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High oil prices put focus on Strategic Petroleum Reserve

Stop adding to the oil reserve, some say.

from the April 24, 2008 edition

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At issue now are the reserve's 701.3 million barrels of oil, enough to replace imports for 58 days. As a member of the International Energy Agency, the United States is required to hold 90 days of net petroleum imports. By 2019, the US plans to reach 1 billion barrels, which will provide 100 days of emergency supplies. Adding in 90 percent of commercial stockpiles, the US has 118 days' supply today and will have 123 days by 2020, estimates Jeremy Cusimano, an economist for the Petroleum Reserves, which is part of the Department of Energy, in Washington.

In February, the Government Accountability Office (GAO) issued a report suggesting that the government make changes in the way it adds oil to the SPR. Currently, the oil is delivered from oil companies as payment in kind for royalties owed for pumping oil from federal land. Instead, the GAO suggested that the government set a dollar amount of oil it wants to acquire.

The Energy Department, Mr. Cusimano points out, is not actually buying the oil. But, he says, a DOE examination has found that holding the oil has been a positive investment. Currently, the average "acquisition" cost is $27.73 a barrel.

In recent times, the SPR has been tapped twice. After hurricane Katrina, which destroyed pipelines, the government released 11 million barrels of oil. In 1991, during the Gulf War, it released 17.3 million barrels.

Energy experts are divided over whether it would make any difference to release oil today. "It's a tight market, an incredibly tight market when every drop matters," says Tim Considine, who has done a study on the SPR and is a professor at Pennsylvania State University. "But looking at the SPR to alleviate market pressure is only a short-term fix."

Phil Flynn, an oil trader at Alaron Trading in Chicago, doubts it would have any impact. "It is such a small amount of oil," he says.

Mr. Flynn notes that a prior presidential candidate, Sen. John Kerry (D), suggested a halt to buying oil for the reserve in March 2004, when gasoline prices were rising. "We should have bought all we could at $35 a barrel," Flynn says.

The US needs the import protection, Flynn says, since some major oil exporters such as Russia and Venezuela are not as friendly toward the US as they used to be. "If you want to bring down the price of oil," he adds, "shore up the value of the US dollar."

While the debate continues, the DOE is getting ready for an increase in reserve supplies. In August, it will start to receive 70,000 to 75,000 barrels per day. Since the current SPR is almost full, it will go to a new facility in Mississippi, farther from the coast.

 

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