Tuesday, May 23, 2017

Trump seeks to sell off half of the Strategic Petroleum Reserve

Tugboats transport the Hess Corp. Stampede tension leg oil platform on Friday, May 5, 2017. The Stampede deepwater oil and gas field is one of the largest undeveloped fields in the Gulf of Mexico, sitting 115 miles south of Fourchon, Louisiana. Photographer: Eddie Seal/Bloomberg

As part of its 2018 budget, the Trump administration is proposing to reduce by half the size of the Strategic Petroleum Reserve, a cushion against global price shocks and supply disruptions. The administration said it expects the drawdown to reduce the federal deficit by $16.6 billion, part of a package of deficit reduction measures over the next 10 years.

The proposal probably will run into sharp differences in Congress and among oil experts, most of whom say that the reserve should remain a buffer in an emergency. As of May 12, the reserve had 688.1 million barrels, equal to about 141 days of net imports of crude oil and refined petroleum products.
The administration has proposed selling off 270 million barrels from the reserve by the year 2027, a move that it also said would allow it to retire two out of the four Gulf Coast facilities that store the oil.

“Given the long-term trajectory of domestic energy production and transportation capabilities, a smaller SPR is projected to be able to continue to meet international obligations and emergency needs,” states a budget document released by the White House on Tuesday.

The sales would start at half a billion dollars in the next fiscal year and climb to $3.9 billion, for a total of $16 billion over the next decade.

A policy brief floated by the conservative Heritage Foundation, a group that has exerted a major influence on the Trump budget, suggests selling off the entirety of the SPR over a two-to-three-year period (a more radical proposal than the Trump idea).

“The SPR has not served its purpose, as Presidents have used the SPR as a political tool or failed to release reserves in a timely and impactful manner,” Heritage fellow Nicolas Loris wrote in 2015. “It is time for Congress to recognize it is not the government’s role to respond to high prices. Congress should therefore pull the plug and drain the SPR once and for all.”

The Strategic Petroleum Reserve is the world’s largest stockpile of emergency crude oil, and lies near the largest U.S. refiners and pipeline networks in four large salt caverns in Louisiana and Texas.

It was established in December 1975 in the wake of the oil embargo imposed on the United States by Arab members of the Organization of the Petroleum Exporting Countries (OPEC).
That cutoff of oil sales to the United States delivered a shock to the U.S. economy. More recently, strategists have defended the reserve as a bulwark against a possible disruption in supplies from Saudi Arabia, the world’s largest oil exporter, or a closure of the narrow Strait of Hormuz at the mouth of the Persian Gulf.

Some analysts have argued that the United States no longer needs a big stockpile because of the surge in domestic production resulting from shale oil output over the past decade and the reduction in U.S. imports of crude oil.

Economist Philip Verleger has been among the leading advocates of shrinking the reserve. “The reserve was created at a time when the nation was very dependent on imported oil,” he wrote in a blog article for S&P Global Platts in 2014.  “The dependency is in the past.  The Reserve no longer serves the purpose for which it was developed."
“The risk of complete collapse in Venezuela is just one of many reminders that the world remains vulnerable to oil price shocks, and those will be felt by U.S. consumers at the pump just as much today even though we import less oil than we used to because oil is a global commodity,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University.

“The SPR is a 40-year-old national security asset that helps to protect the U.S., in partnership with other countries, from potential oil supply disruptions and price spikes. It would be foolish to sell it off just because our imports have fallen or to fill short-term budget holes, especially when oil prices are so low.” (Bordoff was President Barack Obama’s National Security Council adviser on energy and climate.)

This isn’t the first time the Strategic Petroleum Reserve has been tapped for revenue. A budget deal in October 2015 included sales of 58 million barrels — 8 percent of the reserve — from 2018 through 2025 to raise $5.1 billion, which would equal 0.125 percent of that year’s budget. In addition, Congress turned to sales of the reserve to meet financing needs of the Highway Trust Fund, which would drain the reserve of another 101 million barrels.

The administration’s plan to shrink the petroleum reserve would come after these earlier drawdowns, leaving the emergency buffer with about 250 to 260 million barrels, according to the new budget document, or less than 40 percent of the current level.

Selling half the reserve over a full decade would have limited impact on world oil prices. The sale would amount to just 74,000 barrels a day, a modest amount of global consumption of 96 million barrels a day. But it would slow down efforts by the Organization of the Petroleum Exporting Countries to reduce global inventory levels that are near record highs.

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