Last week, in his State of the Union address, President Bush proposed to spend $65 billion from the government’s general fund to double the size of the Strategic Petroleum Reserve. For most Americans, the reserve, where 700 million barrels of oil have been stored since the late 1970s, is mostly an article of faith: Few know that it’s located deep underground in four sites on the Gulf Coast, and because those sites are considered vital to national security, hardly anyone has seen it. But it’s time to take a closer look at the reserve’s purpose, its usefulness and its cost. Before we invest another $65 billion in this underground bank of oil, we should ask ourselves what we’re really getting for the money.
Though the Strategic Petroleum Reserve is remote and not open to the public, I toured the largest of the sites, Bryan Mound, located in Texas, in the summer of 2003. Except for the security fences and sunburned young men carrying guns, it was a friendly place — balmy waterfront scrub overrun by migratory birds, and the occasional alligator or bobcat. The oil sits far out of sight, some 2000 feet below ground, in caverns in thick salt deposits.
The caverns are made by a technique called “solution mining,” which basically involves running water down into the salt and sucking out saltwater until a significant hole has been hollowed. The salt wraps itself around the oil like plastic, so the caverns don’t leak. They are, in fact, a miracle of salt engineering, and if it were possible to see them, they’d probably be as big a tourist draw as the Hoover Dam. But the petroleum reserve is pretty much invisible — and so is its ambiguous history.
The reserve was established in 1975, after the first Arab oil embargo cut exports to the United States, as a way to fight back against any future threats to our energy supply. Some called the reserve our own “oil weapon.” By the time it was completed in the early 1980s, however, embargoes were no longer a threat. Significant amounts of oil were being traded on the open market, so oil producers could no longer control who bought their oil.
Then the Strategic Petroleum Reserve gained a second life as an insurance policy against oil shortages and high prices. During the 1991 gulf war, the reserve stood by ready to pour more oil into the market in the event the conflict paralyzed production in the Persian Gulf. By allaying fears of a shortage, it theoretically could keep oil prices from spiking.
In this role, the reserve became the center of a new debate over the American government’s role in the oil market. Should it regulate prices? Or stand by only for emergencies? “That’s the S.P.R.’s Achilles heel,” Sarah Emerson, an analyst at Boston’s Energy Security Analysis, Inc, told me. “Its role changes depending on who’s in office.”
Since the election of George W. Bush, administration officials have resisted using the reserve at all. At the start of the Iraq war, rather than tap into the reserve, the Bush administration asked Saudi Arabia to pledge to put an extra 2.5 million barrels of oil a day on the market, if needed. Ironically, the reserve had been created to free the United States from the influence of foreign oil producers, but our unwillingness to use it created a new type of dependency.
Just this week, Saudi Arabia indicated that it will work to keep oil prices lower, at least in part to further American diplomatic goals with Iran. And this raises a new question about the reserve: If we didn’t use it in 2003, when it might have come in handy, will we be any more likely to use it once we’ve made it twice as big?
My sense is that the Strategic Petroleum Reserve is more important as a psychological aid (like the stashes of food survivalists keep in case of catastrophe) than as a practical solution to energy security. In many ways, it is a relic of cold-war thinking that lives on even though the very idea of energy security has changed. We now import about a million barrels of oil a day in the form of goods from China. That is, China imports the oil, uses it to make products, and we depend upon those products. The reserve can do little to protect us in this more complicated modern world. If we double the size of the reserve, we will be paying $65 billion for more of the same psychological reassurance, and little else.
Rather than increase the size of our petroleum reserve, we should address its problems. One of these became obvious in 2005, after Hurricane Katrina and Hurricane Rita: The reserve is located on the Gulf Coast — the same place as half of our domestic oil production and nearly half of our refining capacity. Any hurricane (or terrorist attack) that affects our active energy supply will affect our backup supply as well.
The president’s current doubling plan would keep the entire reserve on the Gulf Coast, which means we would go from having all our eggs in one basket to having paid for twice as many eggs and put them all in the same, hurricane-prone basket.
And then there is the fact that, today, our imports, which account for 60 percent of the oil we use, increasingly come in the form of refined oil — gasoline and diesel. The reserve, on the other hand, stores only crude. After Katrina, the reserve quickly released 11 million barrels of crude oil, but that couldn’t replace the millions of barrels of gasoline no longer flowing from the area’s refineries. European tankers filled with gasoline were soon steaming toward the United States — like the “cavalry,” in the words of a federal Energy Information Administration report. If the United States is to be its own cavalry, it should have three or four regional reserves of gasoline at various locations around the country.
But perhaps the biggest problem with the reserve is that its costs never appear at the pump. The United States spends about 2 billion dollars a year maintaining the reserve, and billions more filling it, but because the money comes from the general fund, rather than from a “security tax” on gasoline, those costs are hidden from the consumer.
The reserve is only a small part of the larger story of hidden gasoline costs in the United States. For the last 100 years, the government has used money from the general fund to subsidize energy to keep it as cheap as possible for Americans, ostensibly to encourage economic growth. Now those hidden costs – which include tax breaks for the oil industry, accounting giveaways, direct subsidies for some oil and gas production and the cost of protecting oil and natural gas shipping lanes – may total around $39 billion a year, according to Doug Koplow, who studies energy subsidies for Boston-based Earth Track.
While many Americans feel that current gas prices are high, they are in fact much lower than they would be if we counted in the costs of these subsidies, including the cost of maintaining the reserve. We receive an unitemized bill for the subsidies when we pay our taxes on April 15, but we never see any sign of them at the pump. Deceptively low gas prices discourage conservation, making Americans more vulnerable to supply disruptions of all sorts. You could even argue that this policy, which encourages Americans to produce 45 percent of the world’s carbon dioxide from auto emissions (even though we own only a third of the cars), is speeding global warming and making hurricanes more likely to swamp the refineries, oil installations and petroleum reserve sites on the Gulf Coast.
Any way you look at it, we need to stop subsidizing supply and start managing energy demand. But even if we determine that we need more oil, or gasoline, in the reserve, we should at least pay for it with a 5- or 10-cent-per-gallon tax on gasoline.
(To read more about the history of the Strategic Petroleum Reserve and the current debate over it, see this report from the Congressional Research Service [pdf].)