Donald Trump Budget Plan Renews Debate on Oil Reserves

By Alison Sider and Erin AilworthFeaturesDow Jones Newswires

(Editor's Note: This story is being republished to appear on additional newswires.)

President Donald Trump's proposal to help reduce the national debt by selling down more of the U.S. emergency oil stockpile is reigniting a debate about whether the reserves are still crucial to the country's economic security.

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The Trump administration said Tuesday that its new budget proposal calls for selling an additional 270 million barrels of oil over the next decade. Congress had already recently approved selling down some reserves to raise money for various domestic programs.

The administration now wants to increase those sales. Officials said the additional amount could bring in $500 million in fiscal 2018 and $16.6 billion through 2027.

Proponents say the reserve fund is necessary in the event of a crisis, like a war in the Middle East or another violent disruption to supply, that could leave the U.S. short of oil for a period. Critics say that rising domestic production makes such large reserves redundant and that proceeds from selling it could be put to better use.

The Strategic Petroleum Reserve, or SPR, was intended as a buffer against disruptions in the flow of imported oil. It was created in the wake of the Arab oil embargo of 1973-74, when gasoline prices at the pump quadrupled and consumers were stuck waiting in long lines at filling stations. It is now the world's largest supply of emergency crude, according to the Energy Department.

But rising output from shale formations in places like Texas and North Dakota has made the U.S. less dependent on crude from the Organization of the Petroleum Exporting Countries. As a result, many energy analysts say the U.S. no longer needs to sock away hundreds of millions of barrels of oil as protection against supply shortages and price spikes.

Some analysts also say the reserve is outdated or simply ineffective. It can take as long as 13 days for the government's oil to reach the market after the president calls for its release, making it a blunt instrument in a market that can swing in an instant. The reserve's infrastructure has also become dilapidated in recent years, requiring new funding to make repairs and upgrades.

"I don't think it has any efficacy -- it's basically a security blanket, " said Fred Beach, assistant director for energy policy at the Energy Institute at the University of Texas at Austin. "It's a political tool. It's just not enough to swing a global market."

Those who favor keeping the reserves higher counter that even with the U.S. producing more of its own crude, a sudden price spike could still harm the economy. Shale producers need months to significantly boost output. During that time the U.S. could be short of oil, forcing users to pay exorbitant prices until new domestic supplies reach the market.

"Making it significantly smaller -- that's going to work really well until the next geopolitical crisis," said Adam Sieminski, who served as the head of the U.S. Energy Information Administration until this year and is now an analyst at the Center for Strategic and International Studies. "I would like to actually see a healthy debate with congressional hearings. It's worth exploring in more detail."

Robert McNally, president of the Rapidan Group, equated the proposal to "selling the family silver." Mr. McNally served as an energy adviser on the staff of President George W. Bush during a time when the government refilled the reserve using royalties from its offshore leases.

"I've seen the terror in the eyes of officials when gasoline prices rise or a Middle East war happens. Having that emergency stockpile -- you really appreciate it," he said.

The U.S. government has dipped into these oil reserves several times over the past few decades. It was usually for emergency reasons, including after Hurricane Katrina in 2005, when a number of oil operations were affected by the storm. The U.S. in 1991 drew on reserves during Operation Desert Storm in Iraq.

Congress authorized sales from the stockpile in 1996 to pay for deficit reduction, marking the first time it tapped the reserve for reasons other than its stated purpose.

The surging output from U.S. shale formations has led to lawmakers increasingly viewing the reserve as a piggy bank. In 2015 and 2016, Congress approved sales aimed at raising money for programs including the Highway Trust Fund and medical research. Those sales, which began earlier this year, could amount to some 190 million barrels through 2025, according to the EIA.

As a member of the International Energy Agency, the government is required to keep stockpiles large enough to cover 90 days worth of net petroleum imports. In the event of a major supply disruption, it must release a certain amount from that reserve at the direction of the IEA.

But the White House proposal likely wouldn't run afoul of that, experts said: Net imports are dropping and the 1.3 billion barrels of oil and fuel in privately owned storage tanks could more than meet the IEA's rules.

(END) Dow Jones Newswires

May 24, 2017 10:44 ET (14:44 GMT)