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How strategic is the Strategic Petroleum Reserve? Do we need it?

Congress just left town for recess. Should we feel relieved that it can do no (or at least minimal) harm while it’s out of town, or should we feel bad that it went on vacation without enacting several important bills or making a real dent in establishing the ground rules for a fair and effective budget for next year?

oil reserves2We live in the world’s second-largest democracy, and a democracy whose political leaders frequently claim that we are an exceptional people and nation. Yet, can we and they really look in the mirror and say we and they are exceptional, particularly with respect to Congressional behavior itself? One of the three institutional pillars of our democracy – Congress – is almost dysfunctional. Ideology often substitutes for intellect and thinking; the urging of lobbies replaces study and analysis; and shouting and name-calling replace debate and dialogue. What a model for an exceptional nation to provide other countries looking to the supposed nation on the shining hill and yearning for the democratic way!

In this context, I found myself laughing and crying simultaneously after reading a recent Bloomberg article, “Congress Looks Underground for Cash.” Unwilling to face the possibility of new taxes for legitimate programs aimed at speeding drug development and medical research or funding the nation’s infrastructure needs (or finding consensus on budget cuts), a number of House and Senate members have proposed to use the Strategic Petroleum Reserve for part of each program’s costs. Good objectives but bad policy!

Now, as you let the idea of using the Strategic Petroleum Reserve for domestic purposes, unrelated to oil and energy needs, sink in, remember, if you’re old enough, that the Reserve grew out of the Arab oil boycott in the early seventies. Its purpose, at the time, was to allow the nation to survive future supply shocks and to grant the U.S. a tool to withstand tension in the Middle East and elsewhere.

Maybe it’s time to look at and possibly amend the initial objectives of the Reserve. But for the safety and security of the U.S., this reevaluation should be done reasonably and rationally. The Strategic Petroleum Reserve shouldn’t become a grab bag to avoid hard budget choices.

Think of it in terms of numbers: The Reserve has close to 700 million barrels in it now. America uses about 19 million barrels every day and still is dependent on foreign oil for 25-30 percent of its oil consumption. Put another way, we have, in theory, around a five-month supply of oil if an international oil crisis emerges and imports are reduced to zero.

You might say that, because there are so many complex variables, this theory is likely never to be converted to practice. Really! Again, remember the five-month Arab oil boycott in 1973!

The U.S. might be able to negate major economic and consumer impacts for a longer period by relying on increased shale oil development. Oil companies could respond by producing more oil, assuming a significant decline in imports was telegraphed well before they occur. Well, before any foreign boycott, global prices for oil would have to move to much higher levels than they are now to stimulate new wells and production. Refining and distribution capacity would have to exist and result in increased efficiency as well as now-absent policy consensus concerning environmental issues among citizens and federal, state and local governments.

But magic probably won’t occur. Despite American ingenuity, past experience tells us there will be a time gap between positive market signals, if they exist, and positive oil-company responses. International oil prices – not patriotism – will govern behavior, and it is conceivable that U.S. production, minus export numbers, will not measure up to U.S. needs.

The proposed withdrawals by Congress are just under one-third of the reserves – not a trivial amount – and this is only for two programs! Gosh, why not include housing or early childhood education programs? What about agricultural initiatives? Maybe job training? I know a few college presidents who are pleading for more money to hire faculty or engage in research. I am surprised that no one thought of funding the Export-Import Bank through petroleum reserves. Remember Puff the Magic Dragon and Lucy in the Sky with Diamonds?

Maintenance of the integrity of the Strategic Petroleum Reserve seems still important for security reasons – its original purpose. We may need the leverage and the strategic edge the reserve provides some day.
To assure its ability to withstand dependence on foreign oil, the nation should also be looking at options to supplement or complement the reserve. Vehicles in the United States now use nearly 45 percent of oil consumed in this nation every day.

What if, as the president has proposed, the nation begins to wean itself off oil and moves toward expanded use of ethanol as well as other alternative fuels, such as methanol, electricity, a range of biofuels and natural gas, when they are ready for prime time? Increased market share for alternative fuels would reduce reliance on or extend the efficacy of the Reserve, as well as the need for oil imports. It would help lessen the importance of oil as a critical defining element of U.S. Middle East foreign and defense (or offense) policies. In this context, it would also permit the nation to become a leader internationally with respect to curbing GHG emissions and other health- and environmental-related pollutants.

Paraphrasing George Bernard Shaw and Robert Kennedy, some people ask why and I say, “why not?”

Optimist and pessimist, the Oil & Gas Journal and replacement fuels

“The optimist proclaims that we live in the best of all possible worlds and the pessimist fears this is true” — James Branch Cabell. Or, as I once said in a presentation in China after Tiananmen Square, “a strategic optimist is a realist with brains.”

I live with the hope we can do better as nation with respect to the environment, our economy and the quality of life choices open to Americans, particularly low- and moderate-income Americans. But I worry that given the ideological and related political divisiveness among us, we may not.

In this context, after reading the recent article, “SAFE: Report’s ‘flash points’ emphasize US transportation fuel problem” in the Oil & Gas Journal, often seen by some as a mouthpiece for the oil industry, my thoughts reflected both optimism and pessimism. I concluded that I was a realist tempered by experience (and hopefully with a brain). Okay, what did the piece suggest that stimulated my mental and emotional adrenaline? Two or three quotes used by the author Nick Snow, respected Washington editor of OGJ, taken from a national conference convened by Securing America’s Future Energy (SAFE):

“A proliferation of global oil geopolitical ‘flash points’ (e.g., conflicts in countries or within countries that limit or could limit the supply of oil) makes it even more urgent for the U.S. to aggressively reduce its dependence on crude oil for transportation fuels…If we could be only 65% dependent on oil for our transportation fuels by 2025 instead of 90%, it would make a tremendous difference…We also need better politics developed by people who can find win-win situations so we can move forward…We all agree that we need to diversify our transportation sources away from oil.”

Nick Snow is no blazing liberal. According to his resume, Mr. Snow has spent 30 years or so as a journalist covering oil issues, many of those for media outlets friendly to oil interests (e.g., Oil Daily).

Have we reached nirvana? Did the article in the OGJ signal that big or small oil companies will soon announce their commitment to replacement fuels, like natural gas-based ethanol and methanol? Their support, given the fact that some oil companies already own significant natural gas fields, could be important from a public policy and an “on the ground production and distribution” perspective.

When I was a kid, older members of my family, if they wanted something but knew it was impossible to secure, would say, “I should live so long.” In some respects, while I’m surprised by the selected quotes used in the article by Mr. Snow, I doubt it heralds an epiphany by leaders of the oil industry or their companies.

Why am I a wannabe optimist but a realistic pessimist? Oil companies’ primary behavior over the past decade or more has been to oppose the development of most replacement fuels, FFVs and open fuel markets. Sometimes they have done this through other organizations that they influence or control, and sometimes directly. Clearly, gas station franchises granted by oil companies remain tied to a “just say no” position on replacement fuels, or a back- or side-of-the-station mandate concerning location of replacement-fuel pumps. For the most part, their reaction to “flash points” has been “drill, baby, drill,” and their battle cry has been that only more drilling will make the nation oil independent. This is a curious stance, since companies are simultaneously seeking to increase their ability to export globally. America still imports about a third of its oil, while retail prices for gasoline at most stations remain high.

I’m afraid that the OGJ piece by Snow is not a harbinger of good tidings concerning oil company endorsement of replacement fuels — at least any time soon. Rather, the article reflects a willingness of the author to honestly describe a major issue facing the nation, that is, the disproportionate share of oil in transportation fuels. Regrettably, excluded from the piece is a narrative about the fact that oil converted to gasoline has a significant negative effect on the environment, and that oil imports still take a toll on the economy. Replacement fuels would address security, environmental and economic issues, and related national objectives in a much more positive way.

I have a vested interest in remembering the famous Andrews Sisters. How many of you remember them? They played in my uncle’s band for a short time. So let me end, somewhat inappropriately, using the last stanza of one of their hit tunes “I Can Dream, Can’t I?” by composer Sammy Fain. I am sure neither the sisters nor Sammy would mind. With respect to the oil companies, “I am aware. My heart is a sad affair. There is much disillusion there. But I can dream, can’t I?”

Dreaming is about all you can do now, with respect to getting oil companies to develop, or support the development of, flexible replacement fuels. Maybe someday!