US fuel stockpiles: in need of a update?

A Belated Response to Sandy

I was traveling when I saw a press release from the US Department of Energy (DOE) announcing the establishment of a strategic gasoline stockpile to serve the Northeast. Responsive 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 DOE recognize some of the limitations of the current US Strategic Petroleum Reserve (SPR), I am 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.

The Current SPR Is Outdated in Many Ways

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 would 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.

It is also increasingly in the wrong place. While oil imports into the Gulf Coast are 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 2007′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. It also raises questions about the extent to which SPR oil might be used to produce gasoline or diesel for non-US customers.

Product Reserves A Step in the Right Direction

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.

What Else Was Considered?

However, while this decision moves in the right direction in several ways, it does not even address all the vulnerabilities highlighted by Sandy. Nor is it obvious whether DOE considered alternative strategic fuel stockpile options employed in other countries.

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, a shortage of 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 seem to be touting.

I can’t help wondering whether the team at DOE that devised this measure considered alternatives in use in Europe, for example. 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 I believe 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 invest in and maintain idle inventory 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 triggers 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, 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 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, could more than compensate for the distrust that many consumers might feel for the industry as custodian of such a strategic reserve. I hope this was at least given careful consideration before the administration decided to implement another federally owned fuel reserve.

Conclusion: The Quadrennial Energy Review Should Assess the Current SPRs In Depth

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 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.

Source: US Strategic Gasoline Reserve: Solution or Band-Aid?