Thursday, March 27, 2014

SPR: Oil Subsidy & Weapon

[SPR: Industry kickback, political slush fund, & weapon of war?]

The International Energy Agency (IEA) was formed by large net oil consuming nations in response to oil supply shocks of the early 1970s.  The IEA has required member nations, including the US, to have 90 days oil import coverage stored in a Strategic Petroleum Reserve (SPR).

The original mission of the SPR was to shelter oil consuming economies against unexpected oil supply shocks.  However, this mission expanded to become a free insurance policy for the oil industry as well as, most recently, an economic weapon. Releases are also occurring much more frequently just prior to national elections in net oil consuming nations.

Most countries require their oil industry to fund the 90 days of SPR. The US is different. In the US, taxpayers, via the Department of Energy (DOE), pay to store SPR oil.  The taxpayer funded US SPR currently holds 696 million barrels of crude oil (the red line below).

Free Insurance for the Oil Industry
This taxpayer funded storage failed to increase storage per oil consumer. It had the opposite effect.  As the US government (funded by taxpayers) began storing more and more oil in order to provide a buffer against supply shocks, it provided the US oil industry encouragement to do exactly the opposite - store less.  Storing oil is expensive, and so industry is happy to allow taxpayers to subsidize storage.

Running inventories so low is risky for private industry.  However, if industry runs short, due to a hurricane or storm, it now simply taps taxpayer funded storage without any penalty - effectively free insurance.  The frequency of these loans have increased dramatically since 2000.

New Economic Weapon
In addition to being a taxpayer-funded free insurance policy for the oil industry, the SPR has now become an offensive, rather than defensive, economic weapon.  The most recent volley from this weapon was a test release of 5 million barrels of oil from the SPR announced a few weeks ago coinciding with a hugely oil dependent Russia invading Ukraine's Crimea.

Today, a number of economic commentators are calling for use of this new economic weapon to be expanded.
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