President Bill Clinton rang the oil industry's gong when he proposed to raise $1.5 billion by selling 12% of the crude in federal storage. If nothing else, the plan-part of Clinton's fiscal 1997 budget proposal-revived discussions about the Strategic Petroleum Reserve. This should happen from time to time.
Americans have invested $21 billion since 1975 to hoard 587 million bbl of crude in salt caverns capable of holding 750 billion bbl along the Gulf Coast. Just to maintain facilities, the Department of Energy has requested $212 million for 1997. For spending at such levels, asking why never hurts.
How much oil?
Hoarding crude for use in emergencies is only prudent. The question is how much. Some observers, including some in the oil industry, insist that fill resume until SPR volumes reach capacity. They resist any suggestion that the U.S. can lower storage volumes without compromising energy security.
But neither energy security nor SPR is immune from fiscal imperatives. What is more, beyond some critical fill level, quality of strategy can be as good as volume.
This brings up the International Energy Agency. In service to its sharing agreement set up in response to the Arab oil embargo of 1973-74, IEA asks its consuming-nation members to hoard enough crude to cover net imports for 90 days. At SPR's current level, the U.S. covers imports for 71 days. And imports are rising, which reduces SPR coverage without a drawdown.
Sale of SPR crude thus would seem to put the U.S. at odds with the IEA's sharing agreement. But this is nothing new. The DOE's policy for withdrawing SPR crude from storage in an emergency already skirts IEA's sharing trigger.
For this, DOE deserves credit. Recognizing from experience during the Persian Gulf crisis of 1990-91 that the IEA trigger-a 7% shortfall-is immeasurable and unenforceable, DOE struck out on its own. Its strategy focuses on price as the best signal of emergency supply trouble and promises early withdrawal from SPR in order to calm markets.
The U.S. improvised this response after the Iraqi invasion of Kuwait snatched 4.5 million b/d of oil from international trade. Prices spurted, but IEA discerned no shortfall worthy of action. Former President Bush nevertheless offered 33.75 million bbl of SPR crude for sale-the U.S. share of the IEA agreement-and thereby let the market know that a supply cushion was at hand. The guarantee suppressed panic and helped the market adjust swiftly and efficiently to the supply jolt.
The experience highlighted the central flaw of IEA's strategy-the need to measure a void. And the limited volume of SPR crude that ultimately entered the market-17 million bbl-suggests that IEA storage requirements are excessive. The market of the 1990s is much more flexible and responsive than it was in the 1970s. And, as companies know, carrying stocks is not cheap.
The U.S. commitment to the SPR and IEA must not weaken. But the U.S. should work to align the latter's sharing strategy with modern market realities before agreeing to spend much more on the former.
Market effects
In any case, there's a better reason than flawed IEA strategies to doubt the wisdom of selling SPR crude for fiscal reasons. It's the potential market effect of an SPR draw. The emergence of new supply might suppress crude prices enough to jeopardize domestic production and producers.
That's not fair to producers, who have had no reason to make fiscally motivated competition from SPR a factor in their business planning. And it's not good business for the government, which threatens long-term, taxable economic activity for the sake of a one-time revenue gain of little consequence.
Everything considered, an SPR draw would risk too much for too little. But the proposal provides an occasion for the government to ensure that taxpayers receive maximum benefit from this important insurance program at least possible cost.
Copyright 1996 Oil & Gas Journal. All Rights Reserved.
