Harvey’s Destruction Demonstrates Value of Strategic Petroleum Reserve

The nation’s Strategic Petroleum Reserve, with its supplies of crude oil and gasoline, was created by statute to protect the U.S. economy from “severe energy supply interruption.” This authority, exercised by a presidential declaration, can be used in the event of a disruption of either domestic or imported petroleum products.

The unprecedented rainfall, flooding and destruction from Hurricane Harvey this week has struck the energy nerve center of the nation and is exactly the kind of event of “significant scope and duration, and of an emergency nature” that the SPR was created to address.

The Gulf of Mexico accounts for almost 20 percent of total U.S. crude oil production, and the Texas Gulf Coast alone is home to almost one-third of U.S. refining capacity. Hurricane-related shutdowns have already led to the loss of 2.2 million barrels per day in operating refinery capacity in Texas, more than 12 percent of the U.S. total.

Offshore oil platforms have been evacuated and shipping channels through which crude oil and product move are in danger of silting up. Pipelines moving refined product from the Gulf to other regions of the country may be damaged or contaminated – there are reports of water in the Colonial pipeline, the only product pipeline system serving the Southeastern United States.

Gasoline prices hit a 2-year high this week – September deliveries rose almost 12 cents in one day — and it is likely that prices will continue to be volatile while the full extent of the damage is being assessed. The Texas attorney general is reporting that some stations in Texas are charging as much as $20 per gallon.

Harvey’s impact will be felt far beyond the states at the frontline of its destructive path. While preliminary estimates of damage in the Gulf region alone exceed $75 billion, this does not take into account the impacts of higher energy (and chemical) products for the entire country. Taxpayers will bear the costs of a critical but expensive emergency response package, adding to the U.S. budget deficit.

Because of these strains on the economy, action to deploy the SPR is critical – and not wholly dependent on presidential declaration.

The Secretary of Energy also has authority to order an “exchange of oil to acquire oil.” That is, the DOE “loans” crude oil to address a shutdown and is “repaid” with a premium of crude oil without exchanges of cash. This authority works especially effectively in a so-called “backwardated market” – when long-term contract prices are lower than current prices – where more oil goes back into the reserve that was put out for the initial bid. This authority was used twice in the Clinton administration when I was at DOE as under secretary.  In June 2000, a dock collapsed in a ship channel in Louisiana, blocking the downstream access to crude for two large refineries. DOE was able to supply SPR oil upstream of these refineries in less than 30 hours. The government received higher quality crude back to the reserve once the channel was cleared.

The department also used this authority in September 2000 when oil prices were climbing and heating oil inventories in the Northeast were extremely low. The department put 30 million barrels onto the market and ultimately received 35 million barrels back; at $100 per barrel, this would translate into an additional half billion dollars in crude oil inventory to be used for future emergencies, all at no cost to the taxpayer.

In the aftermath of Harvey, both of these options are available and should be executed. We are fortunate that in this situation, we have a large Strategic Petroleum Reserve and a Northeast Gasoline Supply Reserve designed for precisely these emergencies – their use could reduce the pressure on supplies that may be needed elsewhere and help minimize near-term price volatility while repairs are made and supplies stabilize. SPR crude could be used to either mitigate supply shortfalls or address refinery access issues.

Yet as I noted in a July 10 editorial in the Houston Chronicle, the Trump administration wants to sell half of the 700 million-barrel SPR and shutter the Northeast gasoline reserve. The plan calls for the closure of two of the four SPR storage sites in Texas and Louisiana, which are located near ports, pipelines and refineries to facilitate a rapid response to supply interruptions. The fiscal year 2018 administration budget would also eliminate the Northeast Gasoline Supply Reserve.

Instead of dramatically downsizing the SPR, we should be doing all we can to ensure that these assets – the Strategic Petroleum Reserve and the Northeast Gasoline Supply Reserve — are retained and modernized to bring the highest value for those who are directly affected by natural disasters like Harvey, as well as for the American taxpayer.

Our thoughts are with the people in Texas who have lost their loved ones, homes and possessions as a result of Harvey. Deploying the assets of the SPR should be one of the first responses in our recovery plan for the region.

Ernest J. Moniz was the 13th Secretary of Energy and now serves as president and CEO of Energy Futures Initiative.

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