U.S. emergency oil reserve tempts Congress at the wrong time

By Timothy Gardner

WASHINGTON (Reuters) - U.S. lawmakers on both sides of the aisle figured this month they had hit on a clever way to fund everything from new drug programs to highway maintenance: sell off part of America's strategic oil reserves, a supply cushion that no longer needs to be so large.

The notion, embedded in a House of Representatives bill that passed earlier in July and in a Senate transportation bill proposed on Tuesday, has met with criticism from energy experts and economists, many calling it the right idea, but the wrong time.

A drilling revolution in the United States has left oil supplies robust at the Strategic Petroleum Reserve (SPR), which holds more than 695 million barrels of crude in Texas and Louisiana, just shy of its 714 million-barrel capacity that makes it the world's largest supply of government-owned emergency crude oil.

The boom helped to halve the price for a barrel of domestic crude since last summer to about $50 and cutting the value of the SPR, which holds about $35 billion worth of crude at current prices.

Furthermore, a 40-year-old ban on U.S. crude oil exports has already helped lead to a domestic oil glut, pushing down U.S. prices to more than $6 per barrel lower than the global Brent benchmark .

"Tapping the SPR and not allowing exports of domestic oil would be a catastrophe," said Amy Myers Jaffe, head of Energy and Sustainability at the University of California at Davis, and a consultant who advises governments on energy. "Oil would be trapped here and you'd hurt domestic production."

Selling oil to raise cash for projects unrelated to bolstering energy security also has stiff opponents in Senators Lisa Murkowski and Maria Cantwell, the Republican and Democratic leaders of the Senate energy committee.

It is uncertain whether the drugs bill and the highway bill will pass both chambers of Congress, but idea of tapping the SPR is unlikely to fade.

SLIPPERY SLOPE

The White House is reviewing the highway funding bill that includes tapping $9 billion of oil from the SPR from 2018 to 2025, an official said Tuesday.

The White House has said little, but many observers point to signs suggesting that the Obama administration is unlikely to allow a raid of the SPR.

Jason Bordoff, founding director of Columbia University's Center on Global Energy Policy and a former energy adviser to President Barack Obama, said even though the White House has not signaled yet that it would veto a bill that taps the SPR, Energy Secretary Ernest Moniz likely laid out the administration's leaning on the reserve in his speech last month.

In the speech, Moniz said he did not agree the SPR was a less potent tool in an era of near record high oil output, while a recent federal report noted that global spare oil production capacity to deal with emergency outages was near its lowest on record.

Congressional actions that would sell SPR oil to fund miscellaneous initiatives are "a very slippery slope when our energy security needs are involved, albeit evolving," Moniz said.

Soft oil prices, the drilling boom, and lower oil imports might lead some to view the SPR a tool with diminished value in the energy security arsenal, but "we don't believe this is the case," said Moniz, a highly regarded cabinet member who played a big role in last week's Iran nuclear weapons deal.

LOWER IMPORTS BUT STILL VULNERABLE

The U.S. oil boom has slashed imports, which now means that the SPR holds 137 days' worth of U.S. crude imports, far more than the 90 days required under membership in the International Energy Agency.

Yet the world's spare oil production capacity, or the amount of crude that can quickly brought on without major investments, is below the 2.5 million-barrels-per-day level the U.S. Energy Information Administration considers oil markets to be tight.

The global cushion was 1.7 million bpd, the EIA said in late June.

The U.S. consumes 20 percent of the world's oil, meaning an disruption in the Middle East or other producing regions that pushes global crude prices up could hurt the economy, unless emergency supplies are plentiful.

The fact the United States is importing less crude, "is not a strong rationale for selling off a bunch of oil from the SPR," said Columbia University's Bordoff.

"Our economy's vulnerability to oil price spikes is determined more by how much we consume, not by how much we import."

INSTEAD, INVEST

Rather than cashing out the SPR, many experts are urging the administration to modernize it.

A recent Department of Energy study suggested it needs about $2 billion in maintenance as the oil boom disrupts infrastructure to transport oil across the country and as aging equipment limits the speed of its response.

Major pipelines have been reversed to bring oil to the refining hub on the Gulf of Mexico and some of the SPR infrastructure has not been updated since being built in 1975. Refined oil product reserves may need to be built to better supply some markets.

"Their top priority should be make sure the SPR is effective for its intended purpose by fixing it and making sure you can move the oil to market," said David Goldwyn, who coordinated global energy affairs at the State Department during Obama's first term.

(Reporting by Timothy Gardner; Editing by Jonathan Leff and Marguerita Choy)

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