Download The U.S. Strategic Petroleum Reserve

NS4054
Fall Term 2015
Strategic Petroleum Reserve
Overview
• Jason Bordoff, Senate Testimony on the U.S. Strategic
Petroleum Reserve, October 6, 2015
• Main Points
• First, the SPR created during the 1970s crisis remains an
important national security asset – even though there has been a
steep rise in U.S. oil production and a fall in imports
• Second It is prudent to study whether the size, composition,
location or use of the SPR should be modified to reflect changes
in the global oil market since the 1970s – security concerns
rather than budget problems should frame this discussion
• Third there is a need to modernize the SPR’s existing
infrastructure to ensure it can remain effective
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Background I
Background
• As member of the IEA the U.S. is required to hold stocks
of crude oil and/or petroleum products equivalent to 90
days of net imports for use in emergency situations.
• Stocks can be held either in private inventories or directly
by the government
• Currently the SPR contains about 142 days of net
petroleum import cover in 4 salt domes in Texas and
Louisiana
• In addition to the SPR, the U.S. government maintains in
the Northwest emergency reserves of
• one million barrels of heating oil, and
• one million barrels of gasoline,
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Background II
• The Energy Policy and Conservation Act (EPCA) of 1975
defines the circumstances under which the SPR may be
used:
• Full drawdown: President can order a full drawdown of the
reserve to counter a “severe energy supply interruption.”
• Limited drawdown: Up to 30 million barrels if the President finds
there is “a domestic or international energy supply shortage of
significant scope or duration.”
• Test sale or exchange: The Secretary of Energy is authorized to
carry out test drawdowns and distribution of crude from the SPR
not to exceed 5 million barrels.
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Background III
• To date present only three drawdowns:
• 1991 during Operation Desert Storm
• 2005 during Hurricane Katrina and
• 2011 during the Libyan civil war
• There have also been a dozen exchanges for various
reasons, including the creation of the Northeast Home
Heating Oil Reserve to help respon to natural disasters
and outages.
• There have also been three test sales to check to
infrastructure and maintenance issues.
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Problems
• Recently several members of Congress have proposed
selling crude oil from the SPR to raise revenue for other
programs
• Infrastructure needs – selling 101 million barrels of oil
between 2018 and 2015
• While need for infrastructure, SPR still plays critical role
in domestic energy security
• Would be short-sighted and unwise way to raise needed
funding.
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Changing Environment I
• SPR remains an important national security asset
• SPR has created a deterrent against oil exporting countries
threatening oil embargoes
• Provided a tool to respond to global oil supply disruptions, and
• Served to prompt OPEC to release spare capacity
• Several arguments put forth on why SPR is less
necessary today including
• Change in oil markets over last 40 years mean that the risk of
actual physical shortages of oil is far lower
• The U.S. is less vulnerable to supply shortages today following
the surge in domestic oil production
• The dramatic collapse in oil prices since mid-2014 has
consequently decreased he potential economic harm from a
supply disruption, and
• Improvements in technology and the growth of climate policy
mean the U.S. will soon be able to get off oil.
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Changing Environment II
• Today’s oil market is different than the oil market in the
1970s
• In 1970s oil price controls existed in the U.S. and most
internationally traded oil was sold under long term contracts.
• A disruption in contracted shipments could result in physical
shortage for buyer because of
• Lack of strategic and commercial stockpiles, or A large spot
market where buyers could easily access alternative sources of
supply
• In intervening years oil market has become the most
largest and liquid commodity market on earth with
vibrant futures market
• Vast majority of globally traded oil bought and sold for a
price indexed to benchmarked crude prices including
Europe (Brent), The United States (WTI) and Middle East
(Dubai)
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Changing Environment III
• Given changes in oil markets – consequence of a supply
disruption anywhere is a price increase everywhere
• Hence risk against which the SPR needs to guard today
is a global disruption to crude supply that causes
domestic prices to spike regardless of whether U.S.
refineries import from the disrupted countries
• Oil price spices have an adverse effect on the economy
• Generally a $10 per barrel increase in oil price would cause a
0.7% slower economic growth in the U.S. four quarters after the
oil price rise
• All but one of the 12 post war oil price shocks were accompanied
by U.S. recessions
• Increasingly important role for SPR may also be to manage
market expectations
• 2012 oil price tempered following sanctions on Iran because of
the perception U.S. and allies would release oil from stockpiles
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Changing Environment IV
Surge in oil production makes U.S. less vulnerable
• Net imports are only one channel by which the economy
is vulnerable to oil price spikes
• Since 2008 oil production in U.S. has risen 80 percent or
four million barrels per day
• With decline in domestic demand, this has led to a
decline in oil imports from 60 to 20% of U.S. consumption
• Currently the volume of oil the U.S is projected to import
in 2025 is 14 million b/d lower than projections made less
than a decade ago
• Reduced oil imports and increased domestic production
should lessen the impact on the domestic economy of
global oil price swings.
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Changing Environment V
• Reduced impact does not mean there would be no
impact. Several reasons that the SPR remains critical
despite reduced import dependence
• First, any supply disruption would still have significant
distributional impacts
• Gasoline price increase reduce motorists spending for other
goods and services
• Energy price increases also regressive given lower-income
consumers spend a higher percentage of their income on energy
than high income consumers
• In theory other ways of addressing such distributional
concerns – however doing so is unlikely
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Changing Environment VI
• Second it is far from clear U.S. oil import dependence will
remain this low forever
• The reduction in import dependence has been driven by
both increased domestic supply and reduced demand –
great uncertainty about the outlook for both.
• On the supply side shale oil has shown ability to increase
productivity, but unclear current rates of improvement can be
maintained
• Still limited experience with tight oil production, so all projections
should be taken with a grain of salt
• On demand side 2015 much greater increase in demand than
anticipated from oil price declines
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Changing Environment VII
• The oil market is entering uncharted territory
• While oil prices have fallen history teaches we should not
expect them to stay there
• Indeed oil prices may be even more volatile than in the
past.
• OPEC countries have for the time being given up their historic
role as market stabilizer
• Right now OPEC countries have a very narrow margin of spare
capacity
• In world of narrow spare capacity any disruption to global supply
can have an outsized impact on price because thee is little buffer
in the event of supply disruptions
• With low oil prices higher political risks and thus
possibility of supply shortfalls
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Changing Environment VIII
• The U.S. economy will remain heavily dependent on
petroleum
• Many advances in energy efficiency, together with
increased attention to climate change should result in
reduced fossil fuel consumption
• Still very likely oil will remain the dominant transportation
fuel for decades in the U.S. and globally
• IEA is predicting oil consumption will increase form the
current 92 million b/d to 104 million b/d by 2040
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SPR Future I
SPR should not be used as an ATM
• Given evolving role of SPR in today’s changing oil
markets good reasons to undertake an analysis of
whether and how the SPR should be reformed
• If the primary risk against which it projects is not a
shortage of oil imports but a global price spike with
disruptions
• Should the size of the SPR be increased or deceased?
• Given the changing patterns of US. Oil output and trade
• Should the composition of light versus heavy oil be
changed?
• How should the concept of “severe energy supply
disruption” be understood today? and
• What does that mean about the frequency with which
government officials should considser releasing or filling
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the SPR?
SPR Future II
Some generalizations
• Given the nature of today’s oil market, the level of stocks
should no longer be based solely on import dependence.
• Instead an analysis would need to assess
• the impact on the macro-economy of oil price spikes
• The likelihood of supply disruptions and associated price spikes,
and
• The impact of SPR volumes to mitigate those spikes
• Compare those potential benefits to the carrying and opportunity
costs of maintaining crude oil in strategic reserves
• Need to rebuild country’s infrastructure, but depleting the
SPR is a short-sighted way to raise those funds
• Besides, prudent management buys low and sell high –
not the case today
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SPR Future III
SPR revenue should be used for SPR modernization
• SPR’s outdated infrastructure needs to be modernized
• to ensure it can remain effective in the event of an emergency by
delivering additional and incremental barrels to the market
• Historically oil and refined petroleum products flowed
from south to north to inland refineries
• With increase in oil production in North Dakota these patterns
are being reversed
• To accommodate these changes in geography of U.S.
crude oil supply and transportation
• Have been pipeline additions and
• Reversals as well
• Analysis and heavy investments in infrastructure will
have to take place before SPR is effective in quickly
getting oil to refineries
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Recommendations I
• To ensure SPR crude oil can be effectively assessed in a
future supply disruption the Quadrennial Energy Review
estimated that $1.5 to $2 billion was needed to make the
SPR effective
• Conclusions
• SPR has served as a critical piece of country’s energy
security strategy since the 1970s oil crisis
• Our ability to tap the SPR has been severely limited by
recent changes in the U.S. oil outlook and infrastructure
• Addressing these constraints should be a key priority to
ensure the SPR can remain effective in an emergency
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Recommendations II
• Dramatic changes in the global oil market over the past
four decades and
• Changed nature of the risks against which the SPR guards mean
• Mean that Congress working with the U.S. Department of Energy
need to consider whether to modify the SPR’s
• Size
• Composition
• Location, or
• Use
• That analysis should determine whether we sell off SPR
crude, not immediate budget needs for priorities
unrelated to energy security
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