March 13, 2014 / 11:05 AM / 6 years ago

RPT-ANALYSIS-With SPR test, Obama warms up to flex U.S. energy muscle

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By Timothy Gardner

WASHINGTON, March 13 (Reuters) - A rare U.S. test of its strategic oil reserves may be just coincidentally timed with the most serious stand-off with Russia in decades, but the underlying message of the move announced on Wednesday left little doubt: Prepare for the rise of a new global energy superpower.

The Energy Department said it would offer up to 5 million barrels of sour crude from the Strategic Petroleum Reserve (SPR), with bids due in two days. Officials said the sale would ensure the reserves can still quickly deliver oil to refiners despite changing pipeline networks.

Plans for the sale had been in the works well before Russian forces invaded Crimea in Ukraine last week, according to administration officials. Several Washington analysts also said they had heard talk of the release some weeks ago.

The White House said the test sale was required by law as part of continual evaluations of the reserve, authorized by Congress after the 1973 Arab oil embargo sent U.S. gasoline prices soaring and American drivers to long lines at service stations. Yet the last such test occurred in 1990, months before the United States waded into the first Gulf War.

For many analysts, the subtext wasn’t so much a warning shot to Russia, which produces more than 10 million barrels every day. It was the Obama administration’s desire to expand the SPR from an emergency buffer against severe disruptions to U.S. oil imports into a more flexible lever it can use to aid the economy and, ultimately, to influence foreign policy.

“I don’t think this has anything to do with Crimea, but longer term I do think the administration sees the SPR is something it can use as a geopolitical tool,” said Jamie Webster, senior director of global crude market at IHS Energy in Washington.

Faced with an unexpected new-found bounty of crude oil and natural gas reserves, Washington policymakers are still working out how a new era of greater energy independence - and in the case of natural gas an excess - is changing America’s role in the world.

Many lawmakers, including Speaker of the House John Boehner, have called on the administration to speed approvals for natural gas exports to thwart Russia’s pressure on Ukraine, through which Russia provides large amounts of gas to that country and to other parts of Europe. But billions of dollars worth of U.S. equipment and ports need to be built before the gas is shipped.

The SPR is among the most significant policy choices the administration faces in the midst of the energy surge. Washington is also debating lifting a four-decade ban on oil exports, also spurred by the fuel price shocks of the 1970s, and how quickly to approve exports of natural gas.


U.S. oil production surged by 1 million barrels per day (bpd) last year, the fastest rate on record, as booming shale oil production upends the market. Energy companies have raced to reverse pipelines, build new terminals and expand infrastructure to keep pace with rapidly shifting oil flows.

Thanks to declining domestic demand and rising production, the SPR now holds about 210 days worth of crude imports, far more than the 90 days’ worth it is required to hold.

The energy boom gives the United States a “good position to, if it desires, act with intentionality” to use the SPR and growing energy production to influence its foreign policy, said Elizabeth Rosenberg, the director of the Energy, Environment and Security Program at the Center for a New American Security.

The growing confidence of its own energy resources was in evidence last year, as President Barack Obama coordinated with the European Union in slapping sanctions on Iran - one of the world’s biggest exporters - over its disputed nuclear program.

The sanctions regime has slashed Iran’s oil exports by 1 million barrels per day since mid-2012 without raising global crude oil prices, a move analysts argue could not have been pulled off without the surge in hydraulic fracturing, or fracking, in North Dakota and Texas.

The SPR offers the Obama administration the most immediate tool for flexing its energy muscle. Building natural gas export terminals will take years, and lifting the ban on crude oil exports risks a rift with environmentalists.


Mark Routt, an energy expert at the KBC Technologies consultancy in Houston, said the DOE test sale may show that Washington may be reconsidering the export ban, which could help control Russian aggression or tame market reaction to unrest in places like Libya, which the West is afraid may slip back into civil war.

“Allowing the U.S. to export crude would be one way to economically penalize Russia,” said Routt. “(Wednesday’s) release could be a warning and a necessary first step to eventually letting crude be exported.”

But he noted that the dramatic increase in U.S. oil production has produced significant changes in the way the reserve system works, including reversals in the flow of pipelines.

Writing in a book shortly before becoming a senior energy adviser to Obama, Michelle Patron advocated using SPR for exporting crude in the event of a global disruption.

Webster of IHS said the Obama administration is likely considering many aspects of the SPR, including what kind of oil it should hold. Currently one third of the reserve consists of light-sweet oil, abundantly produced in North Dakota, but not necessarily the best feedstock for U.S. refineries built to run on heavy-sour oil from Mexico and Venezuela.

Whether oil reserves should be moved to the high demand Northeast from the Southwest is another consideration. The administration will also consider expanding reserves to oil products like jet fuel and gasoline.

“In practice this will wind up being both a test release for DOE and a kind of test conversation for everyone in the public policy community about what the SPR should be in the current market environment,” said Rosenberg of CNAS. (Additional reporting by Sabina Zawadzki in New York; Editing by Jonathan Leff and Ken Wills)

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