Obama Has A Plan To Reduce Oil Prices And Manage Our Oil Reserve

In the face of still high oil prices Senator Barack Obama has a plan to reduce them and via the use of a "swap" of components of our Strategic Petroleum Reserve. The Wall Street Journal covers this idea:

Obama Has A Plan To Manage Our Oil Reserve

By JOHN D. SHAGES
September 8, 2008; Page A17
Energy is playing a pivotal role in this year's presidential election. And a crucial aspect of America's energy security not widely discussed is how to best use America's Strategic Petroleum Reserve (SPR).

Sen. Barack Obama is proposing a simple maneuver -- called an exchange, or swap -- that will help lower the price of oil for consumers, increase the amount of oil in the SPR, increase energy security, and leave taxpayers better off by about $1 billion. His proposal deserves to be adopted.

In 1975, after the Arab oil embargo, the U.S. created the SPR to protect against oil supply disruptions. That reserve now consists of 706 million barrels of crude oil, the largest stockpile in the world.

As the steward of that stockpile, the Department of Energy plays an important role in oil markets. Merely announcing oil acquisitions or sales from the SPR moves oil prices. The SPR's drawdown capability of 4.4 million barrels of oil per day surpasses the daily production capacity of Iran, Iraq or Venezuela.

The authority to sell oil from the SPR is contingent on a presidential finding of a "severe energy supply interruption." In the past 33 years, there have only been two sales from the SPR: in 1991 to support Operation Desert Storm, criticized for being too late; and a widely applauded 2005 post-Katrina sale.

There is also another, little understood statutory authority that allows the Energy secretary to "exchange" oil from the SPR. This authority was created to allow the secretary to periodically change the SPR's composition to ensure that it remains useful to refiners and consumers.

The Clinton administration used this authority in 2000, exchanging crude for heating oil. Later that year, facing a possible heating-oil shortage, the administration loaned 30 million barrels of oil to the market, which was repaid with interest in the form of additional oil at a later date.

This met two objectives. The swap added oil to the SPR at no cost to taxpayers and it put downward pressure on prices.

The Bush administration has used the exchange option extensively. As a matter of policy, however, it has used this option only for minor supply disruptions, and not to intervene in markets due to high prices.

Today, with historically high oil prices, it is time to debate using the SPR. Some argue that the reserve should only be used in emergencies. Others say that we should use all the tools at our disposal to help consumers.

Fortunately, we do not have to resolve these philosophical differences. Instead, we can improve the management of the SPR and maximize its value to the taxpayer. The oil in the reserve now is all light crude, which is easier and cheaper to refine into gasoline, a reflection of refining capability at the time the SPR was created. Over the past three decades, however, U.S. refining capacity has become increasingly sophisticated and complex, because the world's oil is increasingly heavy and harder to refine. Today, about 40% of our refining capacity is configured to handle heavier crude oil.

We now confront a mismatch between U.S. refining capacity and the oil mix in the SPR. In a 2007 report, the Government Accountability Office (GAO) found that in an emergency this mismatch could reduce U.S. refinery capacity by 5% or over 735,000 barrels per day in total as some refineries scale back production to accommodate the SPR oil. The GAO recommended that the Energy Department change the reserve's oil mix to at least 10% heavy oil, roughly 70 million barrels.

This could be accomplished through a swap. From a policy perspective, this would enhance the utility of the reserve, aligning its oil with U.S. refining capacity, while also putting short-term downward pressure on oil prices. From a business perspective, the DOE could craft an exchange to either increase the oil in the reserve, yield a cash bonus, or both. Light crude is more valuable than heavy crude (by about $12 to $18 a barrel), so swapping one for the other could bring in about $1 billion at today's prices.

The House and Senate are considering legislation to mandate such a swap, and Mr. Obama has adopted the concept as part of his energy plan. The public benefits are compelling. Swaps that help energy security, refiners and consumers should be a routine part of managing the SPR.

Mr. Shages is a former deputy assistant secretary for petroleum reserves at the Department of Energy.