Selling part of Strategic Petroleum Reserve is a bad idea

Selling off part of our Strategic Petroleum Reserve (SPR) while the price of oil is at a six-year low and refinery inputs are at an all-time high? It sounds like a classic Washington plan.

I understand the desire to find new sources of money in a belt-tightening era. But the SPR was never meant to be, as Sen. Lisa Murkowski (R-Alaska), the chairman of the Senate Energy and Natural Resources Committee put it, a “piggy bank.”

This does not mean we should not take a close look at the reserve. The need to modernize its infrastructure and operations has been evident for some time.

{mosads}When I served as the head of the U.S. Department of Energy’s (DOE) Fossil Energy Program, which included SPR, I was struck by its lack of pipeline capacity, an issue compounded by the DOE’s decision to swap its right to interrupt scheduled deliveries for priority SPR crude. After Hurricane Katrina, this issue was brought into critical relief. But little if anything was done about it.

Katrina devastated the Gulf Coast, where the SPR is housed. But we have far more to fear than storms. Middle East wars, terrorist attacks on refineries, boycotts or even a global computer hack could cause production to stall and prices to skyrocket. China understands this, which is why it is working to double its own strategic reserves to 600 million barrels by decade’s end.

The U.S. is the world’s swing oil producer. For better or worse, its ability to produce oil closely tracks price. The lower the price, the less domestic oil.

In 1985, the U.S. imported 300,000 barrels a day; two years later, we were importing 2 million barrels. The change was due to Saudi Arabia’s decision to protect their share of the global oil market and leverage its low-cost production to undercut the competition. A similar series of events in 1970 led to the OPEC oil embargo. Conditions today are ripe for a repeat.

The point is, we should view the SPR for what it is: a reserve for emergencies. Like the other member nations of the International Energy Agency, we are required to hold a reserve of crude oil and related products to power the country for 90 days. The stockpile currently has about 1.5 times that capacity, or 137 days. But that’s not justification to turn on the spigots.

The time is right to rightsize the SPR. Instead of selling its oil in a glutted market, ensuring a poor return for taxpayers and further stressing U.S. producers, we should take a step back and decide its optimal size. I believe it should be dynamic, rising and falling as our imports ebb and flow.

A road map for the future should be developed that would mirror the oil industry’s practices. Companies do not make a decision based on the price of oil at a given moment; rather, they look at history. The industry norm is a 10-year rolling price average.

Congress would be well-advised to adopt a similar approach, adjusting the SPR’s size annually based on the updated average. This would not only preserve our oil security, but it would also create a level of market predictability so oil producers and congressional appropriators alike could make the wisest decisions that take into account the global oil market.

At the same time, we should tackle the SPR’s infrastructure. The DOE estimates that $2 billion is needed to provide the needed repairs. We should earmark any proceeds from the sale of SPR oil to modernization. Energy security comes first.

Gas prices have fallen nearly 25 percent since this time last year. Consequently, demand for gas has skyrocketed. At the same time, OPEC production is at record highs and domestic producers are scrambling to maintain production in an all-out price war. It’s exactly the wrong time to flood the market with more crude and play games with our energy security.

Instead, Congress should take a holistic approach. Prepare for the worst in stable times. Repair and modernize. Put in a plan for the future. Above all, do not break the piggy bank to paper over budget gaps.

Washington must act like energy production is a vital component of national security. Because it is.

Maddox has held several senior positions at the Department of Energy and is a consultant to the Livingston Group.