Sunday, May 18, 2008
News
We have an oil reserve?
Josh Clark's questions
By Josh Clark
Last week, Congress passed legislation that calls for the suspension of deliveries to America’s SPR—the Strategic Petroleum Reserve—not to be confused with NPR, which still receives deliveries of lattes, as far as we know.
What’s the Strategic Petroleum Reserve?
In October 1973, on the most sacred Jewish holiday, Yom Kippur, Syria and Egypt attacked Israel. Later that month, OPEC (Organization of the Petroleum Exporting Countries), urged on by the Syrians and Egyptians, voted to simply stop exporting oil to the U.S. and other countries that had lent aid to the Israelis.
Gas prices in the U.S. rose from a quarter to a dollar within a couple of months. Yes, the sound of dollar-a-gallon gasoline makes your knees go weak these days, but consider this: In 1973, that was a 300 percent increase at the pump. Should that happen today, with gasoline at $4 a gallon, we’d be looking at $16 for a gallon of gas.
The 1973 oil embargo had a sweeping effect on the U.S. economy. Speed limits were reduced to increase fuel efficiency. Daylight savings time was extended to reduce electricity consumption (a lot of electricity is produced by power plants that burn fossil fuels). People started buying small, more fuel-efficient, Japanese-made cars.
So President Richard Nixon ordered a reserve of crude oil set aside to ensure that the U.S. wouldn’t be left without oil if OPEC ever tried a similar stunt again. Hence, the Strategic Petroleum Reserve (SPR) was created in 1975, through an act signed into law by Gerald Ford.
2. How much is in the kitty right now?
That depends on which president is in office. When Nixon decreed the SPR be created, the capacity was set between 750 million and 1 billion barrels. This is barrels of crude oil, not refined petroleum. With the oil embargo fresh on their minds, the feds bought oil by the truckload off the open market. Salt mines along the Gulf Coast were purged and their hollow cores replaced with crude oil. The whole set-up was designed to easily accept crude from drilling outfits in the Gulf of Mexico.
The capacity was later knocked down to about 727 million barrels. According to Megan Barnett, a spokeswoman for the Department of Energy, there are less than 703 million barrels in the reserve right now—702.7 million, to be exact. But that’s still enough to make up for the 12 million barrels the U.S. imports daily for a period of 57 or 58 days—if for some reason our imports are cut off, or another storm like Hurricane Katrina plays havoc with getting the oil from rigs to the coast. The reserve oil is “owed” to the U.S. government.
“It’s royalty oil. When companies drill from the gulf, a certain amount goes to the reserve,” says Barnett. “That’s about 67,000 to 68,000 barrels of oil per day, but that’s only less than one-tenth of the 86 million barrels of oil used across the world each day.”
When President Bill Clinton was in office, he stopped purchasing oil and ordered the sell-off of oil reserves to make up for a budget deficit. The supply dwindled to less than 600 million barrels.
When Texas oil man George W. Bush took office in January 2001, however, he vowed to bring the supply back to 700 million barrels. And he actually did so by 2005, through the royalty-in-kind trade Barnett mentioned (the continental shelf oil companies drill on is government property, and this is how they pay rent). The program worked so well that in 2005, the Energy Policy Act directed the Reserve to expand its supply capacity to 1 billion barrels. It’s not there yet, obviously, but ever since then, Bush has been bulking up the reserve like a coach carb-loading a wrestler the night before the International Sumo Federation championship.
3. So, should we raid the stash as Congress suggests?
Last week, both the House and Senate passed measures to suspend deliveries to the reserve until crude oil falls to $75 a barrel; the House voted 385 to 25, while the Senate voted 97 to 1 in favor. Both Democratic presidential rivals, Sen. Barack Obama and Sen. Hillary Clinton, voted in favor of the plan; GOP presidential presumptive nominee Sen. John McCain didn’t vote on it. Congress figures that if those extra barrels make it to the market rather than the reserve, the price of oil will go down, since the supply will be that much more abundant (our buddy supply and demand again).
As if he’s become suddenly aware of the concept of consequences, President Bush has said he thinks the proposal to suspend deliveries to the SPR is a poorly chosen quick fix, that it’s an example of a failure to look at broader energy issues. After all, less than 70,000 barrels of crude per day should have almost no effect on gas prices, since oil global consumption is at 86 million barrels a day.
But it could have more of an effect on the price for oil than you’d think. That’s because more than half of the crude coming into the salt mines along the Gulf Coast is the good stuff, of such high quality that it sets the benchmark price for the rest of the oil drilled in the world. Releasing some of this oil onto the market would have a disproportionate impact on prices, and could possibly lower the price for oil.
Plus, consider the salutary effects of a little role-reversal. Oil analyst Geoffrey Styles points out that the federal government switching gears from oil buyer to oil seller could have a more sublime impact on the markets. Having such a huge customer suddenly switching roles could knock off a bit of the psychological value of oil futures traded on the New York Mercantile Exchange, almost as if Ebenezer Scrooge suddenly stopped hording gold. SP