Recent media stories have claimed the Strategic Petroleum Reserve (SPR) is no longer necessary, or that oil from the reserve could be sold to offset the budget deficit.
With this in mind, it’s important to evaluate exactly what the SPR is capable of doing, and what it means to the national security of the United States.
A recent Department of Energy (DOE) report concluded that:
- The United States could not meet its international obligations, established by treaty, if there was a severe interruption to the world’s oil supply.
- The SPR facility, due to its age, requires considerable new investment to bring the facility up to date, and ensure its ability to operate.
- Changes to pipeline flows caused by shale oil production has resulted in the SPR not being able, under some circumstances, to deliver oil to where it’s needed in the U.S.
What are the potential threats to the world’s oil supply?
From the map, three choke points are obvious, together with the amount of oil flow, in million barrels per day, that could be interrupted.
- Strait of Hormuz, 17
- Bab el Mandeb, 3.8
- Suez Canal, 4.5
To these must be added major oil processing or shipping installations.
- Ras Tanura or Al Jubayl (Saudi Arabia, Persian Gulf export terminals), 3.0 ea.
- Abqaiq, 8.0
Blockage of the Suez Canal or the Bab el Mandeb would result in an interruption of oil supplies for about two months, as tankers are rerouted around Cape Agulhas, South Africa.
For reference, here are the disruptions used by DOE in its report and computer projections.
- It’s important to note that the DOE report assumed 8 mmb/d disruption if the Strait of Hormuz is blocked, which grossly underestimates the threat. Even so, DOE determined the U.S. could not meet its treaty obligations.
- Similarly, the Abqaiq threat is underestimated. Approximately 80 to 90% of Saudi oil must be processed through Abqaiq.
The U.S. is obligated by treaty to export, from the SPR, 44% of the amount of oil that the IEA determines is required under “collective action”. In the case of the Strait of Hormuz, the U.S. would be required to export 7.5 mmb/d, from its SPR, which is impossible since the maximum amount that can be released is 4.4 mmb/d, for 3 months, after which the amount is reduced to 3.8, 3.4 and1.9 mmb/d.
Similarly, the U.S. could not meet its treaty obligations if Abqaiq was severely damaged.
together with drawdown rates.
If either the Strait of Hormuz was blocked or Abqaiq was severely damaged, the U.S. would release 4.4 mmb/d from the SPR, and sell it to the world. This would help reduce the impact on the world price of oil, which would nonetheless spike due to the sharp reduction in supply.
In all other situations, the U.S. would be able to meet its treaty obligations by exporting 2.0 mmb/d, or less, for about 5 months, while distributing the balance of oil from the SPR to U.S. refineries. (Exports help maintain oil supply around the world and mitigate the tendency of the price of oil to spike.)
It should be noted that the other countries with a Strategic Petroleum Reserve must also release oil, which in total, will be about 10% more than the release from the U.S. SPR. Combined, these releases will restore, at least partially, the amount of oil available to world markets.
Market forces would find it virtually impossible to react quickly to resolve oil supply shortages if there was a sudden disruption to oil supplies amounting to 4 to 5% of world supply, or around 4 mmb/d. Market forces would, unfortunately, probably exacerbate the spike in oil prices with demand far exceeding supply.
Computer models have attempted to show both, that the SPR is beneficial, and, alternatively, that it is unnecessary. Factually, computer models are limited in their ability to handle unknowns, and merely reflect what some expert believes is the appropriate probability. For example, what probability should be assigned to a computer model for blockage of the Strait of Hormuz? The risk may only be 1%, which would likely show the SPR to be unnecessary, but if a blockage occurred, the consequences would be devastating without the SPR.
It’s easy to visualize how the Strait of Hormuz could be blocked for as long as 6 months.
It’s also very easy to visualize how Abqaiq could be severely damaged and put out of operation for a year. Similarly, the Suez Canal, Bab el Mandeb, Ras Tanura and Al Jubayl are all large, soft targets.
The United States consumes approximately 19 million barrels of oil per day, of which 6.4 million are imported. Approximately 4.5 million of these imports are from Canada and Mexico.
Assuming the United States could continue to import oil from Canada and Mexico, the SPR would provide enough oil in all but two cases, to allow U.S. consumption to continue at approximately 19 mmb/d.
In summary:
- The SPR can protect the United States from serious consequences of major oil disruptions except in two cases: Blockage of the Strait of Hormuz, and severe damage to Abqaiq. Even in these cases, the SPR can mitigate damaging economic consequences.
Two conclusions can be reached from this cursory examination of the SPR.
- The SPR is important to the national security of the United States.
- Congress and the administration should not sell oil from the SPR to balance the budget, and Congress and the administration should appropriate and use the necessary funds to maintain the SPR in good operating condition.
NOTE:
Readers can forward this article to their Senators and to their Representative, or write to them, with copies of this article attached.
The media is not adequately reporting on the SPR. A recent WSJ article provided scant information on the importance of the SPR to national security. Contrary to the conclusions of this article, the Heritage Foundation, an influential Washington DC think tank, says Congress should pull the plug on the SPR because market forces are able to handle any and all supply disruptions.
They also claim, with some justification, that the SPR has been used by politicians for their political advantage.
While market forces could probably handle small interruptions, market forces can’t handle massive interruptions. The SPR is an insurance policy protecting the United States against the most serious threats.
The DOE SPR report is available at http://bit.ly/2cvMzpU
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