By Steve Elwart
Barack Obama was returning recently to the White House when he stopped to pet his dog Bo. One of the pool reporters shouted, “Does Bo think you should release the Strategic Petroleum Reserve?”
Instead of Bo, members of the media should be asking what the National Security Council thinks of talks regarding the release of oil from the nation’s emergency backup to try to lower prices during Obama’s campaign for re-election.
The Strategic Petroleum Reserve (SPR) was created in 1975 in response to the 1973 Arab oil embargo. It has been included in every energy plan the United States has enacted since 1975, in recognition of the United States’ dependence on imported oil.
The SPR includes five underground salt dome storage facilities in Texas and Louisiana and has enough capacity to hold 727 million barrels of oil. It currently holds approximately 704 million barrels.
The stated purpose of the reserve is to “provide the Unites States with energy and economic security through its emergency stockpile of crude oil.” The Energy Policy and Conservation Act (EPCA) authorized the drawdown of the SPR upon a finding by the president that there is a “severe energy supply interruption.”
Congress enacted additional authority later to permit use of the SPR for short periods to resolve supply interruptions stemming from situations internal to the United States.
Price deliberately was kept out of a president’s SPR drawdown authority. The intent of a drawdown of the reserve was not to lower gasoline prices, even in an election year.
At the time the reserve was started, the United States was the world’s largest consumer of oil. By 1970 the United States consumed about one-third of oil produced in the free world. By 1973, American per capita energy consumption was six times the rate of the rest of the world, and oil was supplying about half of U.S. energy needs.
The major factor that made the United States energy posture vulnerable was government interference in the markets. In August 1971, President Richard Nixon announced an unprecedented across-the-board series of wage and price controls. These controls included controls on crude oil and natural gas prices. While most controls were lifted by 1974, public opinion influenced the government’s decision to retain control on crude oil until 1981. By holding down domestic prices, domestic oil production declined and, at the same time, discouraged conservation.
But it was no secret that holding down domestic production was playing into the hands of the adversaries of the United States. On June 6, 1967, a boycott was imposed against the United States on the basis of the false accusation that it had participated with the Israelis in the attack on Cairo.
The embargo did not significantly decrease the amount of oil available due to a lack of coordination among the Arab countries and the fact that the United States was then importing less than half-million barrels a day of oil from them; supplies which were easily made up from other sources.
Even though the embargo was lifted, tensions still existed between the West and the Arab oil exporting countries. In 1972, the Arab oil producing countries made no less than 15 different threats to use oil as a weapon against their “enemies.” Almost all of them singled out the United States as the prime enemy. All of these threats turned out to be empty.
This changed in 1973.
In October 1973, OPEC’s “Gulf Six” initiated an embargo following the United States’ and Western Europe’s support of Israel against Arab nations in the Yom Kippur War. Saudi Arabia and Iran were the main countries involved in the embargo.
The impact was immediate. At the time, the United States imported 25 percent of it oil (much less than today), with more than 8 percent coming from the Middle East. As a result, the price of oil went from $3 a barrel to $12 a barrel and gasoline rationing began. U.S. citizens also began purchasing smaller cars and interstate speed limits reduced to 55 miles per hour.
The longer term effect was the economic recession incurred by a quadrupling of oil prices in a two-month period.
Just prior to the embargo, the U.S. National Petroleum Council (NPC) began an ongoing study called “Emergency Preparedness for Interruption of Petroleum Imports into the United States.” One of the conclusions in its September 1974 final report was the need for some sort of emergency petroleum reserve system.
The goal of the reserve, the report concluded, was to “include sufficient capacity to insure against a reasonable range of anticipated risk” with facilities designed for the “quick and efficient movement of security stocks into the U.S. supply system to replace lost imports.”
At the same time, Congress was considering the Petroleum Reserves and Import Policy Act, which called for the creation of a “strategic petroleum reserve,” for limiting oil imports to “levels, sources, and forms that are consistent with national security, public safety, and welfare.”
Driving the need for this bill as Sen. Henry “Scoop” Jackson, D-Wash., said was an “ominous” trend – the “increasing tendency” of some nations “to use oil for political blackmail.” (For political reasons, the bill was shelved, but Sen. Jackson continued to lobby for the reserve).
The Strategic Petroleum Reserve eventually was authorized by the Energy Policy and Conservation Act (EPCA), on Dec. 22, 1975, which declared that “the storage of substantial quantities of petroleum products will diminish the vulnerability of the United States to the effects of a severe energy supply disruption.”
After the initial test of the reserve, the SPR has only been used three times in its history in response to a supply disruption:
- 1990/91 – “Desert Storm” sale – 21 million barrels (This offset lost oil production in Kuwait when Saddam Hussein set the wells on fire as his army retreated from the country.)
- 2005 – “Hurricane Katrina” sale – 11 million barrels (Katrina shut down 95 percent of crude production and 88 percent of natural gas output in the Gulf of Mexico. This amounted to a quarter of total U.S. output.)
- 2011 – “Arab Spring” sale – 30 million barrels (a non-emergency sale to offset disruptions caused by political upheaval in Libya. Most of this oil went to Europe who imported the majority of Libya’s oil.)
There were two other times the reserve was tapped, instances with political implications. In 1996, Congress required the sale of more than $220 million of stockpiled oil to help pay down the budget deficit, a move, in hindsight, looked wise when oil prices tanked two years later. In July 2000, President Clinton ordered the transfer of some of the strategic reserves to fill a newly created Northeast Home Heating Oil Reserve. This move had some obvious political implications for Al Gore’s presidential bid.
The Obama administration is looking at tapping into the reserve yet again. Obama administration officials, including the energy and treasury secretaries, have said in recent weeks that tapping the Strategic Petroleum Reserve was a tool available to the administration.
Speaking at New York University on March 15, Britain’s Prime Minister David Cameron said he and Obama discussed tapping oil reserves.
“We’d both like to see global oil prices at a lower level than they are today,” Speaking of releasing reserves, he added, “I think it is something worth looking at, because it’s having an effect on all our economies.”
If oil were released from the SPR, the key question is whether such a release would, in fact, reduce prices in the short term. Most analysts believe that drawing the light, sweet crude oil from the SPR would actually be of more benefit to the European market that relies on that type of crude oil more than the U.S. It would have a smaller effect in the United States.
There is the further concern that any oil sold from the SPR would end up in the reserve of another country with no significant price decrease at the pump.
If sales out of the SPR would artificially depress the price of oil and offer temporary relief at the pump, it wouldn’t be much. As an example, the cost of crude oil only accounts for 60 percent of the cost of gasoline in the state of California .
Therefore, if an SPR release resulted in a $10 decrease in the cost of crude oil, the driver would only see a 15 cent per gallon drop in gasoline prices.
Since analysts do expect oil prices to continue on a long upward trend, as soon as the administration stops selling oil out of the SPR, the price would rebound to its current levels, probably higher.
The administration would then be faced with living with a smaller oil reserve, or replacing the oil it sold with higher priced oil.
A smaller reserve would place this country in a more vulnerable position. If Iran, for example, would take its oil off the world market completely or succeed in closing the Strait of Hormuz, the United States would have a smaller cushion against the subsequent supply disruption.
Replacing the oil would result in even higher deficits since the revenue raised by sale would be quickly spent and the United States would have to replenish the reserve in an outright purchase of oil or in “royalty in kind” (RIK) deliveries.
In fact, any replenishment of the reserves may be impossible since the Energy Policy Act of 2005 (EPACT, P.L. 109-58) that permanently authorized the SPR permits a SPR fill only if it can be established that adding to the reserve is not placing upward pressure on prices, which may not be feasible at this time.
Analysts say the only benefit now for an SPR release would be political, in that lower gasoline prices could be touted as evidence that the current administration is performing well and deserves reelection.
The coming price increase and impact on the deficit from replacing the reserve with higher priced oil would come later, after the November elections.
Steve Elwart, P.E. is the Senior Research Analyst with the Koinonia Institute and a Subject Matter Expert for the Department of Homeland Security. He can be contacted at firstname.lastname@example.org.