Moniz urges reevaluation of SPR role

OREANDA-NEWS. June 18, 2015. US energy secretary Ernest Moniz today called for a major rethink of the US Strategic Petroleum Reserve's (SPR) role in dealing with oil supply disruptions.

Rather than viewing the 692.9mn bl emergency oil stock merely as a mechanism for coping with a loss of crude imports, Moniz said the US should consider using its "most important federal energy security asset" to put incremental barrels on the market, to avoid the economic damage that might result from a price shock.

"It is important for policy makers to consider the use of the reserve in the context of today's markets, not those of 40 years ago when the SPR and the triggers for its use were established," Moniz said at the Energy Information Administration's (EIA) annual energy conference.

Moniz's suggestion emphasized a largely overlooked recommendation in the US administration's Quadrennial Energy Review released in April.

If realized, the proposal would constitute a more dynamic role for the SPR in safeguarding US energy security. While the SPR has been tapped over the years for a variety of reasons, its purpose as an energy security tool was to address clear threats to physical US oil supplies.

The Department of Energy (DOE) has estimated the SPR would provide about 137 days of import cover, if foreign shipments of crude and refined products were shut off. That calculation is based upon the US' net imports of 5.04mn b/d of crude and products in 2014.

But since US retail gasoline prices reflect changes in the price of the international crude benchmark Brent, damage to the US economy from a global oil disruption "is no longer measured by days of import protection," Moniz said.

Moniz made clear he is not talking about exporting SPR oil. Instead, by putting incremental barrels of oil into the market, policy makers could redirect shipments on the water that otherwise would be headed to US shores.

Speaking on the sidelines of the conference, Moniz said policy makers might want to authorize anticipatory authority for using the reserve. "If there is a disruption which holds the promise of having a major economic dislocation not only for us but for the world, can we exercise our asset in an anticipatory way, roughly speaking, as opposed to, 'Well, let us see how bad it gets and take action' "?

In 2011, the US joined other IEA member states in a 60mn bl release from strategic stocks in response to disruptions caused by the civil war in Libya. The US released nearly 31mn bl to 15 companies as part of that response.

Moniz said the size of the SPR should not be determined based on the number of days of import cover it would provide but on the potential volume of supply disruption. But he did not say whether that would mean a larger reserve. "I am actually not suggesting it is not big enough, I am suggesting that we need to re-evaluate it," he said.

The conflict in Ukraine and concerns about Russian energy supplies in the wake of US and EU sanctions has prompted the Group of Seven industrialized economies to "just think about energy security a little bit differently."

US officials are concerned about the SPR's ability to meet its drawdown capacity of 4.4mn b/d. In March 2014, DOE conducted a test sale of oil from the SPR to assess the reserve's drawdown and distribution capabilities, selling nearly 5mn bl of sour crude at an average price of \\$93.75/bl. The test revealed potential problems with pipeline capacity, storage space and availability of US-flagged vessels if an emergency drawdown were required.

As part of its Quadrennial Energy Review, the administration called for \\$1.5bn-2bn to upgrade the SPR.

In May, the US House of Representatives' Energy and Commerce Committee voted unanimously to direct the Department of Energy to sell 8mn bl/yr of oil from the reserve to help pay for a bill designed to spur medical innovations. But Moniz decried proposals for using the SPR for purposes beyond coping with energy supply disruptions as a "slippery slope."