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News :: Economy |
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Strategic Oil Reserve Nearly Topped Off |
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by NYT via Joe Futrelle
Email: futrelle (nospam) shout.net (verified) |
07 Dec 2004
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FREEPORT, Tex. - A swamp near here is one of the most secretive places in America. There are no signs, just a 500-acre complex protected at all times by 30 armed guards in combat fatigues patrolling in sport utility vehicles.
This is part of the world's largest and most expensive filling station, the United States Strategic Petroleum Reserve, where a large portion of the government's nearly 700 million barrels of oil are stored in underground salt shafts that are supposed to be stable into the 2020's.
American taxpayers have invested about $20 billion to build and stock this reserve and three others in hidden places since it was created in 1975 in response to the Arab oil embargo that began two years earlier. And now, after 29 years, it is finally about to be filled to the brim for the first time.
Some oil economists say these reserves are having important effects on oil prices. They assume that the United States will no longer be putting upward pressure on oil prices by adding to the reserve, while that huge reservoir will reduce the country's vulnerability to any new shock and soothe the "fear premium" that elevates gas prices. Others say they will simply sleep better, knowing that America has a secure energy supply.
But whether America is no longer vulnerable is not entirely clear, any more than the direction of oil prices themselves. What is clear, from a rare visit permitted by the Energy Department, which manages the reserve, is that this little-known operation is a colossus and nerve center in the energy world.
"For a while it seemed like no one had heard of us and then, boom, we're on the radar screen," Gregory Magallanez, site operations specialist at the Strategic Petroleum Reserve, said in an interview as contractors drove around the complex in small electric-powered vehicles.
Usually the only unannounced visitors here are white egrets or the occasional seagull, Mr. Magallanez said. "The attention is a little worrisome sometimes."
After Sept. 11, President Bush decided to fill the reserve to its maximum in hopes of creating an insurance policy in the event of another oil shock.
"Say you wake up one day and there's been an Iranian-style revolution in Riyadh," said David Pursell, an expert on the reserve and a principal with Pickering Energy Partners, an energy investment company in Houston. "You simply wish you had more oil."
The question of ensuring a secure energy supply has taken on added significance in the last year, as terrorist groups have taken aim at petroleum installations in Iraq and Saudi Arabia and political turmoil has struck two other large oil exporters, Nigeria and Venezuela. China's growing appetite for oil has only added to the jitters about the global oil supply.
Even though the reserve will be filled early next year, there is no sense that it has provided the country with enough of a security cushion. Altogether, the reserve would cover only about two months of the country's imported oil needs. In fact, there is growing recognition, and some aggressive exhortation, that the nation's dependence on imported oil and soaring global oil demand have made energy markets increasingly vulnerable to disruptions.
"We should consider increasing the reserve even further after it's full," said Bill Richardson, a former energy secretary in the Clinton administration and now governor of New Mexico. Indeed, part of the energy bill Congress might consider next year would increase the reserve in the United States by 300 million barrels, bringing the nation's entire reserve system to a billion barrels.
"I also think we should creatively find ways of releasing oil from the reserve while working together with OPEC in an effort to bring prices down," Mr. Richardson added, in a nod to the potential impact that filling the reserves could have on oil prices. "OPEC's in a box right now and because of our continuing dependence on imported oil, so are we."
Simply the notion of a full American reserve seems to have encouraged other countries to fortify their own energy storehouses. Japan, South Korea, Taiwan and Germany already have theirs. China, which surpassed Japan in the last year as the second-largest importer of oil, and India, which is competing with China for oil supplies in some developing countries, are also moving ahead with plans to build their own strategic oil reserves. Even Russia, the largest oil producer, is considering building a reserve.
Energy experts expect the new reserves to be modeled largely on the American system, which includes three other sites in Texas and Louisiana. The site here, built on a swampy hill called Bryan Mound southeast of Houston, is the reserve's largest complex, with 232 million barrels of crude oil stored almost entirely underground in immense salt domes.
Not everyone, of course, is enthusiastic about the reserve's usefulness. The costly system has been criticized since its creation three decades ago. Energy industry executives estimate that since then the government has spent more than $20 billion to build the system and keep it stocked. The reserve emerged as a thorny political issue this year, with Democrats calling on the Bush administration to release oil from the system in an attempt to ease rising fuel prices, much as President Bill Clinton tried to do in 2000.
Free market advocates aligned with President Bush's own party, meanwhile, have renewed calls to do away with the reserve altogether as a way of removing government involvement in the pricing of crude oil. Despite concern over high oil prices, neither proposal has gained ground while worries persist over threats to petroleum security in the Middle East, the world's main source of oil exports.
The potential enlargement of the reserve in the United States and the creation of reserves elsewhere might put additional pressure on oil prices.
But only about 100,000 barrels a day go into the United States reserves out of worldwide consumption of 82 million barrels. The United States consumes about 20 million barrels of oil a day, or about a quarter of global consumption, so at its current level of about 671 million barrels, the reserves would provide the equivalent of just two months of crude imports.
It is impossible to know exactly how a complete withdrawal of the reserve's oil would play out since that has never happened before. Altogether, technicians at the reserve estimate it can release a total of 4.5 million barrels a day, falling substantially short of current domestic consumption. The two largest withdrawals were 17 million barrels during the Gulf War in 1991 and 30 million barrels in 2000, neither of significant size or duration.
Here in Freeport, the reserve functions differently from systems in countries like Japan, where private companies are required to store oil and refined gasoline to complement the government's own inventories. In the United States, the reserve consists almost entirely of unrefined oil acquired directly from producers instead of purchases of oil on the open market.
The government takes the oil in place of royalty payments that energy companies normally make to drill on public land, though some imported crude also goes to the reserve through exchanges to acquire a variety of sweet and sour blends of crude.
Security measures at the Freeport complex, which was originally created by the Dow Chemical Company to store magnesium, have been enhanced in the last three years. Visitors to the reserve are required to be American citizens, a rule waived recently when technicians from Russia and India toured the site as part of studies toward creating their own reserves. Thirty armed guards in gray combat fatigues patrol the 500-acre site around the clock.
"The costs of creating a reserve are high, but minimal in comparison to a catastrophic oil shock disruption," said Gal Luft, executive director of the Institute for the Analysis of Global Security, an organization in Washington that studies energy security issues and that is pushing for three one-billion-barrel reserves in North America, Europe and Asia to be built over the next decade.
"The problem is that new reserves aren't being created at a pace that equals the decline in spare oil production capacity around the world," Mr. Luft said. "Obviously, 700 million barrels in this country is not enough." |
See also:
http://www.nytimes.com/2004/12/07/business/07reserve.html
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