How Will Federal Budget Deal Affect US Oil Security?

As Middle East and Latin American countries grapple with sinking oil prices, the United States is considering a budget deal that would require the sale of 58 million barrels of oil from the emergency reserve created decades ago to shield the nation from market disruptions. While this release of crude is unlikely to directly affect oil prices, some experts say depleting the Strategic Petroleum Reserve could leave the U.S. vulnerable to unforeseen events that disrupt global oil markets.

Congress agreed this summer to use sales of crude oil from the reserve to prop up the Department of Transportation's Highway Trust Fund, and those sales combined with the budget proposal would liquidate more than 20 percent of the nation’s petroleum reserves, according to the Washington Post. The budget deal aims to quiet the recurrent Capitol Hill battles over spending and federal borrowing until the next administration and Congress take office in 2017.

“I don’t think it’s good policy to use the SPR like an ATM and raid it when you need money,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former energy and climate adviser to President Barack Obama’s National Security Council. “In a world with significant geopolitical risks and almost no buffer to handle market disruptions, it remains quite important that the U.S. have a robust stockpile of oil to handle emergencies.”

The budget deal lays out a plan that would sell off 58 million barrels of crude from 2018 through 2025 in chunks of $5 million, $8 million and $10 million per year, raising a total of $5.1 billion or 0.125 percent of this year’s budget. These calculations are based on the Congressional Budget Office’s oil price estimates of $88 per barrel, which assume that prices will recover from their current levels.

While something that makes up less than 1 percent of the federal budget may not seem so significant, some experts say the reserve helps prevent volatility in crude oil markets and has a part in maintaining the global oil balance. The reserve was established in the wake of the 1970s oil crisis when the Arab members of the Organization of the Petroleum Exporting Countries imposed an embargo against the United States for its support of Israel in the 1973 war. Since then, the U.S. has decreased its dependence on oil imports and increased investments in clean energy, so some believe the reserve is is less important than it was then.

The emergency reserve contains 695 million barrels of crude oil that are held in salt caverns in Louisiana and Texas, which amounts to about 142 days of imports, according to the Washington Post.

“If the U.S. were to lose all of those imports, we could be on our own for a couple of months. But the majority of our imports are coming from Canada, Mexico and Venezuela, places far outside the Middle East,” said Andrew Lipow, president of Lipow Oil Associates, a consulting firm in Houston that specializes in the petroleum industry. “So some of the reasons for carrying such a large reserve have gone away because we’ve diversified our oil interests, and at the same time U.S. oil production has increased.”

The budget deal also authorizes the use of some funds for a program to modernize the petroleum reserve, which Bordoff says is desperately needed. Because the oil in the reserves sits near the Gulf of Mexico, specific technology is needed to transport it over the water to refineries on the East and West coasts before it can be used on a global scale.

“Right now it needs significant investments to ensure we can get the crude out into the market in the case of an emergency,” Bordoff said Wednesday.

The rest of the budget deal includes a relatively modest $80 billion increase in spending over the next two years, plus a $32 billion increase for the emergency war fund. This amounts to barely more than a 1 percent increase per year on the $4 trillion federal budget.

While discretionary spending in the budget is evenly divided between defense and domestic programs, the spending is offset by cuts to programs such as Medicare and Social Security disability benefits, as well as the sale of oil from the reserves. The Obama administration praised the compromise.

“What we’ve put together is a good deal. No one got everything they wanted. But it will last for two years, and it will prevent us from lurching from crisis to crisis,” Vice President Joe Biden said Tuesday, according to the Washington Times.

Many Republicans, on the other hand, have decried the bill as a concession to the other party. Three Republican senators who are running for president in 2016 have been vocal about their distaste for the bill. Florida Sen. Marco Rubio and Texas Sen. Ted Cruz both dismissed it as not in line with what they hoped for, but Kentucky Sen. Rand Paul went further, saying he would filibuster the compromise. He is considered unlikely to prevent the bill from passing, but Paul appeared serious about his opposition at a campaign stop Tuesday, the Guardian reported.

“I will do everything I can to stop it, I will filibuster it, I will not let them condense the time,” Paul said. “I will make sure that the country is aware that really both sides appear to have given up, right and left.”

Though in less dramatic terms, some oil experts also seemed to say this week that resorting to the sale of crude oil from the U.S. Strategic Petroleum Reserve amounted to a failure on lawmakers' part.

“The first best scenario is that we as a country decide what we want to prioritize and pay for those things rather than raiding the SPR,” said Jennifer Harris, a senior fellow at the Council on Foreign Relations and a former policy planner at the State Department on global markets and energy security. “The SPR is a thing in need of a purpose, and we would do well to reflect on what that is. … It’s a nontrivial asset, and being thoughtful about whether we still need it is important.”