Wednesday, October 29, 2014

China Seizes Opportunity to Fill Its Petroleum Reserve. Should Others?

  • China is apparently snapping up cheap oil cargoes to fill its strategic petroleum reserve.
  • That might make sense for the US, too, if earmarked for new regional SPRs, rather than refilling the existing one on the Gulf.
The Wall St. Journal has reported that state-owned oil companies in China are capitalizing on lower prices to fill that country's strategic petroleum reserve (SPR). The obvious question is whether the US should do the same, particularly since surging oil output from shale deposits is a major factor in the recent rebalancing of the oil market. If that means putting more oil into caverns on the Gulf Coast, the answer should be no. However, this could be an opportunity to begin creating strategic reserves for parts of the country like the West Coast that are poorly served by our 1970s-vintage SPR.

Superficially, $80 oil provides a tempting chance to turn a profit while replacing the 30 million barrels of oil the US government sold as part of a "coordinated release" with other International Energy Agency members during the Libyan revolution. Comparing the average WTI price in June 2011 to today's, the Department of Energy could pocket around $15 per barrel on the overall sale and repurchase. However, much has changed in the last three years.

When I examined this subject a year ago, the dramatic reduction in US oil imports resulting from the combination of resurgent production and lower consumption had roughly doubled the effective capacity of the SPR, in terms of the number of days of lost imports it could cover in a crisis. Since then, US crude oil imports have fallen by another 5% or so, increasing SPR coverage correspondingly--at least for the parts of the country to which it can easily deliver.

Yet as I noted in another post earlier this year, US oil imports aren't just falling; they are shifting in location. The West Coast, where domestic production has been declining, not growing, now accounts for about 15% of US crude oil imports. It has essentially no dedicated petroleum reserve, other than commercial inventories that are roughly 50% lower than when I traded oil for Texaco's refining and marketing subsidiary in the early 1990s. If oil prices fell much further, it might even make sense for west coast refiners to stock up, regardless of what official action the US government took.

With US oil production still increasing, demand stable or falling, oil imports shrinking, and imports from Canada growing in both absolute and relative terms, it is high time to reconsider holding nearly 700 million barrels of oil--$55 billion worth even at today's depressed prices--in a part of the country where production could soon surpass its 1972 peak. This seems like exactly the kind of overdue reform opportunity that a new Congress might be interested in taking up next year.


Anonymous said...

Finally someone is talking sense.

Anonymous said...

Geoffrey, and what do you think about the effect on oil price if we assume the sell of SPR to, say, 90 days of import level? 30-40-50 per barrel?

Alex Zotin from Moscow, Kommersant-Dengi magazine

Geoffrey Styles said...

Selling into this market would make no sense. However, a good first step would be to exchange out 100 million barrels of light/sweet from the Gulf Coast SPR for sour crude for placement in storage on the West Coast, using rented tankage. No net change in the global oil supply, so no impact on price, other than a slight compression of the sweet/sour differential.