BEAR TRAP

March 31, 2014 § 3 Comments

George Soros was recently quoted as suggesting that the US use the Strategic Petroleum Reserve (SPR) as a deterrent to Russian aggression in the Ukraine. No details were given but I thought we could examine the validity of the premise. Certainly it was more promising than the knee jerk suggestion by others that we export LNG to the Ukraine, which too we will debate.

The SPR was created following the Arab Oil Embargo in the early seventies. It is currently near capacity at about 700 million barrels. The intent had been primarily to guard against a disruption of imports. In some ways shale oil has changed much of that. Domestic production has catapulted in the last few years, with the prospect for much more. These are relatively shallow wells drilled quickly compared to offshore wells. A supply disruption would require SPR help for a much shorter period than was envisioned back when the capacity was designed. The country is also using significantly less oil now. Finally, cheap shale gas is going to steadily displace oil.

Strait of Bosporus

All of the above argues for the release of the SPR if a national imperative dictates. It could be drawn down significantly without affecting the original mission. One such imperative could be to dampen the expansionist ardor of Russia. Oil represents more than half of all Russian budget revenues and 30% of the GDP. If we were to release 1 million barrels per day for a month, that 30 million barrel deficit would be wiped out by new production (in addition to the current rate) from the Bakken and Eagle Ford in pretty short order. This is, of course, if we want to top up the SPR. In my view that is not necessary. Also, the SPR was filled up at an average cost of a bit under $30 per barrel. A little profit will be made as well by the Treasury. History has shown that a million barrels a day will cause a serious drop in the price of oil.  The size of the SPR backing up the threat would also be a factor.  The result would be a dramatic impact on the economy of Russia, hopefully just in the short term to change behavior.

This action could not be taken without the active cooperation of the Saudis. Their buffer capacity could make it up in no time. US relationship with the Saudis is at ebb right now due to the Syrian situation. However, in their eyes Russia is a worse actor in Syria than are we. So they may just go along. Also the mere threat may be enough. But it has to be credible. Release for a week may be necessary, much as Russia did in cutting off gas through the Ukraine in 2009 for ten days.

Now for the knee jerk suggestions regarding exporting LNG to the Ukraine to help out. First, could LNG ships navigate the Bosporus Strait? The answer is probably a reluctant yes from Turkey. But LNG goes wherever there is the best price. US sourced LNG would likely go to Asia. Admittedly, however, any US sourced LNG going to Asia now releases Middle East LNG for the Ukraine. The clincher on this whole argument is that any new permits would take at least two years to start export and even that only if the permit was given to an existing LNG import terminal. A brand new terminal would take four to five years. So if curbing Russian aggression in the short term is the intent LNG makes absolutely no sense, even as sabre rattling.

A scant five years ago who would have thought that the US may be in a position to use hydrocarbons as a weapon of political will? Shale oil and gas achieved that single handedly. This is another reason why we have a duty to produce it responsibly.

Vikram Rao

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§ 3 Responses to BEAR TRAP

  • parliamentofideas says:

    I submitted an editorial to the WSJ last week title : KOPEC (Keystone, Open SPR, work with OPEC to trap Russian energy exports, Curtail commodity trading by Russia on international exchanges.
    The globalization of a previously stranded commodity – natural gas – will soon lead to the uses I suggest. While we may be somewhat premature in efforts to thwart aggression today, these steps as well as your ideas will be functional soon.

  • Bob Dalton says:

    I do not think it is in our short or long term interest to drive down the cost of oil by releasing the reserves. Additional wells will not be drilled and our new oil opportunities will be retarded. I suggest allowing U.S. Oil to be exported. If you want to give oil to Ukraine or other Russian customers instead of cash via IMF, maybe that will work.
    If you want to shut down Russian bad behavior, interrupt their maritine shipments with our Navy.

    • rtecrtp says:

      My suggestion was intended to be short term. By the numbers the Russian economy would be seriously impaired by even a short term drop in oil price. Also the mere threat may be enough. But, agreed that if you anounce it as short term it may not have the desired effect.

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