Donald Trump Budget Plan Renews Debate on Oil Reserves
May 24 2017 - 10:59AM
Dow Jones News
(Editor's Note: This story is being republished to appear on
additional newswires.)
By Alison Sider and Erin Ailworth
President Donald Trump's proposal to help reduce the national
debt by selling down more of the U.S. emergency oil stockpile is
reigniting a debate about whether the reserves are still crucial to
the country's economic security.
The Trump administration said Tuesday that its new budget
proposal calls for selling an additional 270 million barrels of oil
over the next decade. Congress had already recently approved
selling down some reserves to raise money for various domestic
programs.
The administration now wants to increase those sales. Officials
said the additional amount could bring in $500 million in fiscal
2018 and $16.6 billion through 2027.
Proponents say the reserve fund is necessary in the event of a
crisis, like a war in the Middle East or another violent disruption
to supply, that could leave the U.S. short of oil for a period.
Critics say that rising domestic production makes such large
reserves redundant and that proceeds from selling it could be put
to better use.
The Strategic Petroleum Reserve, or SPR, was intended as a
buffer against disruptions in the flow of imported oil. It was
created in the wake of the Arab oil embargo of 1973-74, when
gasoline prices at the pump quadrupled and consumers were stuck
waiting in long lines at filling stations. It is now the world's
largest supply of emergency crude, according to the Energy
Department.
But rising output from shale formations in places like Texas and
North Dakota has made the U.S. less dependent on crude from the
Organization of the Petroleum Exporting Countries. As a result,
many energy analysts say the U.S. no longer needs to sock away
hundreds of millions of barrels of oil as protection against supply
shortages and price spikes.
Some analysts also say the reserve is outdated or simply
ineffective. It can take as long as 13 days for the government's
oil to reach the market after the president calls for its release,
making it a blunt instrument in a market that can swing in an
instant. The reserve's infrastructure has also become dilapidated
in recent years, requiring new funding to make repairs and
upgrades.
"I don't think it has any efficacy -- it's basically a security
blanket, " said Fred Beach, assistant director for energy policy at
the Energy Institute at the University of Texas at Austin. "It's a
political tool. It's just not enough to swing a global market."
Those who favor keeping the reserves higher counter that even
with the U.S. producing more of its own crude, a sudden price spike
could still harm the economy. Shale producers need months to
significantly boost output. During that time the U.S. could be
short of oil, forcing users to pay exorbitant prices until new
domestic supplies reach the market.
"Making it significantly smaller -- that's going to work really
well until the next geopolitical crisis," said Adam Sieminski, who
served as the head of the U.S. Energy Information Administration
until this year and is now an analyst at the Center for Strategic
and International Studies. "I would like to actually see a healthy
debate with congressional hearings. It's worth exploring in more
detail."
Robert McNally, president of the Rapidan Group, equated the
proposal to "selling the family silver." Mr. McNally served as an
energy adviser on the staff of President George W. Bush during a
time when the government refilled the reserve using royalties from
its offshore leases.
"I've seen the terror in the eyes of officials when gasoline
prices rise or a Middle East war happens. Having that emergency
stockpile -- you really appreciate it," he said.
The U.S. government has dipped into these oil reserves several
times over the past few decades. It was usually for emergency
reasons, including after Hurricane Katrina in 2005, when a number
of oil operations were affected by the storm. The U.S. in 1991 drew
on reserves during Operation Desert Storm in Iraq.
Congress authorized sales from the stockpile in 1996 to pay for
deficit reduction, marking the first time it tapped the reserve for
reasons other than its stated purpose.
The surging output from U.S. shale formations has led to
lawmakers increasingly viewing the reserve as a piggy bank. In 2015
and 2016, Congress approved sales aimed at raising money for
programs including the Highway Trust Fund and medical research.
Those sales, which began earlier this year, could amount to some
190 million barrels through 2025, according to the EIA.
As a member of the International Energy Agency, the government
is required to keep stockpiles large enough to cover 90 days worth
of net petroleum imports. In the event of a major supply
disruption, it must release a certain amount from that reserve at
the direction of the IEA.
But the White House proposal likely wouldn't run afoul of that,
experts said: Net imports are dropping and the 1.3 billion barrels
of oil and fuel in privately owned storage tanks could more than
meet the IEA's rules.
(END) Dow Jones Newswires
May 24, 2017 10:44 ET (14:44 GMT)
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