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Strategic Petroleum Reserve Size

April 24, 2012

An op-ed in the Wall Street Journal by Austan Goolsbee, Council of Economic Advisers from 2010 to 2011, claimed we needed to follow Linda’s rule, which was the supply of toilet paper kept in the home by the op-ed writer’s mother in the event of a California earthquake. Basically, “only have enough insurance to cover the anticipated interruption in supply.”

The op-ed pointed out that the Strategic Petroleum Reserve (SPR) had increased until it can now cover a 100-day interruption in oil supplies. The author then declares that a 100-days’ supply is more than is needed. He says that it could be cut 25%, which would add $20 billion to the U.S. treasury.

The op-ed makes no effort to explain why a smaller SPR would cover what we would need in an emergency.

In fact, the author underestimates the need for the SPR.

Blocking the Strait of Hormuz could use all of the current supply of oil in the SPR, and perhaps more.

Last week’s article, Blocking the Strait Of Hormuz, explained why the current size of the SPR may or may not be large enough to protect us if the Strait of Hormuz is blocked – where 20% or more of the world’s oil supply is cut.

Blocking the Strait Of Hormuz didn’t conjecture about what could also happen if there was a war with Iran. The article merely focused on how long it might take to open the Strait of Hormuz.

If Iran found its back against the wall, which it assuredly would, it’s likely to lash out, not only against Israel, but also against Saudi Arabia.

The most logical attack by Iran would be a missile attack on Abqaiq which processes around eight million barrels of oil daily, or about 80% of Saudi Arabia’s oil output. It’s well within range of Iranian missiles, both old and new.

The facility at Abqaiq removes the hydrogen sulfide and reduces vapor pressure. Oil can’t be shipped without being processed to remove the hydrogen sulfide.

Depending on how extensive Abqaiq was damaged, it could take six months or more to repair the facilities, which would extend the time before world oil supplies could return to normal. Whether oil from the SPR would still be available depends on how long it would take to not only open the Strait of Hormuz, but also return Abqaiq to operation.

We’ll likely need more, rather than less oil in the SPR so long as there is a possibility of war with Iran.

The op-ed also, rightfully noted, that fracking had allowed domestic oil production to rise.

Unfortunately, it isn’t clear that our government will lift drilling restrictions and allow us to substantially increase our production of oil. Until oil production is increased, possibly doubled, it makes little sense to cut the SPR.

Selling oil from the SPR to temporarily reduce the price of gasoline could weaken our ability to withstand an Iranian caused oil shock. The $20 billion added to the treasury by selling oil from the SPR would seem piddling if the price of oil doubles in a real emergency.

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2 Comments leave one →
  1. April 24, 2012 10:45 am

    Time to be long oil.

  2. April 24, 2012 10:57 am

    Thanks, it’s a good observation.
    But what happens if there is an oversupply and no war with Iran?
    Or, alternatively, if this administration continues to block drilling in the GOM, ANWR etc. which restricts our supply.
    I only mention these to be certain that all sides of the equation are considered before anyone makes an investment decision.

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