department of Energy aims to reach SPR’s capacity (727 million barrels) by the end of September. There is draft legislation to expand this to 1.5 billion barrels, at a cost of $5 billion. Last year DOE requested $168 million; $25 million was appropriated.

When could the SPR reach one billion barrels?

It will take three to five years to expand capacity at existing facilities – rock-hard salt caverns along the coast of Texas and Louisiana – and up to 12 years to build a new facility to be located near Richton, Miss.

The DOE maintains that it is ten times cheaper to store crude oil under rather than above ground, with a 98-percent recovery rate and minimal environmental impact. Our dependency on imports is overwhelmingly in crude oil, not refined products. Fortunately, crude is far easier and cheaper to store than refined products which degrade over time.

What is the average cost paid per barrel?

Since the SPR was established the average cost is a surprisingly low $28.42 per barrel, although the per barrel rate has recently soared. But this does not come from taxpayers. Since 1999 the DOE has taken only in-kind oil transfers from firms drilling on federal leases. The firms essentially use oil to pay for their leases.

How much import protection is there and how quickly would this come into play?

The SPR currently holds about a 58-day supply, based on our daily import need of 12 million barrels. That’s a decline from 1985, when, at a lower import level, the SPR held 118 days of supply.

It would take 13 days, after a presidential directive, for the DOE to start selling into the domestic market. Currently though, the DOE is only capable of drawing down just 4.4 million barrels a day from the SPR – roughly a third of current imports – not enough to staunch upward price pressures.

Is membership in the International Energy Agency any help?

In recent years, a broad range of countries have created--or significantly expanded--their own SPRs. European Union countries, who since 1968 have been tasked to maintain strategic reserves equivalent to 90 days of imports, make up a significant portion of the IEA. Through the IEA, the US can tap other members for relief--in NATO-like solidarity--in the event of major refining disruptions.

In the aftermath of hurricanes Katrina and Rita, which knocked out 1.5 million barrels a day of US refining capacity, IEA members released refined products, which are stockpiled by some EU countries. Most of this came to the US East Coast and helped keep down prices.

“We benefited quite greatly from that,” says David Johnson, director of DOE's office of petroleum reserves. “The IEA works quite well.” There are no plans to extend stockpiling to refined products, Johnson said.

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