Call in the SPR

As summer gas prices continue to simmer, and with the largest oil field in the US offline, suggestions that the President release oil from the Strategic Petroleum Reserve (SPR) will become increasingly strident. But even network news anchors are asking how much good this can do, given that the shortfall is on the West Coast, while the SPR oil sits in salt caverns on the Gulf Coast. Whether or not the current situation qualifies as a legitimate reason to release SPR oil into the market, it certainly highlights the limitations of the present strategic oil reserve.

When the SPR was established in the 1970s, relatively little foreign crude found its way to the West Coast. California was largely self-sufficient, other than some Indonesian crude brought in to make low-sulfur fuel oil for utilities. The Pacific Northwest refineries enjoyed a diet of Canadian crude, supplemented by occasional tankers from L.A., and the odd Saudi cargo. Once the North Slope field ramped up in the late 1970s, the West Coast was swamped with crude oil. There was no real or perceived need for a West Coast SPR.

Fast-forward 30 years, and oil production in both Alaska and California is in deep decline. Even without a disruption in Alaska, California's refineries depend on steady imports from a variety of sources. In this context, the current 688 million barrels of oil in the SPR don't seem very useful in addressing a serious West Coast oil shortage.

Releasing SPR oil would provide indirect assistance, allowing Gulf Coast refiners to divert tankers of suitable foreign crude to Seattle, San Francisco, or L.A., in exchange for SPR crude plus an appropriate differential to cover differences in timing, quality and transportation costs. This would happen pretty seamlessly in today's market, though it might be much more difficult in the kind of global oil crisis for which the SPR was really intended. That argues strongly for the creation of a regional West Coast reserve, if the SPR concept is to have meaning for the portion of the country west of the Rockies.

The production rate of West Coast oil fields isn't the only thing that's changed in three decades. Our whole approach to regulation and government intervention has shifted, as well. Would it really make sense in 2006 terms for the federal government, or a consortium of Western state governments, to buy up land, construct 20 or 30 million barrels of crude oil storage and the pipelines to connect it to refineries, and then acquire the oil to fill it? Or would it be more effective to provide suitable incentives for the private sector to do this, in a manner that would likely be much better integrated with the existing refinery supply network, and then manage the inventory on a semi-commercial basis?

Several years ago, I suggested a similar appear for the entire national SPR. The idea encountered a lot of skepticism, in the aftermath of Enron. The politics of changing the Gulf Coast SPR still look daunting, particularly after last year's hurricanes. However, starting up a market-based West Coast reserve would add protection that doesn't currently exist and test this approach for possible later application to the entire SPR. As I've frequently reminded my readers, the current situation is not a re-run of the 1970s, and we don't have to apply 1970s solutions to it. It's time for new thinking on how best to protect ourselves against oil supply disruptions, regardless of their cause.