R-Squared Energy Blog

Pure Energy

Critiquing the SPR Swap Plan

This morning, I read an interesting editorial in the Wall Street Journal:

Obama Has a Plan To Manage Our Oil Reserve

The editorial was written by John Shages, a former deputy assistant secretary for petroleum reserves at the Department of Energy. The editorial essentially argues that the composition of the Strategic Petroleum Reserve (SPR) is lighter than the composition of oil that most refineries run. Since lighter crude is also more expensive than heavier crude, Shages is suggesting that we sell some of the light crude and buy back some of the heavy crude. His argument – echoing the argument from Obama and various other government officials – is that this would generate cash and help drive down oil prices.

Some excerpts from the editorial:

Sen. Barack Obama is proposing a simple maneuver — called an exchange, or swap — that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.

Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.

OK, let’s debate. Regular readers know that I strongly object to using the SPR in an attempt to influence prices. That is not what it is for. High prices – which are incidentally well off of their highs – do not constitute an emergency. Further, that line about taxpayers being better off by $1 billion misses a very large point. I could also trade in my house for a mobile home, and be better off by a few hundred thousand dollars. But that few hundred thousand has costs associated with it: Less home, a home that isn’t as safe in bad weather conditions, and a home that has less value when I wish to sell it. Likewise, there are costs associated with downgrading the quality of the SPR.

Mr. Shages continues:

The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world’s oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.

We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve’s oil mix to at least 10% heavy oil, roughly 70 million barrels.

It struck me as very odd that having oil that is too light could reduce refinery capacity. After all, light oil is much simpler to process – as is alluded to above. Yields are also higher. Yet the claim is that we would be better off with heavier oil in the SPR? This didn’t add up, so I dug up that GAO report that was referenced:

Improving the Cost-Effectiveness of Filling the Reserve

Some excerpts from that report:

Our analysis of DOE’s Energy Information Administration (EIA) data shows that, of the approximately 5.6 billion barrels of oil that U.S. refiners accepted in 2006, approximately 40 percent was heavier than that stored in the SPR.10 Refineries that process heavy oil cannot operate at normal capacity if they run lighter oils. For instance, DOE’s December 2005 found that the types of oil currently stored in the SPR would not be fully compatible with 36 of the 74 refineries considered vulnerable to supply disruptions. DOE estimated that if these 36 refineries had to use SPR oil, U.S. refining throughput would decrease by 735,000 barrels per day, or 5 percent, substantially reducing the effectiveness of the SPR during an oil disruption, especially if the disruption involved heavy oil.

If you know what the assays look like for heavy oil versus light oil (See The Assay Essay), this looks like a very improbable claim. I suppose if you didn’t try to optimize your refinery for light oil, then that might be a true statement. But refiners optimize their refineries on a daily basis. I used to work in a heavy oil refinery. We could run heavy oil through, or we could run light oil through. If we don’t change the refinery settings at all, and run light oil through, then the above argument may be correct. But we would never do that. The overall yields are in fact higher with the lighter crudes, but you have to make the necessary adjustments. You may end up shutting down some units – like cokers – that are designed to handle heavy crudes.

But there is a more significant factor that seems to be overlooked. Refiners are configured to run heavy crudes because they are cheaper. Why are they cheaper? One, because they are more readily available. What does that suggest? That it is much less likely that there would be a disruption of heavy crude supplies. Thus, Mr. Shages (and Obama’s) argument is based solely on what refiners typically run, and ignores the question of typical availability of supply.

In conclusion, a heavy oil refinery can run light crudes with some adjustments. A light oil refinery can’t run heavy oils without severely impacting yields. Further, a light oil refinery is much more likely to see supply disruptions because there is simply less light oil available. This is why swapping heavy oil for light oil is a bad idea. It is a misguided attempt to influence oil prices, and that is not the purpose of the SPR. If it is allowed to be used for this purpose, then all we are doing is speculating with the reserve.

Footnote: Headed back to Europe today; offline for a couple of days.

September 8, 2008 Posted by | assays, Barack Obama, oil prices, oil refineries, refining, SPR | 60 Comments

SPR is Being Tapped

In response to Hurricane Gustav and the oil production that was taken offline as a result, the federal government announced that 250,000 barrels of oil would be released from the Strategic Petroleum Reserve:

Oil prices drop as US opens reserve taps

LONDON (AFP) – Oil prices fell on Wednesday as the US government decided to release crude stocks from its strategic reserve after Hurricane Gustav halted energy production in the Gulf of Mexico.

“The release of the oil will prevent any shortage and that will, of course, help calm the market,” said Victor Shum, an analyst with energy consultancy Purvin and Gertz.

The United States announced late on Tuesday that it was releasing 250,000 barrels of oil from its strategic reserve to help cover lost production.

There was no oil production on Tuesday in the Gulf of Mexico region, where a quarter of US oil is normally produced, the US Department of the Interior said. Ninety-five percent of natural gas production was also offline.

The threat from Gustav had raised grim memories of the 2005 hurricanes Katrina and Rita which damaged or destroyed about 165 of around 4,000 oil platforms in the Gulf. Damage this time appeared to be much less severe.

This news is helping to put downward pressure on oil prices, already down almost 30% from the highs set just a couple of months ago.

Long-term, I certainly don’t believe the oil bull is dead, but a lot of people are learning a very hard lesson about commodities trading: You can go from rich to poor very quickly. I have heard some in the “peak oil now” camp argue that it is a no-brainer to invest in oil futures, because 5 years from now oil is going to be $400 a barrel. That may very well be true, but there will be a lot of ups and downs in the short-term that make the long-term strategy difficult to realize. Those who bought oil contracts at $147 and are still holding them now understand what I mean.

September 3, 2008 Posted by | investing, SPR | 198 Comments

Pinning Pelosi

I received an interesting e-mail yesterday:

Nancy Pelosi, Speaker of the House and Author of “Know Your Power: A Message to America’s Daughters” will answer questions in a live discussion on washingtonpost.com today (Wednesday, Aug. 6 at 3 pm ET).

Pelosi will discuss the current political scene heading into the conventions, the message of her new book and other questions submitted by readers.

To submit questions and participate in the live discussion click here: http://www.washingtonpost.com/wp-dyn/content/discussion/2008/08/01/DI2008080102174.html

This seemed to me to be an ideal opportunity to pin her down on two issues that she is clearly passionate about, but seem to me to be diametrically opposed: Tapping the Strategic Petroleum Reserve (SPR) and reducing carbon emissions. So, I submitted the following question, several hours prior to the chat:

Dear Speaker Pelosi,

Perhaps you could clarify an issue that is baffling to me. On the one hand, you have spoken passionately for the need to combat global warming by reducing our carbon emissions. This is clearly a priority for you, as well as for large segments of the Democratic Party. On the other hand, you have also come out strongly in favor of tapping oil from our Strategic Petroleum Reserve in order to bring oil prices down. Given that high prices are causing the public to abandon SUVs and to embrace fuel efficiency and mass transit – exactly the sorts of things that need to happen if we are to reduce carbon emissions – how is your position on the SPR not completely inconsistent with your position on global warming? If in fact you push through your proposal on the SPR, won’t that lead to increased consumption and therefore increased carbon emissions?

Had I been a bit more long-winded, I would have pointed to reports that gasoline demand is in fact down this year, breaking a multi-year trend of increasing demand. Or I could have shown the many news stories showing record demand for Priuses while SUVs are not moving. The reason demand is down is clearly price-driven. Price is the clearest handle we have on moderating demand.

Unfortunately, Pelosi (or the person screening the questions) decided not to answer my question. Instead, they answered a question in which she could once more push for tapping the SPR!

Marietta, Georgia: Dear Madam Speaker,

Although this forum is primarily focused on your book, I cannot help but bring up an issue that is affecting each and every American. Why have the American people not seen energy legislation that lowers the price of gas?

Thank you

Nancy Pelosi: Now let’s pivot from book questions to a topic many of you have raised: the high price of gasoline at the pump and what we can do about it.

Every American family is affected by the high price of oil and gas. It is our responsibility in Congress to protect the consumer and increase the domestic supply of energy. For the past 18 months, the Democrats in Congress have set forth an energy agenda. Some has been passed into law – and some has been blocked by the Republicans.

House Democrats have put forward 13 major proposals that would increase supply, reduce prices, protect consumers and transition America to a clean, renewable energy-independent future. Each time a majority of House Republicans have voted against these proposals.

Let me be very clear: drilling for oil in protected areas offshore will not bring down the price at the pump for 10 years – and then only 2 cents. To say otherwise is a hoax on the American people.

Here’s what we can do:

1. Free Our Oil

We can have immediate price relief at the pump. Freeing our oil from the Strategic Petroleum Reserve will bring down the price of oil in 10 days. President Bush refuses to take this step for immediate relief.

10 years or 10 days – the choice is clear.

2. Use It or Lose It

Democrats passed the Drill Bill which says to Big Oil “Use it or lose it!” – drill in the 68 million acres in the lower 48 states or let someone else drill there. Also, “use it or lose it in Alaska. All of these areas have permits for drilling – and will produce oil sooner than drilling in protected areas offshore.

3. End Excessive Speculation Which Raises the Price of Oil

Democrats were part of a strong bipartisan vote was taken in the House but GOP leaders twisted arms to block passage.

4. Repeal the subsidies for Big Oil

With Big Oil making record profits, they do not need American taxpayers funding their drilling.

Instead we can invest in research, renewable energy, and tax credits for wind, solar and other renewables. This passed the House but failed in the Senate by one vote – John McCain was absent that day but said he would have voted no.

5. Increase Our Energy Supply With Increased Use of Natural Gas – a cleaner energy source.

There is immediate relief for the consumer – if only President Bush would free our oil.

I must say that Number 5 is a surprise, and something I have long advocated. Instead of recycling our natural gas into ethanol, it would be much more efficient to use it directly as fuel. As I have pointed out before, Brazil – the poster child for ethanol production – also has 8 times the number of natural gas vehicles on the road as we do in the U.S. They don’t waste their natural gas separating ethanol from water. Besides Brazil – Argentina, Pakistan, Italy, and India all have larger natural gas fleets than does the U.S. So for those who suggest that we don’t have the infrastructure in place to manage this, maybe we can learn from India and Pakistan. So I agree with Pelosi on this point: As our supply of oil depletes, we can moderate the decline with natural gas.

Number 1 on Pelosi’s list is the very contradiction I asked about, Number 2 promotes a myth (there already is a ‘use it or lose it’ provision in the law) and is nothing more than pandering, Number 3 may have some merit, but is again in contrast to her position on global warming (higher prices equal lower carbon emissions), and Number 4 says that oil companies should not be entitled to the same sorts of tax deductions afforded every other industry. I will let you all in on a dirty little secret: Big Oil also deducts the salaries of their employees from their gross receipts, just like every other business. Maybe that ‘subsidy’ should be eliminated. Maybe their deductions for capital spending should be disallowed. More subsidies. But I digress.

Can anyone explain to me why championing action on global warming while also championing tapping the SPR is not blatantly contradictory? Anyone? Or why nobody in the Democratic Party seems to have the guts to speak out on this contradiction? Instead, Barack Obama – long opposed to tapping the SPR – has now fallen into line and is calling for the same.

Actually, I think I know the answer to the contradiction. Proponents of tapping the SPR think that alternative fuels are going to rapidly scale up, displace petroleum with cheap ethanol, and the consumer won’t have to suffer in order to bring fossil fuel consumption down. To that, I would point out that the Energy Information Administration – the source of Pelosi’s claim that drilling in the OCS would only bring prices down by 2 cents a gallon – testified last year that they don’t foresee that cellulosic ethanol is going to scale up to even a billion gallons by 2030.

The EIA also predicts that fossil fuels will continue to be the dominant source of our energy supply for decades to come. So, the very agency Pelosi references in her argument for tapping the SPR is telling us in no uncertain terms that alternative fuels aren’t going to ride to the rescue. With that in mind, I believe it is impossible to reconcile a position of tapping the SPR with a position that reducing our carbon emissions is a high priority. It’s like saying “I propose that the nation needs to go on a diet. And by the way, I also propose that we increase the supply of donuts to make them more affordable.”

I just wish a politician would have the guts to step forward and address this contradiction.

August 7, 2008 Posted by | energy policy, global warming, Nancy Pelosi, politics, SPR | 17 Comments

Pinning Pelosi

I received an interesting e-mail yesterday:

Nancy Pelosi, Speaker of the House and Author of “Know Your Power: A Message to America’s Daughters” will answer questions in a live discussion on washingtonpost.com today (Wednesday, Aug. 6 at 3 pm ET).

Pelosi will discuss the current political scene heading into the conventions, the message of her new book and other questions submitted by readers.

To submit questions and participate in the live discussion click here: http://www.washingtonpost.com/wp-dyn/content/discussion/2008/08/01/DI2008080102174.html

This seemed to me to be an ideal opportunity to pin her down on two issues that she is clearly passionate about, but seem to me to be diametrically opposed: Tapping the Strategic Petroleum Reserve (SPR) and reducing carbon emissions. So, I submitted the following question, several hours prior to the chat:

Dear Speaker Pelosi,

Perhaps you could clarify an issue that is baffling to me. On the one hand, you have spoken passionately for the need to combat global warming by reducing our carbon emissions. This is clearly a priority for you, as well as for large segments of the Democratic Party. On the other hand, you have also come out strongly in favor of tapping oil from our Strategic Petroleum Reserve in order to bring oil prices down. Given that high prices are causing the public to abandon SUVs and to embrace fuel efficiency and mass transit – exactly the sorts of things that need to happen if we are to reduce carbon emissions – how is your position on the SPR not completely inconsistent with your position on global warming? If in fact you push through your proposal on the SPR, won’t that lead to increased consumption and therefore increased carbon emissions?

Had I been a bit more long-winded, I would have pointed to reports that gasoline demand is in fact down this year, breaking a multi-year trend of increasing demand. Or I could have shown the many news stories showing record demand for Priuses while SUVs are not moving. The reason demand is down is clearly price-driven. Price is the clearest handle we have on moderating demand.

Unfortunately, Pelosi (or the person screening the questions) decided not to answer my question. Instead, they answered a question in which she could once more push for tapping the SPR!

Marietta, Georgia: Dear Madam Speaker,

Although this forum is primarily focused on your book, I cannot help but bring up an issue that is affecting each and every American. Why have the American people not seen energy legislation that lowers the price of gas?

Thank you

Nancy Pelosi: Now let’s pivot from book questions to a topic many of you have raised: the high price of gasoline at the pump and what we can do about it.

Every American family is affected by the high price of oil and gas. It is our responsibility in Congress to protect the consumer and increase the domestic supply of energy. For the past 18 months, the Democrats in Congress have set forth an energy agenda. Some has been passed into law – and some has been blocked by the Republicans.

House Democrats have put forward 13 major proposals that would increase supply, reduce prices, protect consumers and transition America to a clean, renewable energy-independent future. Each time a majority of House Republicans have voted against these proposals.

Let me be very clear: drilling for oil in protected areas offshore will not bring down the price at the pump for 10 years – and then only 2 cents. To say otherwise is a hoax on the American people.

Here’s what we can do:

1. Free Our Oil

We can have immediate price relief at the pump. Freeing our oil from the Strategic Petroleum Reserve will bring down the price of oil in 10 days. President Bush refuses to take this step for immediate relief.

10 years or 10 days – the choice is clear.

2. Use It or Lose It

Democrats passed the Drill Bill which says to Big Oil “Use it or lose it!” – drill in the 68 million acres in the lower 48 states or let someone else drill there. Also, “use it or lose it in Alaska. All of these areas have permits for drilling – and will produce oil sooner than drilling in protected areas offshore.

3. End Excessive Speculation Which Raises the Price of Oil

Democrats were part of a strong bipartisan vote was taken in the House but GOP leaders twisted arms to block passage.

4. Repeal the subsidies for Big Oil

With Big Oil making record profits, they do not need American taxpayers funding their drilling.

Instead we can invest in research, renewable energy, and tax credits for wind, solar and other renewables. This passed the House but failed in the Senate by one vote – John McCain was absent that day but said he would have voted no.

5. Increase Our Energy Supply With Increased Use of Natural Gas – a cleaner energy source.

There is immediate relief for the consumer – if only President Bush would free our oil.

I must say that Number 5 is a surprise, and something I have long advocated. Instead of recycling our natural gas into ethanol, it would be much more efficient to use it directly as fuel. As I have pointed out before, Brazil – the poster child for ethanol production – also has 8 times the number of natural gas vehicles on the road as we do in the U.S. They don’t waste their natural gas separating ethanol from water. Besides Brazil – Argentina, Pakistan, Italy, and India all have larger natural gas fleets than does the U.S. So for those who suggest that we don’t have the infrastructure in place to manage this, maybe we can learn from India and Pakistan. So I agree with Pelosi on this point: As our supply of oil depletes, we can moderate the decline with natural gas.

Number 1 on Pelosi’s list is the very contradiction I asked about, Number 2 promotes a myth (there already is a ‘use it or lose it’ provision in the law) and is nothing more than pandering, Number 3 may have some merit, but is again in contrast to her position on global warming (higher prices equal lower carbon emissions), and Number 4 says that oil companies should not be entitled to the same sorts of tax deductions afforded every other industry. I will let you all in on a dirty little secret: Big Oil also deducts the salaries of their employees from their gross receipts, just like every other business. Maybe that ‘subsidy’ should be eliminated. Maybe their deductions for capital spending should be disallowed. More subsidies. But I digress.

Can anyone explain to me why championing action on global warming while also championing tapping the SPR is not blatantly contradictory? Anyone? Or why nobody in the Democratic Party seems to have the guts to speak out on this contradiction? Instead, Barack Obama – long opposed to tapping the SPR – has now fallen into line and is calling for the same.

Actually, I think I know the answer to the contradiction. Proponents of tapping the SPR think that alternative fuels are going to rapidly scale up, displace petroleum with cheap ethanol, and the consumer won’t have to suffer in order to bring fossil fuel consumption down. To that, I would point out that the Energy Information Administration – the source of Pelosi’s claim that drilling in the OCS would only bring prices down by 2 cents a gallon – testified last year that they don’t foresee that cellulosic ethanol is going to scale up to even a billion gallons by 2030.

The EIA also predicts that fossil fuels will continue to be the dominant source of our energy supply for decades to come. So, the very agency Pelosi references in her argument for tapping the SPR is telling us in no uncertain terms that alternative fuels aren’t going to ride to the rescue. With that in mind, I believe it is impossible to reconcile a position of tapping the SPR with a position that reducing our carbon emissions is a high priority. It’s like saying “I propose that the nation needs to go on a diet. And by the way, I also propose that we increase the supply of donuts to make them more affordable.”

I just wish a politician would have the guts to step forward and address this contradiction.

August 7, 2008 Posted by | energy policy, global warming, Nancy Pelosi, politics, SPR | 17 Comments

More SPR Nonsense

I must say that I find it amazing that the same people can argue 1). We are too dependent upon fossil fuels; 2). We must find alternatives; 3). Carbon emissions are too high; 4). We need to promote higher fuel efficiency — and then 5). We must tap the Strategic Petroleum Reserve (SPR) to bring oil prices down so people can afford to consume more. This is utter rubbish, and I have addressed this once before (including the observation that nobody seemed to fact-check the claims that the SPR was being filled at a rate of 70,000 bbl/day).

Again, what is the purpose of the SPR?

In the event of an energy emergency, SPR oil would be distributed by competitive sale. The SPR has been used under these circumstances only twice (during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005). Its formidable size (700-plus million barrels) makes it a significant deterrent to oil import cutoffs and a key tool of foreign policy.

However, the calls for tapping the reserve continue to come, because high prices apparently constitute an energy emergency in some people’s minds. Here’s the latest:

Eight Reasons to Release Oil from the Strategic Petroleum Reserve

Let’s look at a couple of the reasons given:

1. Record oil prices have hurt American families

Ordinary families are struggling with record high energy prices. Many families’ gas costs have increased by hundreds or even thousands of dollars a year. The price of home heating oil has doubled in the past year. And the Department of Energy predicts that average electricity prices will increase by 5 percent this year, and go up 9 percent in 2009.

Yes, and we are seeing significant drops in gasoline demand as a result. You know what that means? The people who argue for lower carbon emissions should be happy. And the kicker of this article is that the author, Daniel J. Weiss, is “the Director of Climate Strategy at American Progress, where he leads the Center’s clean energy and climate advocacy campaign.” What’s wrong with this picture? Do climate advocates think getting people to change is going to be easy? No, there is going to be cost, pain, and inconvenience. But people respond to price. They don’t respond to feel-good speeches about the need to cut back.

Let’s look at one more:

6. There is plenty of oil in the reserve to withstand a supply disruption

The SPR has more oil than ever before—706 million barrels, which is 98 percent capacity. Selling 50 million barrels over 100 days would still leave it filled to over 90 percent capacity. This is enough oil to cope with a complete foreign supply disruption for nearly two months, assuming zero reduction in demand in the wake of such a catastrophe.

This is just an argument that the SPR is bigger than it needs to be. Yet the authorization to fill (eventually to 1 billion barrels) was made as a part of the Energy Policy Act of 2005, which received broad support. As someone who is very concerned about disruptions of future oil supplies, I want a healthy volume in the SPR. I want it tapped only in the event of something like a major supply disruption that actually threatens to sharply reduce the amount of available oil. I didn’t want it tapped at $20 oil, and I won’t want it tapped at $500 oil.

Finally, let’s not forget the history here. Chuck Schumer has lobbied to have the SPR tapped since 1999, when oil was hitting the outrageous value of $20 a barrel. He got his way in 2000, as President Clinton caved leading up to the elections. Here Schumer (and others) are at it again in 2004, which was also an election year. Oil at that time had risen to $35 a barrel. (Here’s another article from someone who recognizes Schumer’s misguided logic in tapping the SPR).

Where would we be had we heeded these perpetual calls to tap the reserve? With higher gasoline consumption, higher carbon emissions, a drained SPR, and Senator Schumer complaining about fossil fuel consumption. We would be much more vulnerable to supply disruptions, and our financial position with respect to the SPR would be billions of dollars worse off than it is now (i.e., down 100 million barrels or more from today’s level with oil at $130/bbl).

High fuel prices have led to many positive changes in people’s behaviors. Demand is down, fuel efficiency is being embraced, and sales of SUVs are down. The very same people who advocate these things are the same people who would reverse these positive changes by tapping the SPR. It appears that they don’t understand that cheap energy is the very reason we became so dependent upon fossil fuels. We won’t wean from fossil fuels if they remain cheap. As I have noted before, a big reason that Europe’s per capita energy usage is half that of the U.S. is because they have maintained prices at artificially high levels. This caused them to develop different living/transportation/consumption preferences than is the case in the U.S.

If people are forced to tighten budgets – and heaven forbid carpool, ride the bus, or simply drive less as a result of high prices – that does not constitute an energy emergency. We need to get past these ridiculous calls to tap the SPR, and highlight the inconsistencies (and past history) of the positions of those who advocate such a move.

July 16, 2008 Posted by | Chuck Schumer, energy policy, politics, SPR | 17 Comments

Stop Filling the SPR?

To me, some of the most humorous ideas for relieving high oil prices are the perpetual calls to release oil from the Strategic Petroleum Reserve (SPR). Note what the SPR is actually for:

The Strategic Petroleum Reserve (SPR) is the world’s largest supply of emergency crude oil. The federally-owned oil stocks are stored in huge underground salt caverns along the coastline of the Gulf of Mexico.

Decisions to withdraw crude oil from the SPR are made by the President under the authorities of the Energy Policy and Conservation Act. In the event of an energy emergency, SPR oil would be distributed by competitive sale. The SPR has been used under these circumstances only twice (during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005). Its formidable size (700-plus million barrels) makes it a significant deterrent to oil import cutoffs and a key tool of foreign policy.

So, it is supposed to protect us from oil import cutoffs, and yet every time oil prices rise, politicians want to tap it for political purposes. They wanted to do it when oil “sky-rocketed” to $20, and there have been calls to tap it every time oil climbs a few dollars. Imagine that we had tapped it when oil hit $20, and today found ourselves with a depleted SPR and oil at $120. We might as well not have a strategic reserve.

Maybe the politicians have finally figured out that there isn’t going to be a release, so they are trying a new strategy:

Suspend deliveries to U.S. oil reserve, lawmakers say

With fuel costs becoming a crucial election-year issue, members of both parties — separately — pitched their ideas Wednesday for bringing down prices.

Democrats called for a windfall profits tax on oil companies, rolling back tax breaks for the industry and new protections against price-gouging, while Republicans urged increased exploration for new domestic oil sources. About the only proposal their plans had in common was to stop the delivery of 70,000 barrels of oil a day for the emergency stockpile.

First thing, let’s fact check. I have heard this 70,000 barrel a day number repeated again and again, so I decided to check:

U.S. Weekly Crude Oil Ending Stocks SPR (Thousand Barrels)

Turns out that the rate isn’t correct. In the past 5 weeks, the SPR has been filled at the rate of 45,171 barrels a day. In the past 2 weeks, the rate of fill has been 14,214 barrels a day. So I am not sure where people have come up with the 70,000 barrel number. Even if we look over the past 12 months, the rate of fill is only 33,000 barrels a day. So, first thing, the rate of fill has been overstated.

Second, the capacity is 727 million barrels. How much is in there now? Over 701 million barrels. So, it is already over 96% full. But at the average rate of fill over the past year, it is going to finally be full in just a little over 2 years.

So, what’s my point? Given that the SPR is already almost full, yet the rate of fill is so slow, it really isn’t going to make much difference if they stop filling it. The daily rate of fill over the past year is less than 0.2% of the average daily oil usage in the U.S. – and only about 0.05% of the total daily usage of the world. That’s like noise in the system; there would be no discernable effect if we stopped filling the SPR. It’s a pretty meaningless political gesture, which has a chance to backfire if 1). Oil prices continue to rise; or 2). We have a national emergency. What are the odds of that, you might ask? Well, the SPR has only been tapped twice for national emergencies:

The Desert Storm Drawdown

On January 16, 1991, coinciding with the international effort to counter the Iraqi invasion of Kuwait, President George H.W. Bush ordered the first-ever emergency drawdown of the SPR. The Department of Energy immediately implemented a drawdown plan to sell 33.75 million barrels of crude oil, the United States’ portion agreed to by the International Energy Agency.

The drawdown proceeded on schedule and without major complications. Between the initial authorization and the final sale, however, world oil supplies and prices stabilized, and the United States reduced the sales amount to 17.3 million barrels which were sold to 13 companies.

And, who can forget:

Hurricane Katrina Drawdown

The SPR’s second emergency drawdown occurred after Hurricane Katrina caused massive damage to the oil production facilities, terminals, pipelines, and refineries along the Gulf regions of Mississippi and Louisiana in late August 2005. All Gulf of Mexico production was shut in initially, which equated to about 25% of domestic production. Gasoline prices spiked nationwide in reaction to the disruptions, and the supply levels of gasoline and other refined products were impacted.

On September 2, 2005, in a coordinated action with the International Energy Agency, President George W. Bush issued a Finding of a Severe Energy Supply Interruption and directed the Secretary of Energy to draw down and sell crude oil from the SPR. Secretary Samuel W. Bodman immediately authorized a Notice of Sale for 30 million barrels of crude oil to the U.S. markets. The on-line sale was held from September 6-9, 2005. DOE evaluated each bid and determined that five companies had submitted acceptable offers for 11 million barrels.

To conclude, I am not strongly against the idea, I just don’t think it will have any impact. (On the other hand, I am very strongly opposed to tapping the reserve just to bring down oil prices for political purposes). I also think we could save more oil by maintaining the air pressure of our tires on every car that stops by. In fact, from a recent essay I wrote, it is estimated that we waste 1.2 billion gallons a year due to low tire pressure. This is is three times what we put in the SPR in the past year – but have you heard one government official talking about an intiative to air up our tires?

May 9, 2008 Posted by | energy policy, fuel efficiency, oil prices, politics, SPR, Strategic Petroleum Reserve | 8 Comments