US Strategic Gasoline Reserve: Solution or Band-Aid?

• The new Northeast Gasoline Reserve addresses some of the shortcomings of the current, 39-year-old federal emergency crude oil reserve, or SPR.
• Whether or not the DOE considered other options, the upcoming Quadrennial Energy Review provides an ideal opportunity to rethink our strategic energy stockpiles.

The recent announcement that the US Department of Energy (DOE) would establish a strategic gasoline stockpile to serve the Northeast was at least partly a response 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 the DOE recognize the limitations of the current US Strategic Petroleum Reserve (SPR), I was 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.

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 should now 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.

The SPR’s oil is also increasingly in the wrong place. While oil imports into the Gulf Coast have been 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. And more recently, the emergence of the US as a major net exporter of petroleum products raises questions about the extent to which SPR oil might be used to produce fuel for non-US customers.

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. However, while this decision moves in the right direction in several ways, it does not even address all the vulnerabilities highlighted by Sandy.

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, 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 seemed to be touting.

I also can’t help wondering whether the team at DOE that devised this measure considered alternatives such as those in use in Europe. 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 as I recall 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 maintain idle inventory at taxpayer expense 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 triggered 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, such 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 always 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, should compensate for the distrust that many consumers might feel for the industry as custodian of such a strategic reserve. I hope this option was at least given careful consideration before the administration decided to implement another federally owned fuel reserve.

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 to 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.

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