WASHINGTON – The sale of crude oil from the nation’s Strategic Petroleum Reserve amounts to little more than a rounding error in the federal budget deal struck Tuesday, but some critics lament that the sales will draw down a large portion of the emergency reserve.
Moreover, Congress and the Obama administration are planning to take another dip into the reserve: The compromise to fund the Highway Trust Fund also relies on sales of crude oil from the SPR. Taken together, the measures could ultimately liquidate more than 20 percent of the nation’s petroleum reserves.
“Using the SPR like an ATM is not a good idea,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University, who formerly was President Obama’s National Security Council adviser on energy and climate.
The Strategic Petroleum Reserve, created in the wake of the 1970s oil crisis, currently holds 695 million barrels of crude oil in four salt caverns in Louisiana and Texas. That’s the equivalent of about 142 days of imports.
The budget deal envisions sales of 58 million barrels – 8 percent of the reserve – from 2018 through 2025 to raise $5.1 billion, which would equal 0.125 percent of this year’s budget. The Highway Trust Fund deal would drain the reserve of another 101 million barrels.
All that is based on the Congressional Budget Office’s oil price estimates – $88 a barrel. That figure assumes prices will rebound from current levels. The benchmark for U.S. crude oil, West Texas Intermediate, closed Tuesday at $43.41 a barrel, less than half the CBO projections.
“We did this before, in 1996,” recalled Robert McNally, president of the Rapidan Group, a consulting firm. McNally is a former NSC adviser for energy under President George W. Bush. “The Democratic president and Republican Congress reached into the ATM before to fund the government. It is just as irresponsible now as it was then. I predict that any barrels we sell we will end up buying back at higher prices.”
Neither the Obama administration nor congressional leaders appear to be worried. A senior administration official said recently that with the surge in domestic production and a drop in oil imports, the size of the reserve could be trimmed without compromising national security. It is also unlikely that the United States, which imports much of its oil from Canada, would have to cover all of its current imports in case of disruptions in the more oil-producing volatile regions – the Middle East, West Africa and Venezuela.
“The reserve was created at a time when the nation was very dependent on imported oil. The dependency is in the past,” economist Philip Verleger wrote in September 2014. Since then, prices have plunged. In August, Verleger wrote, “The United States is swimming in oil. The SPR, to be blunt, is superfluous.”
But other experts say that the large size of the emergency petroleum reserve has had a calming effect on crude oil markets, preventing price volatility and promoting economic stability. Even though U.S. oil production is up, the global balance is delicate, they note. Saudi Arabia, which usually keeps excess capacity on hand to support prices, is pumping close to its limit.
Meanwhile, U.S. oil patch investment has tumbled, while demand is ticking up: Sales of SUVs this year are up about 15 percent. And gasoline forecasts based on Obama administration fuel efficiency requirements could be altered in 2018 when the fuel-efficiency accord reached in 2009 is reopened, Bordoff said.
“With global spare production capacity near zero and the world aflame, we ought to think first before reducing our protection against oil supply interruption,” McNally said. “You should not be arbitrarily selling off the SPR to plug budget holes.”
Bordoff said that the large size of the reserve helped assuage anxiety about imposing open-ended economic sanctions on Iran, a move that took about 1 million barrels a day off world markets. Even though a deal on Iran’s nuclear program has been reached, they note, it is important that the United States and the rest of the world not worry about oil prices if a lapse in Iran’s enforcement of the agreement prompts consideration of renewed sanctions.
“The impact on the world oil price of sanctions to limit Iranian oil sales and other geopolitical fears was tempered, at least in part, by a perception in the market that the U.S. and perhaps other International Energy Agency members might release the SPR if prices rose too far,” Bordoff said in congressional testimony in October.
Because of changes in the oil industry, sanctions or a disruption in an oil-exporting country would probably not cause physical shortages of the sort seen in the 1970, but they could drive up oil prices and slow economic growth. “An increasingly important role for SPR policy may also be to manage market expectations,” Bordoff said.
He did applaud a provision in the budget deal that would modernize the Strategic Petroleum Reserve, which he said is currently unable to be tapped at the 4.4 million barrel a day pace mandated. The work on the reserve will cost between $1.5 billion and $2 billion. Where will the money come from? More sales from the reserve, according to the budget deal.
“If selling a fraction of SPR is the only way to get the money needed to modernize the SPR, then I’m in favor of that,” Bordoff said Tuesday. “However much oil there is in the SPR doesn’t do us any good if we can’t get to it.”