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Don’t sell off the SPR

The Strategic Petroleum Reserve (SPR) has effectively deterred oil embargoes since it was established, and provided relief to replace disrupted oil supply due to weather, civil unrest and war when presidents have called for it.   It is tempting to sell down some of the SPR now that the U.S. can provide more of its own oil supply through domestic production, and as we face the need to invest in maintaining the SPR’s physical infrastructure and ensure there is requisite pipeline capacity to move SPR oil to where it needs to go.  But it would be a mistake to hollow out the world’s largest non-OPEC supply of strategic stocks. 

Rather than sell some it for non-strategic purposes, a better solution is to let fellow members of the International Energy Agency (IEA), and those countries that will formally associate with it and abide by its rules, buy special drawing rights (SDRs) to a share of the reserve. The funds we raise should be used to repair leaking storage caverns, assure our ability to drawdown at optimal rates during a disruption, and fund regional product reserves. 

{mosads}As domestic oil production has risen, and imports of light oil have fallen, the amount of oil the US requires to meet its requirements has declined. At this moment, with roughly 692 millions barrels of oil in the SPR as of the end of May, we have roughly 141 days of import cover. This leaves more than 250 million barrels of potentially “surplus” oil.  The Department of Energy has documented the need to maintain the existing storage caverns and to modernize the SPR drawdown infrastructure, estimating that an investment of $1.5 – $2.0 billion US dollars (USD) would be needed to construct new dock capacity in the Gulf Coast to raise the incremental drawdown capacity of the SPR and to “undertake a life extension program for key SPR components.” To that end, the Administration requested an additional $257 million USD for the SPR in President’s Fiscal Year 2016 Budget.  

At the same time, the European members of the IEA, many of whom rely more heavily on private stocks, are facing rising imports and a growing inability to effectively meet their treaty obligation to maintain stock levels.  Other major consumers, notably China and India, are building strategic stocks that will resemble the US SPR in format, but they are not yet large enough to cover 90 days of net imports in the event of a supply disruption. Smaller consumers lack the storage capacity to hold any strategic stocks. These dynamics indicate that, under a business as usual approach, the world will be increasingly free riding on the US reserve. 

However, the US can strengthen its own energy security, expand collective energy security and ensure others share the burden of responding to oil supply disruptions by allowing IEA members, or the IEA collectively, to buy drawing rights (akin to the IMF’s Special Drawing Rights) to a share of the SPR. These SDRs could allow IEA members to call on shares of SPR oil when the IEA has voted to call for a stock draw under the agency’s collective emergency response mechanism (CERM).   If countries like India or the Philippines agreed to formally associate with IEA and comply with the CERM, they could buy in as well.   

By embracing this approach, the US could keep the size of the SPR the same, but monetize a portion of it to use for physical repair or to build product of other oil reserves in parts of the country other than the Gulf Coast.  Under Section 168 of the Energy Policy and Conservation Act, legal authority already exists to allow the SPR to store petroleum product [sic] owned by foreign nations; this program could be an extension or analogue of that mandate. 

U.S. national security would be well served by such a mechanism.  The U.S. would maintain, rather than erode, global capacity to replace disrupted oil. While the U.S. can supply more of its own needs, price shock impacts of oil disruptions are felt globally and can only be addressed by replacing disrupted supply.  Such a mechanism would allow the U.S. to share the cost of this price shock insurance with others, rather than allowing oil importers who are not members of the IEA to free ride on our largesse. If Asian nations chose to collaborate with the IEA, this would provide additional substance to the Asian pivot. Finally the U.S. could finance the cost of modernizing the SPR – building product reserves, enhancing drawdown capacity and directing the use of SPR oil for export – without seeking a major budget appropriation.  

There are many details to be worked out – what volume of oil we should covert to SDRs, how the IEA would manage its role, how current members could associate with the IEA, how DOE would manage the SDR program, and probably some legislation to allow the use of funds from the sale of SDRs for other purposes. But selling a strategic asset at the bottom of the market is the least optimal solution.  Expanding the collective energy security system is a better way.

Goldwyn was special envoy for International Energy at the Department of State and an assistant secretary of Energy.  He is chairman of the Atlantic Council’s Energy Advisory Board.


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