Oil Reserve Is 'First Line of Defense' for U.S. - Supply Allows Bush Leverage if a War With Iraq Caused Severe Disruption in Market

Posted by click at 6:43 AM in Miscelaneous

www.washingtonpost.com By Michael Dobbs Washington Post Staff Writer Tuesday, February 18, 2003; Page A03

Enough oil is stored in the deep, cone-shaped salt caverns along the Gulf of Mexico -- most of them large enough to accommodate the towers of the World Trade Center -- to replace a year's worth of imports from Saudi Arabia.

Originally conceived as a response to the oil crises of the 1970s, the Strategic Petroleum Reserve has become as much a part of the United States' strategic arsenal as the aircraft carriers, airborne divisions and spy planes converging on the Persian Gulf region. According to the Department of Energy, the 599-million barrel reserve constitutes the nation's "first line of defense" against disruptions in energy supplies.

As President Bush prepares for war with Iraq, he has come under pressure to use the reserve to calm an increasingly jittery market. In addition to the uncertainty caused by the Iraqi crisis, a general strike in Venezuela has helped push oil prices to new highs, and slashed inventories in many parts of the world to critically low levels.

If the past is a guide, and Bush follows the precedent set by his father in the Persian Gulf War in 1991, he probably will resist the temptation to tap into the underground storage sites in Texas and Louisiana until the onset of any hostilities. If the attack on Iraq begins, he will order the release of some of the oil in the reserve, a move designed to signal the United States' ability to ride out any temporary panic over the oil market.

If the war went badly, and Iraqi President Saddam Hussein succeeded in torching Iraqi oil fields or hitting oil facilities in neighboring Kuwait or Saudi Arabia, the reserves would assume huge strategic importance. The 50 or so caverns in Louisiana and Texas contain enough oil to replace 53 days of lost imports. In practice, officials say, supplies should last considerably longer, as the United States buys much of its oil from such countries as Canada and Mexico, which would unlikely be interrupted by a crisis in the Middle East.

The Strategic Petroleum Reserve is "a powerful instrument," said John Shages, one of the Energy Department officials responsible for managing the network of storage sites, pipelines and loading facilities strung out along the Gulf of Mexico. "It gives the president a tremendous tool to use in the event of a severe disruption to the market, from an act of God to a political-military event."

Because of the tightness of the international oil market, said Edward Porter, an economist at the American Petroleum Institute, the Strategic Petroleum Reserve might end up playing "a much more central role" in a new Gulf war than it did in 1991. A decade ago, there was plenty of excess capacity in the oil market. After the war broke out in January 1991, prices quickly tumbled from more than $30 a barrel to about $20.

Today, by contrast, it is much more difficult to offset a likely loss of Middle Eastern oil, if the region became embroiled in war. Iraq alone sells 2 1/2 million barrels a day to foreign countries, including the United States, through "oil for food" arrangements approved by the United Nations and through illegal smuggling. Although Venezuelan oil is slowly coming back on stream, as a general strike against populist left-wing President Hugo Chavez winds down, exports are no more than half of prestrike levels.

According to oil analysts, the only country in the world that can significantly increase production levels practically overnight is Saudi Arabia, which has about 1 million barrels a day of excess capacity. In recent weeks, the Saudi government has boosted production to offset losses from Venezuela. But the Bush administration does not want to be held hostage to a potentially unstable Arab country rife with anti-Americanism that has previously used the oil weapon against the United States.

"We shouldn't allow U.S. national security to be dependent on decisions in Riyadh, when the president has the ability to take those decisions," said Edward L. Morse, who was responsible for international energy policy at the State Department during the Reagan administration. "The Strategic Petroleum Reserve allows the U.S. government to put much more oil onto the market [in the short term] than we can get from the Saudis."

How much oil should be released from the reserve, and under what circumstances, is the subject of great debate among energy specialists. President George H.W. Bush was criticized for not acting after the Iraqi invasion of Kuwait in August 1990, as a result of which oil prices rose as high as $40 a barrel. He finally ordered a limited drawdown of 33.75 million barrels on Jan.16, 1991, the same day he announced that U.S. warplanes had begun attacking Baghdad. By the time the oil reached the market, prices had fallen sharply, and the crisis was largely over.

Last week, as the price of light sweet crude rose to more than $36 on the New York Mercantile Exchange -- a 26-month high -- calls for the release of oil from the reserves came from airlines hit by soaring fuel costs, refineries suffering from a lack of Venezuelan oil and senators worried about the rising price of gasoline for their constituents. Oil industry executives oppose the release of oil from the reserve, except in a national emergency.

The Bush administration is keeping its options open. Energy Secretary Spencer Abraham said last week that the reserve should be used only in the event of severe supply disruptions, and not to bring down prices.

The Strategic Petroleum Reserve dates to 1975, in the aftermath of the Arab oil embargoes against the United States and other Western countries that followed the 1973 Yom Kippur war. Traumatized by spiraling oil prices and long lines for gasoline, Congress passed the Energy Policy and Conservation Act to protect the country from sudden interruptions in supply.

During its early years, the reserve was plagued by technical problems and cost overruns, as the Energy Department struggled to adapt the salt caverns along the Gulf of Mexico to the long-term storage of oil. The goal President Jimmy Carter established in 1977, of filling the reserve with 1 billion barrels of oil by 1985, remained a mirage. Through a perverse bureaucratic logic, the government tended to purchase oil when it was scarce and expensive, because that was when political pressure was greatest to fill the reserve.

Apart from the Desert Storm drawdown, the reserve has rarely been touched. In 1996 and 1997, President Bill Clinton authorized nonemergency sales of 28 million barrels to raise revenue. In September 2000, he ordered an exchange of 30 million barrels of oil to bring down heating oil prices in the Northeast, a move that Republicans criticized as an election-year ploy. By the time Clinton left office, the oil stockpile had dwindled to 540 million barrels.

After the Sept. 11, 2001, terrorist attacks on New York and Washington, the reserve assumed much greater strategic importance. The Bush administration is now committed to filling the reserve to its 700 million barrel capacity. It is also considering ways to reach the original target of 1 billion barrels, which would require $3 billion to $6 billion of new investment in infrastructure and oil purchases.

While the salt caverns along the Gulf of Mexico are fuller than ever, the United States' ever-rising consumption of petroleum means the reserve actually offers less protection against market disruptions than it did a decade or two ago. In 1985, according to Energy Department figures, there was enough oil in the reserve to replace 115 days of lost petroleum imports, more than double the present figure.

"In order to continue to have as much protection as we had 10 years ago, the reserve needs to be substantially increased," said James A. Placke, a senior associate with Cambridge Energy Research Associates. "As we become more and more dependent on foreign sources of supply, you need a cushion to fall back on. Otherwise, the world's sole remaining superpower will be quite vulnerable to events over which we have little control."

Others argue that the road to energy independence lies through drastic conservation measures and investment in new sources of energy, such as ethanol and biofuels, to reduce the United States' dependence on Middle Eastern oil. They say the United States now imports nearly 60 percent of its energy from abroad -- mostly from authoritarian countries, such as Saudi Arabia, Iraq, Nigeria and Venezuela -- and that figure could rise to 70 percent by the end of the decade.

"Continuing to fill the reserve is taking us backwards, not forwards," said Rep. Marcy Kaptur (D-Ohio), one of three members of Congress to vote against an increase in the size of the Strategic Petroleum Reserve. "We need a strategic energy policy, not a strategic energy reserve."

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