The Strategic Petroleum Reserve: Political Oil and the Path Forward

“The global oil market is fundamentally strained and suffering from an array of unwelcome but unremarkable problems. Yet the oil reserve is neither designed nor well equipped to address these chronic weaknesses. Instead it should be preserved to address an emergency disruption in supply.”

Last week, BPC Energy Project Co-Chair and Former National Security Advisor James Jones and BPC President Jason Grumet published an op-ed in The New York Times on the Strategic Petroleum Reserve titled “Let’s Keep Our Hands Off the Emergency Oil Supply.” Read the op-ed here. Rumors of an administration move to release oil from the Strategic Petroleum Reserve have been circulating in Washington, with a rationale behind a potential release of calming oil markets and lowering gasoline prices. Prices for crude oil have been rising in response to predicted declines in Iranian oil exports due to the imposition of new sanctions, as well as from unrest in Sudan, Yemen, and Syria which has limited crude oil exports from these countries.

Jones and Grumet assert that while these disruptions will continue to strain an already tight oil market (a market that currently has a cushion of spare capacity, provided almost entirely by Saudi Arabia, that is hovering around 3 percent of global daily supply, compared to a long-term average 5 percent spare capacity), that “[t]his combination of circumstances, however, does not yet constitute a severe supply disruption,” and that “[u]sing the reserve now would be premature, reduce our national security options and perhaps even undermine the goal of calming oil markets.”

Since its creation in 1975, the Strategic Petroleum Reserve has been drawn upon on under two discrete types of circumstances. The first category of releases were ordered on a non-emergency basis and include a number of small test sales, responses to minor domestic disruptions, and, somewhat more notably, crude oil sales in 1996 and 1997 to raise funds in order to balance the federal budget. The second category of draw downs were employed in order to address discrete global supply disruptions. There have been three emergency releases—during the first Iraq war, after Hurricane Katrina, and in 2011 in response to the disruption of Libyan supply during the country’s civil war.

Jones and Grumet reason that releasing oil from the Strategic Oil Reserve at the present time would be counterproductive at the present time, and that instead “…the president and Congress must take more strategic and lasting action to protect the public and the economy from the effects of $100-a-barrel oil and $4-a-gallon gasoline.” In particular, they suggest focusing on three policy areas where there is considerable bipartisan agreement on potential solutions that will contribute towards increased economic growth and provide resiliency to the economy:

• Increasing domestic oil production. U.S. oil production is projected to grow by more than 1 million barrels per day by 2020. If these projections become reality, U.S. production will help to lower global prices, provide jobs, and reduce the trade deficit. In order to achieve these benefits, Jones and Grumet recommend that “[t]he Obama administration…continue to accelerate efforts to open new areas for production and encourage efforts to construct the distribution infrastructure needed to support increased production.” However, they caution that while the benefits of increased oil production will be positive, “…no amount of production can insulate the United States from the global market and global price spikes.”
• Protect the economy from oil price shocks. Resiliency of the economy from price shocks is driven by the oil intensity of the economy, which simply put, is the amount of oil required to produce a unit of economic output. The U.S. has made considerable progress on oil intensity. In 1975, 1.2 barrels of oil were used to produce $1,000 of gross domestic product, whereas today, just one-half of a barrel of oil is required to produce the same amount of GDP (2005 dollars). These reductions were achieved by substituting oil for other fuels in the electric power sector and through large (and growing) increases in vehicle fuel economy. Policies promoting power-sector fuel diversity and vehicle fuel efficiency have enjoyed support from a substantial majority of Congress.
• Fuel diversity. Jones and Grumet acknowledge that while the U.S. “…will continue to rely on oil for decades, there is considerable support in both parties for efforts to diversify transportation fuels through research and development and the deployment of biofuels, electric and natural gas vehicles.” With approximately 93 percent of the transportation sector dependent on crude oil for fuel, there is ample room for improvement in fuel diversity.