U.S. owns 700 MMbbl of oil and Trump wants to sell it

By Catherine Traywick and Dan Murtaugh on 7/21/2017

WASHINGTON D.C. (Bloomberg) – The U.S. government began stockpiling oil July 21, 1977. It started with just 412,000 bbl of Saudi Arabian light crude stashed in a Southeast Texas salt dome. In the wake of the Arab oil embargo in the first half of the 1970s, which sent prices through the roof and forced Americans to ration gasoline, creating a national reserve seemed like an obvious way to protect U.S. consumers from global supply shocks.

“It’s hard to imagine if you weren’t there,’’ said John Herrington, the Energy secretary under President Ronald Reagan, who pushed to expand the reserve in the 1980s. “We were lining up at gas stations. We were turning down our thermostats.’’

Forty years later, the world has changed, and Washington is torn on whether the Strategic Petroleum Reserve has outlived its usefulness. The U.S. is awash in crude, imports are declining, yet the stockpile remains the largest in world, ballooning to nearly 700 million barrels of crude, enough to offset U.S. production for more than two months, stored in some 60 caverns in Texas and Louisiana.

In light of these changes, Herrington’s position has shifted. “I don’t see the need for a petroleum reserve now,’’ he said.

Shrinking Reserves

The government is far from united on the matter. The Energy Department this year kicked off a $2 billion, multiyear effort to upgrade the reserve and improve its ability to distribute oil during an emergency. President Donald Trump, on the other hand, wants to sell part of the reserve, a plan that lawmakers for now have ignored. So the hoard, and the salt caves, remain.

The caverns themselves are a marvel. For all the disputation in Washington, the place is eerily quiet. At Bryan Mound, about 60 miles south of Houston, the salty breeze from the GOM rustles through knee-high sea grass.

Bryan Mound is the largest of four reserve locations on the coast of Texas and Louisiana, able to hold about 247 MMbbl of crude underground.

On the surface is a blue sign identifying Cavern 5 and a patch of cement. Two thousand ft below, a sprawling cave begins to open. Originally created by underground sulfur mining, the cavity twists and bloats another 2,000 ft down. Cavern 5 can hold about 37 MMbbl of oil, the largest single accumulation of stored oil anywhere in the world.

The caverns are more cost-efficient than smaller above-ground storage tanks. When oil is pumped in, the saltwater is pushed out. To empty the oil, workers simply pump the saltwater back in. That’s what’s happening now. The stockpile is shrinking.

Congress has, in recent years, ordered the Energy Department to sell 190 MMbo to fill government budget holes, but it hasn’t authorized the agency to replace it. That means that by 2025, the stockpile will be 27% smaller. Such a drop in volume could warrant closing some reserve sites, according to Guy Caruso, former chief of the EIA.

Still Vulnerable

Proponents of maintaining the stockpile argue that the U.S. is not immune to price volatility, in spite of rising domestic production and declining imports.

“We’re still vulnerable,’’ said Robert McNally, former energy adviser to President George W. Bush and the president of the Bethesda, Maryland-based consulting firm Rapidan Group. “It’s short-sighted and deeply unwise to assume that today’s energy circumstances will be the same over the next few decades.’’

Christopher Smith, who led the Energy Department’s Office of Fossil Energy under President Barack Obama, argues that just the existence of the stockpile has a calming effect on markets. For U.S. refiners, the argument goes, the reserve serves as a kind of insurance policy, promising relief if times get tough.

The problem with that argument is that the U.S. has never established a clear policy for when to release oil, leaving it instead to the discretion of the president.

Economic Illiterates

“We ought to dispose of the Strategic Petroleum Reserve because we’ve never figured out how to use it in a crisis,’’ said Philip Verleger, an economist who led the Treasury Department’s Office of Energy Policy under President Jimmy Carter and is now the head of an eponymous Carbondale, Colorado-based consulting firm. “The economic illiterates at the Energy Department say it works. But they haven’t used it when they needed to.’’

The stockpile has been used when extreme weather events, like Hurricane Katrina, threatened energy infrastructure on the Gulf Coast. It’s only been used once in response to a global emergency, during Operation Desert Storm in 1991. In 2011, the U.S. also released 30 MMbbl in response to oil-supply disruption in Libya.

One of its more controversial uses came in September 2000, when Democratic President Bill Clinton released 30 MMbbl to lower gasoline prices, a move that critics said was a way to influence the November election.

“We called that the use of the strategic ‘political’ reserve,’’ said McNally, a Republican. Still, he argues that the reserve remains an important foreign policy tool, especially when dealing with other major oil producers such as Saudi Arabia and Venezuela.

Case in point: As the Trump administration weighs banning crude imports from Venezuela as part of a potential sanctions package, White House advisers are considering whether such a move would warrant a release of oil from the reserve. Venezuela sells about 700,000 bpd to Gulf Coast refiners, so an embargo could squeeze refiner margins, and even raise gasoline prices. The oil reserve could give the U.S. some cushion.

Herrington, Reagan’s energy secretary, shrugs off the idea. “Venezuela, to me, is small potatoes,” he said. “And the oil from there is not particularly good.”

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