American Geological Institute

Government Affairs Program

Government Affairs Report: Drawdown of the Strategic Petroleum Reserve (12/97)

The following column by GAP Senior Advisor John Dragonetti is reprinted from the December 1997 issue of The Professional Geologist, a publication of the American Institute of Professional Geologi sts. It is reprinted with permission.

As early as 1912, the federal government recognized the strategic value of oil and the need to establish national reserves as a hedge against future supply disruptions. Since 1995, the government has also recognized that sales of and from these reserve s can serve as a deficit reduction tool. Congress recently approved the removal and sale of $207.5 million worth of oil from the Strategic Petroleum Reserve (SPR) during fiscal year 1998, which would be the fourth such sale since 1995. The provision was originally proposed by President Clinton and is included in the FY 1998 Department of the Interior appropriations bill, which the President is expected to sign. The money from the sale is specifically targeted for facility development, operations, and pro gram management of the SPR. Several senators who opposed the sale have sought instead to use funds generated from the ongoing sale of the naval petroleum reserve in Elk Hills, California. Critics have warned that repeated sales from the SPR at a time of r ecord oil imports represent unsound policy.

The SPR program was established as an emergency response device in reaction to the Arab oil embargo of 1973 and consists of stockpiling large quantities of crude oil in underground salt dome caverns in Texas and Louisiana. Although the program was laun ched in 1975, actual underground injection did not take place until the following year. The SPR, however, was not the first instance of governmental stockpiling of oil, an activity that dates back to the early part of the century when oil-bearing lands we re preserved for national defense purposes as naval petroleum reserves (NPR). Four such sites, dominantly located on public lands, were created by executive order between 1912 and 1933. The first two reserves were set aside in 1912 in California at Elk Hi lls (NPR #1) and Buena Vista Hills (NPR #2). Perhaps the most well known was NPR #3, established in 1915 at Teapot Dome, Wyoming. During the 1920's, it was at the center of a notorious scandal afflicting the Harding Administration. After the control of Te apot Dome and Elk Hills had been transferred from the Navy Department to the Department of the Interior, Interior Secretary Albert B. Fall leased both fields to private interests without the required competitive bidding. Later an investigation found that the Secretary had received large sums of money from the purchasers. Fall was convicted of accepting bribes. sentenced to a year in prison, and fined $100,000. Both fields were restored to the federal government by a 1927 Supreme Court decision. The final reserve, NPR #4, was created on the Alaskan North Slope in 1933. For many years, no substantive production occurred at these sites except for that authorized by Congress at Elk Hills during World War II. The next call for increased production from the nav al petroleum reserves was issued by President Nixon in 1973 to deal with the nation's oil supply vulnerability so dramatically illustrated by the Arab oil embargo.

The profound impact of the OPEC embargo led many to conclude that additional reserves were needed. Despite a great deal of wrangling between President Ford and the Democrat-controlled Congress, the Energy Policy and Conservation Act of 1975 (Public Law 94-163) passed by large margins in both houses and subsequently was signed by the President. The Act included provisional goals and general guidelines for the SPR program. Actual implementation of the program became the responsibility of the Federal Ener gy Administration, which later moved to the newly created Department of Energy in 1978.

During the 1980s, there were numerous executive branch and congressional squabbles and analyses concerning several aspects of SPR activities including oil acquisition, storage capacity, financing, private sector involvement, and potential withdrawal an d distribution of reserves.

Beginning in 1995, the Clinton Administration with congressional approval conducted three sales of crude oil from the SPR primarily to finance the $200 million annual operating costs of the reserve and the one-time cost of transferring oil from the We eks Island, Louisiana reserve site, which had sprung a leak. The underlying purpose, however was to raise revenues to balance the federal budget. During mid-1996, sales were also being used "to flood the market" to combat sharply increasing gasoline price s. These operations were being characterized by opponents, including the Independent Petroleum Association of America, as the first non-emergency sales since the inception of the program. Furthermore, critics argued that the government paid more for the o il it has in storage than it can receive in today's market, estimating a loss to the U.S. Treasury of $100 million. And most certainly, the oil glut produced by the sale would have serious impacts on marginal domestic producers. Perhaps the most troubling issue is that of the nation's energy preparedness considering the fundamental purpose of the reserve was as a protection against economic or oil supply disruptions.

At the same time that controversy was raging over the sale of oil from the SPR, the defense authorization bill for fiscal year 1996 included a provision permitting the sale of the Elk Hills Naval Petroleum Reserve by 1998. The Department of Energy was given the responsibility to resolve ownership issues with Chevron Corporation, which owns 22 percent of the field, prior to any sale. Although Chevron was interested in purchasing the remainder of the field, Occidental Petroleum Corporation came up the wi nner, acquiring Elk Hills for $3.65 billion, a sale price significantly higher than anticipated by either the Department of Energy or Congress. The sale reportedly triples Occidental's U.S. oil reserves and doubles its domestic gas reserves, making it the largest independent operating in California.

The high sale price for Elk Hills came too late for two senators, Jeff Bingaman (D-NM) and Frank Murkowski (R-AK), who earlier had proposed to cancel the SPR sale and instead use proceeds from the sale of Elk Hills to pay for ongoing SPR costs. Their a mendment to the Interior appropriations bill passed the Senate but was dropped during negotiations with the House on a final bill. They have vowed to keep trying to attach their amendment to other legislation before the SPR sale takes place in 1998.

Although it can be assumed the sale of significant portions of the SPR will have a positive effect on the national deficit, history has demonstrated that the embargo of 1973-1974 was followed by sharply increased oil prices and an economic jolt; after the Iranian revolution in 1980, oil prices again increased with further economic consequences; and the recession of 1991 followed the Iraqi invasion of Kuwait the year before. It remains for the future to tell us whether the reduction of strategic oil inv entories is a wise national maneuver.

The Government Affairs Column is a bimonthly feature written by John Dragonetti. John Dragonetti is the Senior Advisor the American Geological Institute's Government Affairs Program.

This article is reprinted with permission from The Professional Geologist, published by the American Institute of Professional Geologists. AGI gratefully acknowledges that permission.

Please send any comments or requests for information to the AGI Government Affairs Program.

Contributed by John Dragonetti, AGI Government Affairs.

Posted April 17, 1998

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