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Disrepair of U.S. Oil Reserve May Hamper Its Value in a Crisis

President Donald Trump said he may release oil from U.S. stockpiles to smooth out any price increases brought on by a strike at Saudi Arabian facilities, but the dilapidated state of the reserves and pipeline bottlenecks may limit the benefit.

“It’s a real issue,” said Jason Bordoff, a former Obama administration official who has studied the Strategic Petroleum Reserve and now works for Columbia University. “I don’t think the SPR could put the maximum release capacity on the market right now.”

Moreover, a boom in domestic oil production has pipelines operating at capacity, limiting the rate at which the strategic reserves held underground in Texas and Louisiana can be tapped, said Bordoff, who previously served as senior director for energy and climate change on the staff of the National Security Council.

Trump said on Sunday that he has authorized the release of oil following a series of drone attacks in Saudi Arabia that knocked out half of the kingdom’s crude output, or about 5% of world supplies. It remains to be seen whether the emergency reserve will be tapped but any bottlenecks could hamper its ability to stabilize oil markets and gasoline prices.

The Energy Department said in a statement the SPR is ready to respond to an order for an emergency release if made. The age of the caverns and supporting infrastructure don’t pose any restrictions, the statement said.

A 2016 report by the Energy Department painted a dire picture of the oil cache’s condition with corroding pipes, failing pumps, and crumbling tanks.

“A large portion of the SPR’s surface infrastructure has exceeded its design life and is in need of life extension,” said the report, which recommended a $2 billion overhaul. “This need for infrastructure life extension, coupled with increasing deferments of major maintenance projects, has resulted in an increasing number of significant equipment failures that have adversely impacted the Reserve’s operational readiness capability.”

While the Energy Department’s maximum drawdown rate is 4.4 million barrels a day, Bordoff and other analysts say this may no longer be achievable given pipeline reconfiguration in recent years to handle the domestic shale boom.

The DOE report had flagged congestion issues which have yet to be addressed.

“Since the time of that study, there’s been even more crude moving south and out of the country so it’s a reasonable assumption that congestion has gotten worse,” said Kevin Book, managing director of ClearView Energy Partners LLC.

Read the 2016 report on the petroleum reserve’s condition

While the reserve is an effective safeguard against short-term supply disruptions, it’s not designed for everyday use. Not all the caverns are equally well maintained or structurally sound, but it still does its job.

“The truth is, if you talk to people who’ve worked there over the years, the SPR has been a work in progress from the very start,” Book said. “It’s still a very efficient storage medium and a very capable insurance policy.”

Set up after the Arab oil embargo in the 1970s sent prices skyrocketing, the stockpile has previously been tapped in response to Operation Desert Storm in 1991, Hurricane Katrina in 2005, and Libyan supply disruptions in 2011.

The emergency stockpile is stored in huge underground salt caverns along the U.S. Gulf Coast. Although it was originally created as a backup in case of future supply shocks, the reserve has more recently become Congress’s go-to piggy bank, used to fund everything from roads to drugs to deficit reduction. About 10 million barrels were sold in the latest of a series of congressionally mandated sales last week.

How U.S. Presidents Use Strategic Petroleum Reserve: QuickTake

Lack of pipeline capacity in some places and reversals elsewhere have made the SPR a less effective tool, said Guy Caruso, a former head of the Energy Information Administration. “It’s diminished from what it used to be because of all the changes but it’s still useful.”
Source: Bloomberg

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