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A Belated Response to Sandy

I was traveling when I saw聽a聽press release聽from the US Department of Energy (DOE) announcing the establishment of聽a strategic gasoline stockpile to聽serve the Northeast. Responsive to calls for such a reserve in the aftermath of the fuel distribution problems caused by 鈥渟uperstorm鈥� Sandy in 2012, Secretary Moniz also framed it as part of a broader effort to beef up US energy infrastructure.

Although it is encouraging to see DOE recognize some of聽the limitations of the current US聽Strategic Petroleum Reserve聽(SPR),聽I am disappointed聽that the new stockpile appears merely to copy the Clinton-era Northeast聽Heating Oil Reserve, in both聽quantity and approximate聽location, rather than reflecting a thorough rethinking of the entire concept of strategic fuel inventories, involving聽all stakeholders.

The Current SPR Is Outdated in Many Ways

As I noted in a post here聽last summer, the crude oil SPR and its Gulf Coast facilities were envisioned and stocked for a different world of falling domestic oil production, rising oil imports鈥搈ainly through Gulf Coast ports鈥揳nd US refineries that supplied only domestic customers. Yet while the SPR鈥檚 roughly聽700 million barrels聽in storage would last much longer in an emergency than they would have done in the previous decade, the reserve鈥檚 other shortcomings have grown as the聽US energy situation has evolved in the last several years.

For starters, it holds too much light sweet crude oil. Once in short supply, the US聽now has such abundant supplies of this grade, thanks聽to聽the shale聽production in聽North Dakota聽and聽Texas, that US refineries may eventually not be able to refine it all, without expensive upgrades or under-utilization of their costly conversion hardware.

It is also increasingly in the wrong place. While oil imports into the Gulf Coast are聽falling rapidly, California now imports聽more than half聽its crude oil needs, with聽half of those imports聽sourced from the Middle聽East. The existing Gulf Coast SPR provides virtually no coverage in the event of a disruption in California鈥檚 supplies.

Finally, as became apparent in the wake of Sandy and of 2007鈥瞫 hurricanes Katrina and Rita, a crude oil SPR provides little benefit if the refineries necessary to process its oil have been shut down by storms, electricity outages, or other causes. It also raises questions about the extent to which SPR oil might be used to produce gasoline or diesel for non-US customers.

Product Reserves A Step in the Right Direction

The announced Northeast Gasoline Reserve represents a step towards addressing these shortcomings, positioning refined products near major markets. That avoids the possibility that refinery capacity might not be available when required, and it circumvents at least part of the distribution infrastructure鈥損ipelines and ports鈥搕hat might fail in a future聽Sandy-like emergency.

The title of the DOE鈥檚 press release also hints that the Northeast reserve might be just the first, with others to follow. Additional locations should be chosen with regard not just to today鈥檚 vulnerabilities, but those聽under a variety of future scenarios.

What Else Was Considered?

However, while this decision moves in the right direction in several ways, it does not even address all the vulnerabilities highlighted by Sandy. Nor is it obvious whether DOE considered alternative strategic fuel stockpile options employed in other countries.

Sandy presented governments and consumers in the Northeast with both a shortfall of supply, from local refineries and long-distance product pipelines, and a聽massive failure of local infrastructure. Many distribution terminals had product in their tanks that they couldn鈥檛 deliver due to power outages, flooding or closed roads, while numerous gas stations were shut due to a lack of power to operate pumps and payment systems, a shortage聽of product to sell, or both. Without addressing these local distribution issues, it is conceivable that the new gasoline reserve might contribute no more in a future emergency than the Northeast Heating Oil Reserve did after Sandy, supplying聽mainly first responders. While still useful, that would fall well short of the consumer benefits that the Senators from New York and Massachusetts聽seem to be touting.

I can鈥檛 help wondering whether the team at DOE that devised this measure considered alternatives in use in Europe, for example. The EU聽requires each member country聽to maintain 90 days鈥� inventory of oil and refined products and gives countries latitude in how to provide聽for that.聽In the UK, and I believe聽at least several other聽EU countries, the responsibility for maintaining strategic stocks falls on聽the fuels industry. That approach offers significant benefits.

Aside from avoiding the need for governments to invest in and maintain idle inventory for many years, this option would also disperse fuel stocks across a much larger number of locations. That would reduce the risk that the strategic reserve facility itself might be incapacitated by the same event that triggers a call on its stocks, or might end up on the wrong side of temporary distribution bottlenecks.聽 It should also reduce the likelihood of an offsetting reduction in commercial fuel inventories, as聽appears to have occurred聽in New England following the establishment of the Heating Oil Reserve in late 2000.

Putting the reserve in commercial hands would also help to ensure that the product maintained in strategic storage meets current specifications, without the need for a complete聽turnover of the stockpile聽that occurred when the Northeast Heating Oil Reserve had to switch from ordinary to ultra low-sulfur diesel a few years ago.

These advantages, when combined with a rigorous auditing and oversight system, could more than compensate for the distrust that many consumers might feel for the industry as custodian of such聽a strategic reserve. I hope this was at least given careful consideration before the administration decided to implement another federally owned fuel reserve.

Conclusion:聽The Quadrennial Energy Review聽Should Assess the Current SPRs In Depth

The US Strategic Petroleum Reserve has been in place for four decades, and the Northeast Heating Oil Reserve for nearly 14 years. Much has changed since these stockpiles were justified and planned, to such an extent that it seems highly improbable that we would wish to implement them in the same way today, particularly in the case of the crude oil SPR. What should a state-of-the-art system of strategic energy storage consist of in 2014 and beyond? That鈥檚 the question I would expect聽the DOE address, with input from a range of stakeholders, including broad representation from the companies that produce and distribute these fuels under normal circumstances.

The press release announcing the gasoline reserve also mentioned the upcoming聽Quadrennial Energy Review, with its initial focus on infrastructure and participation by many parties outside government. While the composition and charter of that effort don鈥檛 appear to align with the needs of a major reform of the聽SPR system, it should at least be able to assess the fit-for-purpose of the current approach. It even invites public comment.

Source:聽US聽Strategic Gasoline Reserve: Solution or Band-Aid?