Fine: The Strategic Petroleum Reserve and quotas

Daniel Fine
The Daily Times
Daniel Fine

Washington is preparing to update the national strategic petroleum reserve, or SPR.   The one billion barrel objective will be slightly reduced through sales.  More important is the change in the delivery system which could move the oil closer to the East Coast refinery complex.

This change would support the reduction of foreign oil imports that was presented and discussed at the San Juan College's School of Energy last month. The SPR could provide oil for the adjustment if quotas on foreign oil imported across the oceans is proclaimed by the next American president next year. As imported foreign oil is reduced, the SPR oil would be sold to refiners to ease the transition to domestic (New Mexico included) produced oil.

There is an awareness at the U.S. Department of Energy that foreign oil imports are rising again as American oil output declines under an increased production volume that is pushing down prices and reversing the shale oil technological revolution.  Over one million fewer barrels are expected at the end of this year while imported foreign oil grows.  (See Tom Taylor’s Four Corner Economic Development local impact assessment that ran in The Daily Times on June 15).

The U.S. Department of Energy planning is consistent with the connection between national security and the American oil and gas industry. The SPR made oil a national security consideration in preparation for a disruption by foreign producers, mainly in the Middle East, that supply developed economies

Is the reserve needed for that event since 2010 when American oil production and reserves moved toward self-sufficiency following horizontal drilling and stimulation technology breakthroughs that provided extractive access to the source rock?

Saudi Arabia and OPEC would say it is irrelevant as they over-produce oil to lower the world price slowing or shutting down American producers. In fact, they have never demonstrated concern over a U.S government strategic but not competitive stockpile of oil.

National security considerations related to the present state of American investment in oil exploration and production, apart from the SPR,  at self-sufficiency scales are required.

With a decline of over one million barrels a day in one year and future large replacement projects vanishing from capital budgets, imported foreign oil is replacing American post-2010 oil barrel for barrel.

Is there “free trade” in global oil?  From the OPEC embargo and consequent price spike in the 1970s until now, there is no “free trade” or “free market” oil.  OPEC, with 40 percent of world production for export, sets a cartel-induced price indirectly. OPEC is government-owned and marketed oil.

The financial futures markets are “free” to trade oil as arbitragers but not as producers of oil. They seldom depart from OPEC and Saudi Arabian supply markers. The United States has free trade treaties in oil with only four countries which are non-OPEC marginal exporters. The Gulf producers discount downstream against American exports. The end of trade restrictions have failed to produce a million jobs and raise the gross domestic product of the United States.

If the energy policy of the next American president includes foreign-oil import quotas, it could duplicate a 14-year period in the 1950s when oil supply and demand was free from speculative perceptions and price volatility. This was the reality of a North American oil production and trading bloc with West Texas Intermediate or light oil. It would detach the San Juan Basin from the market-share threat from the Kingdom of Saudi Arabia.

It offers price stability and separation from the OPEC and non-North American production blocs. This would create long-term industry and producing community freedom from price shocks and “bust” threats related to global events beyond local control. Bank lending to oil operators would return to low-risk relations as the value of reserves stabilizes in a predictable and non-spike pattern.

Quotas on foreign oil will displace imports with domestic production. National security does not require the SPR's billion barrels but only a stand-by for North American  (Mexico, Canada and America) bloc internal disruptions caused by natural events. If the U.S. is almost self-sufficient in oil, friends and allies outside North America will not contend with American drawn downs of world oil in war or emergency situations.

This opens the discussion of American military power projected worldwide to protect the flow of oil.

Daniel Fine is the associate director of the New Mexico Center for Energy Policy at New Mexico Tech and senior energy policy analyst and project leader of energy policy in the New Mexico Department of Energy Minerals and Natural Resources. The opinions expressed here are independent of those positions.