Entry to the U.S. Strategic Petroleum Reserve, Bryan Mound Site, Freeport, Texas. Photo: Bloomberg

By Catherine Traywick and Dan Murtaugh
21 July 2017

(Bloomberg) – The weather was hot and humid on 21 July 1977, the day the U.S. government began stockpiling oil. It started small. Just 412,000 barrels of Saudi Arabian light crude stashed in a Southeast Texas salt cavern. In the wake of the Arab oil embargo, 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 Gulf of Mexico rustles through knee-high sea grass. […]

Congress has, in recent years, ordered the Energy Department to sell 190 million barrels of oil 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 percent smaller. Such a drop in volume could warrant closing some reserve sites, according to Guy Caruso, former chief of the Energy Information Administration.

The agency this year completed two of more than a dozen planned sales of reserve oil, auctioning off about 16 million barrels. A January auction brought in an average price of $51.46 a barrel, while a March sale cleared an average of $45.42 a barrel, according to the Energy Department. The drawdowns have brought the current inventory down to 679 million barrels as of July 14.

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.’’ [more]

U.S. Owns 700 Million Barrels of Oil. Trump Wants to Sell It

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