US Strategic Gasoline Reserve: Solution or Band-Aid?

• The new Northeast Gasoline Reserve addresses some of the shortcomings of the current, 39-year-old federal emergency crude oil reserve, or SPR.
• Whether or not the DOE considered other options, the upcoming Quadrennial Energy Review provides an ideal opportunity to rethink our strategic energy stockpiles.

The recent announcement that the US Department of Energy (DOE) would establish a strategic gasoline stockpile to serve the Northeast was at least partly a response to calls for such a reserve in the aftermath of the fuel distribution problems caused by “Superstorm” Sandy in 2012. Secretary Moniz also framed it as part of a broader effort to beef up US energy infrastructure.

Although it is encouraging to see the DOE recognize the limitations of the current US Strategic Petroleum Reserve (SPR), I was disappointed that the new stockpile appears merely to copy the Clinton-era Northeast Heating Oil Reserve, in both quantity and approximate location, rather than reflecting a thorough rethinking of the entire concept of strategic fuel inventories, involving all stakeholders.

As I noted in a post here last summer, the crude oil SPR and its Gulf Coast facilities were envisioned and stocked for a different world of falling domestic oil production, rising oil imports–mainly through Gulf Coast ports–and US refineries that supplied only domestic customers. Yet while the SPR’s roughly 700 million barrels in storage should now last much longer in an emergency than they would have done in the previous decade, the reserve’s other shortcomings have grown as the US energy situation has evolved in the last several years.

For starters, it holds too much light sweet crude oil. Once in short supply, the US now has such abundant supplies of this grade, thanks to the shale production in North Dakota and Texas, that US refineries may eventually not be able to refine it all, without expensive upgrades or under-utilization of their costly conversion hardware.

The SPR's oil is also increasingly in the wrong place. While oil imports into the Gulf Coast have been falling rapidly, California now imports more than half its crude oil needs, with half of those imports sourced from the Middle East. The existing Gulf Coast SPR provides virtually no coverage in the event of a disruption in California’s supplies.

Finally, as became apparent in the wake of Sandy and of 2005′s hurricanes Katrina and Rita, a crude oil SPR provides little benefit if the refineries necessary to process its oil have been shut down by storms, electricity outages, or other causes. And more recently, the emergence of the US as a major net exporter of petroleum products raises questions about the extent to which SPR oil might be used to produce fuel for non-US customers.

The announced Northeast Gasoline Reserve represents a step towards addressing these shortcomings, positioning refined products near major markets. That avoids the possibility that refinery capacity might not be available when required, and it circumvents at least part of the distribution infrastructure–pipelines and ports–that might fail in a future Sandy-like emergency.

The title of the DOE’s press release also hints that the Northeast reserve might be just the first, with others to follow. Additional locations should be chosen with regard not just to today’s vulnerabilities, but those under a variety of future scenarios. However, while this decision moves in the right direction in several ways, it does not even address all the vulnerabilities highlighted by Sandy.

Sandy presented governments and consumers in the Northeast with both a shortfall of supply, from local refineries and long-distance product pipelines, and a massive failure of local infrastructure. Many distribution terminals had product in their tanks that they couldn’t deliver due to power outages, flooding or closed roads, while numerous gas stations were shut due to a lack of power to operate pumps and payment systems, product to sell, or both. Without addressing these local distribution issues, it is conceivable that the new gasoline reserve might contribute no more in a future emergency than the Northeast Heating Oil Reserve did after Sandy, supplying mainly first responders. While still useful, that would fall well short of the consumer benefits that the Senators from New York and Massachusetts seemed to be touting.

I also can’t help wondering whether the team at DOE that devised this measure considered alternatives such as those in use in Europe. The EU requires each member country to maintain 90 days’ inventory of oil and refined products and gives countries latitude in how to provide for that. In the UK, and as I recall at least several other EU countries, the responsibility for maintaining strategic stocks falls on the fuels industry. That approach offers significant benefits.

Aside from avoiding the need for governments to maintain idle inventory at taxpayer expense for many years, this option would also disperse fuel stocks across a much larger number of locations. That would reduce the risk that the strategic reserve facility itself might be incapacitated by the same event that triggered a call on its stocks, or might end up on the wrong side of temporary distribution bottlenecks.  It should also reduce the likelihood of an offsetting reduction in commercial fuel inventories, such as appears to have occurred in New England following the establishment of the Heating Oil Reserve in late 2000.

Putting the reserve in commercial hands would also help to ensure that the product maintained in strategic storage always meets current specifications, without the need for a complete turnover of the stockpile that occurred when the Northeast Heating Oil Reserve had to switch from ordinary to ultra low-sulfur diesel a few years ago.

These advantages, when combined with a rigorous auditing and oversight system, should compensate for the distrust that many consumers might feel for the industry as custodian of such a strategic reserve. I hope this option was at least given careful consideration before the administration decided to implement another federally owned fuel reserve.

The US Strategic Petroleum Reserve has been in place for four decades, and the Northeast Heating Oil Reserve for nearly 14 years. Much has changed since these stockpiles were justified and planned, to such an extent that it seems highly improbable that we would wish to implement them in the same way today, particularly in the case of the crude oil SPR. What should a state-of-the-art system of strategic energy storage consist of in 2014 and beyond? That’s the question I would expect the DOE to address with input from a range of stakeholders, including broad representation from the companies that produce and distribute these fuels under normal circumstances.

The press release announcing the gasoline reserve also mentioned the upcoming Quadrennial Energy Review, with its initial focus on infrastructure and participation by many parties outside government. While the composition and charter of that effort don’t appear to align with the needs of a major reform of the SPR system, it should at least be able to assess the fit-for-purpose of the current approach. It even invites public comment.

A different version of this posting was previously published on Energy Trends Insider.

A Self-Fulfilling Bet on Biofuels?

An article in today's Financial Times (registration required) raises a worrying possibility concerning the plans of the US and other oil-consuming countries to rely on biofuels for an increasing fraction of future fuel needs. What if oil-producing countries took those plans seriously and reduced their investment in new oil capacity, on the assumption that it wouldn't be needed? In some respects, that's exactly what we have in mind. However, if biofuels then failed to materialize in sufficient quantities to fill the gap between oil supply and total fuel demand, or proved to be economically or environmentally unsustainable, then we might inadvertently create precisely the sort of crisis these efforts were intended to avert. It would be easy to dismiss this argument as OPEC-inspired propaganda, if global oil production didn't require enormous ongoing investments to counteract the natural decline rates of producing fields, and if producing-country governments weren't already under internal pressure to spend their oil profits on programs other than reinvesting in future production.

The good news here is that biofuels have reached a scale at which they actually matter in the global oil supply and demand balance. That wasn't the case during the oil crises of the 1970s, and they were still only a marginal factor when oil prices last peaked in 2008. The latest publicly-available issue of the International Energy Agency's Oil Market Report indicates that biofuels now contribute the equivalent of 400,000 barrels per day (bpd) of oil, before including US and Brazilian ethanol volumes that together equate to another 650,000, bringing the global total to just over a million bpd. That might not sound like a large share of a total market of 85 million bpd, but it's enough to influence the global price of oil, which is set at the margin. Doubling or tripling biofuel output would certainly cost oil producers money, if they ignored this factor in their capacity planning.

So far, this is only a problem for oil producers. It becomes a problem for the rest of us when the biofuel plans and targets of consuming countries are based on unproven technology that may not be able to deliver in time, or possibly at all. Unfortunately, that's the position in which we find ourselves. Consider the Renewable Fuel Standard (RFS) enacted by the Congress in 2007 and refined in new regulations issued by the Environmental Protection Agency. Out of the 36 billion gallon per year target for 2022, only around 16 billion gallons is accounted for by corn-based ethanol and first-generation biodiesel--both of which have been amply proven, however much they depend on generous subsidies to remain competitive. 20 billion gallons per year must come from cellulosic ethanol and other advanced biofuels, none of which are in truly commercial production today, in spite of the hype that has been generated by a handful of "demonstration facilities."

One indication of just how unrealistic these targets might be is that EPA was forced to reduce the cellulosic biofuel target it will enforce for 2010 from 100 million gallons to 6.5 million gal.--the equivalent of just over 400 barrels per day of oil--due to lack of supply. And while the agency attributes that shortfall to delays in starting up new facilities using a variety of new technologies, a careful reading of their analysis suggests the problem might be more serious than that. Two firms account for nearly a third of the 694 million gallons of cellulosic biofuel capacity they expect will be in operation by 2014, Cello Energy and Range Fuels. Unfortunately, last year Cello was ordered by a federal court to pay $10 million for defrauding investors concerning its technology claims. Meanwhile blogger Robert Rapier has documented the problems that Range Fuels has experienced in scaling up its process for producing ethanol from gasified biomass. Until both of these firms have demonstrated they can actually do what they claim, at full scale, it's not prudent to bet the ranch on their production forecasts.

Problems such as this are probably just the tip of the iceberg when it comes to scaling up a myriad of new processes for producing motor fuels from non-food biomass, not because it's impossible or because the firms involved don't have sufficient smarts--though one or both of those factors will turn out to apply in at least a few cases--but because it is intrinsically hard. Scientists have been working on cellulosic biofuels and biomass-to-liquids processes for decades, yet the sum total of all that work, up until this point, has only yielded enough fuel production to cover the annual consumption of about 13,000 average American cars. That doesn't mean that companies and investors are foolish to pursue these technologies, or that ExxonMobil is wrong about the potential they apparently see in algae-based fuels, another hot biofuels sector. What it does mean, however, is that when dealing with technologies that can't be made to appear on command and are subject to a number of serious, unresolved technical and logistical challenges, neither consumers nor our governments should base their plans for the future on the assumption they will mostly succeed on schedule.

How realistic is it that the oil-producing countries that control access to the vast majority of the world's oil reserves would be so convinced by our rhetoric concerning biofuels replacing oil, that they will cut back their investments in new capacity? Part of the answer lies in the narrative of Peak Oil that generated headlines when oil prices were spiking a couple of years ago, involving the high decline rates of mature oil fields and the relatively low investment rates of many producing countries. When the government of Venezuela must borrow money from China despite $80 oil, that's one signpost that they might not have enough to reinvest in exploration and production. We can argue about the likely date of a peak in global oil output, but anything that provides governments an excuse to spend less sustaining their oil industries brings that date closer--and that's equally true for a US administration that appears so confident of the success of its biofuels and fuel economy programs that it can allow the timing of the next offshore oil leasing cycle to slip further and further.

Oil is still the lifeblood of our industrial civilization, but it's also a business requiring enormous investments premised on the likelihood of future demand. That doesn't mean we must remain helpless hostages to foreign oil suppliers; fuel efficiency and biofuels are both sensible--even necessary--strategies for us to pursue. But we have an even larger stake in ensuring that the biofuel goals and plans we communicate, not just among ourselves but simultaneously to our oil suppliers, are based on reality. If both we and they are betting on supplies of advanced biofuels that could well fall significantly short of our expectations, then it is we who will suffer the consequences at the gas pump.

Misleading Statistics

In its editorial on the pending energy tax bill, today's New York Times repeats a frequently-heard, but dangerously misleading pair of statistics concerning US oil consumption and proved reserves. The Times says, "a country that consumes one-fifth of the world’s oil but has only 3 percent of its reserves cannot possibly drill its way to energy independence." Ignoring the feasibility or desirability of attaining energy independence by any means presently available to us, the implication is that remaining US oil resources are inconsequential, and it is high time we discarded them in favor of renewable energy. Yet if we compare the potential energy contribution of even a modest increase in domestic oil production to what we hope to gain from biofuels in the next decade, the better answer is that we need both and can't afford to ignore the contribution of either.

The basic data the Times cites are, if anything, conservative. In 2006, the US consumed 20.7 million barrels per day (bpd) out of global production of 84.6 million bpd, or 24.5% of the total, while producing 8.3 million bpd, or 9.9%. US proved oil reserves stood at about 2.5% of global reserves of 1.2 trillion barrels. However, it is equally true that the US has produced a cumulative 200 billion barrels of oil from proved reserves that never exceeded 40 billion barrels. If reserves told us everything about future production, the US would have run out of oil decades ago. The US government estimates that in addition to our present reserves of 20 billion barrels, we have another 85 billion barrels of untapped offshore oil resources, including those in regions that are off-limits to drilling. US oil production peaked in 1970 and has been declining ever since, but that doesn't mean that we can't reverse that slide for a decade or so.

Even if only a fraction of those untapped resources were ultimately converted to reserves, which would require both access and an assessment that the oil could be produced at current prices and with existing technology, a net 10% increase in US oil production ought to be entirely achievable. That would add 700,000 bpd, or the equivalent of 15.3 billion gallons per year of ethanol, matching the entire ultimate conventional biofuel mandate under the new Renewable Fuel Standard for 2015 and beyond. And in energy return terms, a 10% increase in oil output would contribute more than three times as many net BTUs to the US economy as all that corn ethanol, after subtracting their respective energy inputs. Higher domestic oil production would also buy us valuable time for our vehicle fleet to turn over to more efficient cars, and for the technology of producing biofuels from cellulose to supplant our resource-intensive and environmentally-questionable conversion of foodstuffs to fuel. This isn't a question of "drilling our way to energy independence," but of bringing all our resources to bear at once on the problem of energy security.

However one regards the US oil industry and its current profitability, a fact-, rather than emotion-based analysis of our energy situation ought to convince us that oil and gas still have at least as much to contribute to our energy security over the next decade as any alternative energy technology now at our disposal. We urgently need a practical and realistic strategy for managing the long-term transition from oil and gas to more sustainable, environmentally-benign energy sources that cannot yet carry the burden of providing our economy with all the energy it needs, even after employing every conservation tactic available to us. Turning our backs on billions of barrels of untapped resources, based on superficial sound-bites about consumption and reserves, will make that transition a lot more arduous and expensive than it needs to be.