Moniz says Strategic Petroleum Reserve could be tapped to control price shocks

WASHINGTON — The nation’s emergency petroleum reserve has not lost value amid low oil prices and gains in U.S. crude production, Energy Secretary Ernest Moniz said Monday.

But with the change in domestic crude production, Moniz said, the United States should be rethinking the size of its oil stockpile, the capacity to  distribute it swiftly in an emergency and even how aggressively it can be used to blunt the economic harm of supply disruptions around the world.

Moniz delivered his case for a deeper look at the Strategic Petroleum Reserve to an audience of analysts and industry officials convened at the Energy Information Administration’s annual conference in Washington, D.C.

Although he stopped short of making specific recommendations, Moniz floated the idea that the United States could be more nimble in tapping the reserve during the early stages of oil supply disruptions.

“If there’s a disruption which holds the promise of having a major economic dislocation not only for us but for the world,” Moniz said, “can we exercise our asset in an anticipatory way . . . as opposed to let’s see how bad it gets and then take action?”

Moniz argued that because oil price spikes can affect U.S. consumers and the domestic economy, “the importance of heading off the consequences of disruption is evident.”

This is not the first time Moniz has questioned policies created in the wake of the 1973 OPEC oil embargo, including the government’s emergency crude stockpile, now stashed in four underground salt domes along the Gulf Coast.

The United States recently added two more stockpiles to the crude-focused Strategic Petroleum Reserve — one filled with heating oil and low-sulfur diesel and another with gasoline — but Moniz has said other regional reserves may be needed around the country.

The United States is obligated to maintain a reserve of crude oil or production products equivalent to at least 90 days worth of net imports, as part of U.S. membership in the International Energy Agency.

Because the United States is well above that threshold now, some policymakers and analysts have argued the United States should sell off some of the emergency crude.

But Moniz countered Monday that the size of the Strategic Petroleum Reserve should not be dictated by the United States’ current dependence on imported crude because any global oil supply disruption would affect world prices for gasoline and other petroleum products.

“Harm to the U.S. economy from a global oil disruption is no longer measured by days of import protection as it was when the SPR was established in the 1970s,” Moniz said. “Regardless of how much oil the U.S. imports and from where, in today’s global oil markets a severe global 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.”

“The value of the SPR is its capability to move significant and incremental barrels into the global market, in effect, moving beyond the framework of import protection,” Moniz said.

Moniz did not specify how much crude should be held in the stockpile, which is capable of holding 700 million barrels of crude. But he stressed that “the ultimate size of the SPR needs to be much more closely tied to the size of the potential disruptions as well as the nature and magnitude of the collective energy security response.”

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“We need to ensure that in an oil emergency — a global disruption — we are actually putting incremental barrels into the market and not effectively shutting in our own production,” Moniz said. “The more incremental oil from the SPR we can move into our own markets, the more foreign cargoes can be rerouted.”

A broad government analysis of U.S. energy infrastructure, released in April, suggested modernizing the strategic petroleum reserve, including changes to the triggers for tapping it. It also highlighted problems in swiftly delivering that emergency oil to the market — as evidenced by a March 2014 test sale of 5 million barrels from the reserve.

That sale revealed that while the SPR actually can pump out roughly 4.4 million barrels of oil daily, there isn’t enough pipeline capacity to keep up with it.

For instance, some pipelines expected to carry oil away from the salt domes now flow in different directions.

Moniz suggested building “dedicated SPR facilities to enhance its distribution capacity.”

The quadrennial energy review released in April put the price tag for those improvements at $1.5 billion to $2 billion.

Moniz floated the idea of paying for dedicated SPR infrastructure by selling off some of the oil now in the reserves.

But he criticized congressional proposals to sell some of the emergency crude as a fundraiser for completely unrelated endeavors, including paying off part of the U.S. debt.

That, Moniz warned, is “a very slippery slope.”