Save It for a Rainy Day—What’s Next in Strategic Reserves for Crude and Refined Products?

It seems logical to maintain stockpiles of critically important commodities like crude oil, heating oil and gasoline. After all, supply can be cut off suddenly by acts of God or man, causing price spikes, cold houses and empty gas tanks. Worries about supply interruption led to the creation of a federal Strategic Petroleum Reserve (SPR) and Northeast Home Heating Oil Reserve (NEHHOR) and, more recently, both federal and state reserves for motor fuels, again in the Northeast. But does the SPR as currently configured still make sense, given how much has changed in crude production and flows? Should we set up heating oil or motor fuel reserves in regions beyond the Northeast? And what about a strategic reserve for propane—an important fuel for millions of American homes and businesses? Today, we continue our look at the challenges of stockpiling hydrocarbons in a changing, unpredictable energy world.

It may surprise many readers to know that the U.S. is actually in worse shape today as far as our reliance on crude supplies from overseas (imports) are concerned than it was during the Arab oil embargoes of the 1970s—in spite of the recent shale boom driven increase in domestic production. In May of 1973 Energy Information Administration (EIA) data shows that U.S. crude production was 9.3 MMb/d while imports were 3.2 MMb/d. In November of 2014 production was 9 MMb/d but imports were 7.3 MMb/d – more than double what they were in the 70’s. So we remain vulnerable to the disruptive, out-of-the-blue supply cut-offs that can come from events as different as a Category 5 hurricane, an uprising in the Middle East or the current U.S. refinery workers strike As we said in Episode 1 of our series, the federal government responded to the 1973-74 Arab oil embargo by establishing the SPR that now stores 692 MMBbl of crude at four salt-dome sites along the Gulf Coast and reacted to spiking heating oil prices in the winters of 1996-97 and 1999-2000 by setting up NEHHOR, the nation’s first refined products stockpile that now stores a total of 1 MMBbl at sites in Connecticut and Massachusetts. More recently, in the wake of Superstorm Sandy in October 2012, both the feds and the state of New York started strategic reserves for gasoline and diesel. The feds are storing a total of 1 MMBbl of motor fuel, 700 MBbl of it at sites in New Jersey and 300 MBbl at sites in Massachusetts and Maine; New York is storing a total of 131 MBbl, 71 MBbl of it on Long Island and 60 MBbl upstate.

The value of the SPR has been tested, but only on a relatively small scale. In no instance has a hurricane, international crisis or other event required the release of more than 30 MMBbl (less than 5% of SPR’s total reserves). (That high mark of SPR sales came in 2011, because of supply disruptions in Libya and other countries.)  There are a lot of questions about the value of having an SPR.  Many ask whether it is too big (or too small), whether the types of crude it stockpiles match the imported supplies that might be interrupted, and whether the SPR sites’ location along the Gulf Coast still makes sense, given the major changes in U.S. oil production and flows in the past few years. Some also wonder why the federal government takes such an outsized role in meeting the total U.S. requirement (under our long-standing agreement with the International Energy Agency, or IEA) to maintain stockpiles of crude or refined products equivalent to at least 90 days of imported supply. Most other IEA members either impose stockpiling requirements on or share the obligation with, their oil industry, in order to meet the IEA mandate.