The SPR and the election of 2008
Bruce Beaubouef, Ph.D., Houston, Texas
Energy security is once again a key issue in the American political debate, driven by record high oil prices and the United State’s growing dependence on foreign oil. And, as the presidential contest between Senators Barack Obama and John McCain has progressed, the issues of energy security and rising energy prices have permeated the campaign rhetoric. As the campaign has advanced, the issue of using the U.S. Strategic Petroleum Reserve (SPR) to combat rising oil prices has once again become a key feature of the debate. The SPR is a federally owned, contractor-operated stockpile of roughly 700 million barrels of crude oil stored in underground salt dome caverns along the Texas-Louisiana Gulf Coast.
From the summer of 2007 through July 2008, oil prices escalated from $60 to nearly $150 per barrel. These price increases have cost American consumers an estimated $650 billion – about $2,000 per capita – harming most those least able to afford it. Moreover, entire industries have been placed in jeopardy by skyrocketing energy prices: auto and truck manufacturers, airlines, freight carriers, and even producers of refined petroleum products and petrochemicals.
During this time, members of both political parties expressed strong resentment over the government’s apparent inability to do anything about rising oil and fuel prices. For while the Bush administration has been very aggressive in building up the reserve, it has been very slow to order a drawdown. This is because, in general, Republicans view the reserve as a strategic asset rather than an economic lever. Under President Bush, the only major drawdown came in the wake of Hurricane Katrina, when the U.S. Department of Energy (DOE) placed roughly 21 million barrels on the market.
Frustrated by the administration’s policy, members of Congress began to pressure the White House to at least suspend oil deliveries into the reserve, thereby placing some additional oil on the market. In March, both Senators Hillary Clinton and Obama – at that time vying for the Democratic nomination – took this position; and, in early April, as oil prices passed $110 per barrel, McCain joined the growing chorus of voices calling for a suspension of oil deliveries into the reserve. The Bush administration initially refused, insisting that the SPR oil acquisitions had no meaningful impact on prices. But by mid-May, with pressure for action mounting, the White House conceded this point, and announced that it was suspending oil deliveries into the reserve for the remainder of the year.
Not satisfied with that, key Democratic leaders in Congress continued to call for a drawdown. In July, House Speaker Nancy Pelosi sent a letter to President Bush asking him “to draw down a small portion” of the SPR “to help reduce record prices that are helping push the economy toward recession.” The White House rejected the speaker’s call, arguing that using the reserve to manipulate prices was “ineffective,” and saying that the best way to increase supply would be to open up more public lands, including offshore acreage, for new drilling efforts.
It was in this context that the SPR became a topic in the presidential campaign. In early August, Obama put forward a broad energy plan designed to end U.S. reliance on imported oil within 10 years and address the nation’s growing anxiety over high gasoline prices. The proposal included a 70-million barrel drawdown, an exchange in which oil companies would borrow light sweet crude oil from the reserve and replace it later with heavier crude oil. Obama described the exchange proposal as a short-term solution to a long-term problem, and it was part of a larger energy package that included opening up new offshore areas to drilling, support for hybrid-fuel vehicles, conservation, and the development of alternative energy sources. Both the drawdown and offshore drilling concessions were reversals of positions he had taken just a month before. For his part, aside from his call to suspend oil acquisitions, McCain has remained silent on using the SPR to combat rising prices. He has focused instead on proposals to increase domestic oil production, nuclear power, and clean-coal technology; improving automobile fuel efficiency standards; and developing flex-fuel vehicles.
The SPR was a response to the Arab oil embargo of 1973-74, and was legally created in 1975 to help the United States cope with oil supply disruptions. Today, the SPR is the world’s largest government-owned emergency oil stockpile, with a drawdown capacity of 4.3 million barrels per day – a figure slightly larger than Iran’s daily contribution to world oil supply. It enables the federal government to replace about 36% of U.S. oil imports and add about 5.9% to the world’s daily oil supply for about 163 days.
SPR drawdown policy has often been controversial. In the past, policymakers have debated about whether the stockpile should be used early in a crisis; or, in the event of one, held in reserve against the possibility of a larger disruption or shortage. This has become known as the “early use” vs. “rainy day” policy debate, and different presidents have followed different strategies. In general, this debate has largely followed the party divide, as Democrats have been more ready to use the reserve, and the Republicans have been slower to order a drawdown. For example, the Bush presidents have been criticized for being too slow to order a drawdown in the wake of significant oil supply disruptions (in 1990/1 and 2003), while Clinton received criticism for ordering drawdowns in 1996 and in 2000 when gasoline and heating oil prices increased, but no disruption had taken place.
The biggest controversy came in the fall of 2000, when the SPR became a key issue in that year’s presidential election. SPR drawdown policy went right to the forefront of national political debate when Vice President Al Gore called for a drawdown to relieve tight Northeast heating oil markets. Then-Governor George W. Bush opposed the move, calling it an improper and political use of the reserve. President Clinton ultimately ordered a drawdown, a 30-million barrel exchange; and although the move was controversial, all the oil was claimed by various parts of the oil industry.
Thus, the main question seems to be: Is the SPR an economic tool to mitigate the effect of rising prices, or is it a national security tool to alleviate supply shortages? These debates have largely divided along party lines, with Democrats being more willing to use the reserve, seeing it as an economic tool; while Republicans have been slower to order a drawdown, viewing the SPR more as a national security tool.
The 1990/1 drawdown has been perhaps the best test of whether the SPR works. It was a large-scale drawdown that took place in the midst of a serious foreign policy crisis, following the largest oil supply disruption in world history. The announcement of the 33.75-million barrel drawdown sent the signal to markets that extra oil would be made available to mitigate possible shortfalls, and dampen related price spikes. Crude oil spot and near-term futures prices, after nearly doubling in the fall of 1990, fell back to pre-crisis levels within 24 hours of the drawdown announcement (from $40 to roughly $21 per barrel). Other drawdown announcements have had similar deflationary effects on prices, including the 30-million barrel exchange of September 2000, and the 21 million barrels exchanged and sold following Hurricane Katrina in 2005. Events have thus shown that a credibly stocked SPR can have a calming effect on the market, stabilizing prices by signaling the availability of extra oil supplies. Thus, the SPR can play a key role in helping to solve or ameliorate a short-term energy crisis, but it cannot reverse long-term energy trends or promote new consumption behavior patterns. It seems likely that both candidates recognize this.
Generally, Republicans have been quite energetic about building up the SPR, but have been loathe to order a large drawdown. This has been true of both Bush administrations. Democrats, including President Clinton and members of Congress, have been more eager to order a drawdown to alleviate the economic effects of rising energy prices. Ordering a drawdown is a presidential prerogative, though the Congress can sometimes pressure a president to issue the finding of a “severe energy supply crisis” needed for a large drawdown.
Thus, if McCain wins the presidency, observers should not expect a large drawdown, or even a smaller drawdown, especially if oil prices keep falling (as they have of late). The main question in this scenario will be when oil acquisitions are resumed. On the other hand, if Obama wins the election, it seems easy to believe that there will be a larger drawdown in 2009 as part of some omnibus energy legislation. Tellingly, Obama’s campaign website says that the SPR “is there for a purpose: to help Americans in times of crisis,” and goes on to say that Senators Obama and Joe Biden “believe that the doubling of oil prices in the past year is a crisis for million of Americans.” With the goal of “bringing down prices at the pump,” they support releasing light oil from the SPR now and replacing it later with heavier crude “more suited to our long-term needs.”
Whether McCain or Obama wins, plans for expansion of the SPR’s inventories and storage capacity are likely to continue over the long term. The 2005 Energy Policy Act calls for the DOE to fill the reserve to 1 billion barrels, and storage capacity is being expanded at the existing Big Hill (Texas) and Bayou Choctaw (Louisiana) sites. President Bush’s 2007 State of the Union address called for doubling the SPR’s total storage capacity to 1.5 billion barrels over the next two decades, and a new site is being built in Richton, Mississippi, to help achieve that goal. It seems likely that either McCain or Obama would continue these plans. Both parties recognize that the SPR has become the nation’s principal means of protection against an oil supply disruption, and a key part of the national security apparatus. As long as U.S. dependence on foreign oil remains high, refiners and transporters will continue to rely upon the SPR as a ready resource to help maintain feedstock when supplies are tight or disrupted.
Bruce Beaubouef is the Editor of PipeLine and Gas Technology magazine, a trade journal published by Hart Energy Publishing, LP, Houston, Texas. He received his Ph.D. in History from the University of Houston in 1997, and his dissertation on the Strategic Petroleum Reserve program was published by Texas A&M University Press in September 2007 as The Strategic Petroleum Reserve: U.S. Energy Security and Oil Politics, 1975-2005. He can be contacted at email@example.com.