More agile strategic petroleum reserve could help guard U.S. economy — Moniz

Source: Jenny Mandel, E&E reporter • Posted: Wednesday, June 17, 2015

Tending to the nation’s energy security could mean putting additional “oil on the water” to head off the economic consequences of shortages around the world, rather than just accounting for the number of days the United States might go without crude imports in a crisis, according to Energy Secretary Ernest Moniz.

“After the Russian aggression against Ukraine in 2014, the G-7 energy ministers and representatives … articulated a new, broad set of energy security principles that reflect [a] collective idea of energy security and a more modern view than what I would call the more oil-centric definition of the 1970s,” Moniz said yesterday in a keynote address to Washington, D.C., insiders at an U.S. Energy Information Administration conference.

Those principles range far beyond energy “independence” or a strict one-to-one replacement of imported fuel supplies, and include support for transparent markets, diversified energy supplies, and supporting efficiency and “clean energy,” Moniz said.

As Congress gears up to advance energy reform legislation in both chambers, Energy Department officials see an opportunity to push for those policy updates along with modernization of the Strategic Petroleum Reserve and associated distribution infrastructure that officials estimate would cost $1.5 billion to $2 billion.

“Past oil price spikes have invariably been followed by two to three years of weak economic growth,” Moniz said. “Harm to the U.S. economy from a global import disruption is no longer measured by days of import protection, as it was when the SPR was established in the 1970s, regardless of how much oil the U.S. imports and from where.

“In today’s global oil markets, a severe market disruption would largely have the same effect on domestic petroleum product prices, whether or not U.S. refineries import crude oil from disrupted countries,” he added. In that scenario, “world oil prices will skyrocket, and the U.S. and global economies will be harmed.”

Given the potential for damage to American consumers from a supply spat halfway around the world, Moniz said U.S. policymakers should update the SPR’s management guidelines to include “anticipatory authority” that would allow officials to respond to global disruptions that “hold the promise of disrupting” U.S. oil markets.

“To be clear, I am not suggesting that SPR oil should be exported,” Moniz said. “What I am saying is that international oil cargoes are fungible … the more incremental oil we can move from the SPR into our own markets, the more foreign cargoes can be rerouted. In an emergency, this will effectively increase global oil supplies by roughly the amount of oil being distributed from the SPR.”

The easiest way to move that stockpiled fuel to U.S. markets today, Moniz added, is by loading it onto ships for transport.

“We need to be sure that in case of a global disruption, we are actually putting incremental barrels of oil into the market, and not effectively shutting in our own production,” Moniz said. “Putting incremental SPR oil onto the water offers the economy the most valuable protection.”

Scope and cost?

DOE is already looking at a tab for deferred SPR maintenance that appropriators in both chambers recently declined to cover, he said. And the department is pushing for new, regionally based reserves for refined products like gasoline, diesel or fuel oil that could more quickly serve consumers in the event of an emergency outage.

The SPR system also needs distribution updates in light of the crude flow changes that have taken place in recent years, Moniz said, noting that an SPR test sale last year revealed that pipelines that DOE had counted on to move stockpiled crude had been reversed to carry domestic production to Gulf Coast markets.

Moniz said it could be possible to fund modernization or the construction of new product reserves in part by an additional SPR sale, if current stocks are deemed to be more than what is needed.

“It may be that we can create a net increase in value by converting a small portion of our current SPR oil inventory into investments needed to modernizing the SPR infrastructure, and our energy security evaluation assessment will shed more light on this,” Moniz said. But he warned against the “slippery slope” of using SPR sales to fund other government initiatives.

“The SPR needs to be large enough, its anticipatory authorities robust enough, and its distribution capacity sufficiently decongested and large enough to maximize its value in avoiding economy-damaging oil and gasoline price spikes from a global disruption,” Moniz said.

“And of course, any re-evaluation of how oil reserves are sized and used are not just a national discussion, but one that needs to engage our friends and allies and major economies, those with whom we need that collective response in the event of a major disruption.”