In case of military strike on Syria, US has backup oil
The SPR Grew Without Buying A Barrel
Although mainly focused on the oil market鈥檚 current jitters over Syria, Liam Denning鈥檚 Wednesday聽聽in the Wall St. Journal neatly highlights the extraordinary degree to which resurgent US oil production and weaker US demand have boosted the effectiveness of US oil inventories, including the US Strategic Petroleum Reserve (SPR). Without adding a drop 鈥� the SPR聽actually聽聽in 2011 鈥� the reserve鈥檚 potential to replace daily聽imports in a crisis has soared as those imports have declined.
In the near term this could prove extremely helpful should expected US-led reprisals against the Syrian government result in a regional disruption of oil flows. Longer term, it serves as a further reminder that the existing聽SPR was designed for another era and is overdue for a major聽.
An Imperfect Backstop
Having 700 million barrels of聽oil in聽聽along the Gulf Coast has tempted presidents and other聽politicians, who saw opportunities to benefit from using it聽to attempt to crush periodic gasoline price spikes. However, the current situation comes much closer to the scenarios the SPR was intended to address when it was聽, to provide a backstop for our vital energy supplies in emergencies involving a physical interruption of supply. When it comes to uses of the SPR, I鈥檝e always been聽a purist, perhaps because I can recall sitting in gas lines and participating involuntarily in the bizarre 鈥渙dd-even鈥澛爎ationing-by-license-plate scheme introduced聽during the聽oil crisis following the Iranian聽Revolution in 1979.
Here鈥檚 how the benefits of tapping the SPR in an actual聽crisis have improved, based on聽the聽rapid recent drop in聽US oil imports. In 2007, the SPR could have replaced just over half of our聽聽from countries other than Canada or Mexico聽for 165 days, at its聽聽of 4.25 million barrels per day (MBD). With its current inventory and this year鈥檚聽聽through May running聽at around 7.6 MBD, the SPR could substitute for聽100%聽of our non-North American imports for 163 days. The value of such an insurance policy is rarely appreciated until it is needed.聽
Of course in practice the situation would be more complicated, mainly for reasons that support the case for rethinking the current 1970s-vintage reserve. One problem is that the oil stored in caverns near the Gulf聽of Mexico聽wouldn鈥檛 provide much immediate assistance for east coast refineries or for the West Coast, which has become聽聽on imports as production in both聽听补苍诲听聽declined steadily. Then there鈥檚 the issue of quality.聽聽of the SPR oil is light and sweet (low in sulfur), while much of the oil we still import is heavy and sour (higher sulfur), to match the requirements of current refinery configurations. With production of light sweet crude in Texas and North Dakota booming, releasing sweet crude from the SPR could compound regional imbalances and possibly result in reduced refinery utilization. Any redesign of the SPR should take these important shifts into account.
Conclusions 鈥� No Free Lunch from the SPR
奥颈迟丑听聽jumping at the thought of a聽looming聽聽on Syria, it鈥檚 worth recalling what a back-up supply from the SPR can and can鈥檛 do. It can buffer the US economy from the impact of a serious interruption in the flow of crude oil cargoes聽from the Middle聽East or elsewhere,聽for some months. US refineries would continue to operate, as would the planes, trains, trucks听补苍诲听ships聽they fuel, and on which聽commerce depends. However, consumers wouldn鈥檛 be insulated from the price increases that would accompany any major disruption in Middle East oil exports, because the SPR oil must be auctioned to refiners at market prices. The resulting situation at gas stations might look a lot like price-gouging, with social media spreading聽outrage and聽conspiracy theories at the speed of light. The fallout from聽that could be disruptive, too, if somewhat less so than widespread fuel shortages and 鈥渙ut of gas鈥� signs.
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