U.S. oil reserve could face another hit after budget deal

The budget deal struck between President Barack Obama and Republicans in Congress that would sell down the U.S. emergency oil reserve contains a measure to boost energy security by modernising the aging reserve created in the 1970s.

But the deal also leaves the door open to another potential sale from the reserve, to the ire of some energy experts who want the reserve to remain as full as possible to reduce potential damage to the U.S. economy from future global oil price spikes.

Obama on Monday signed the two-year budget deal struck late last month between the White House and congressional leaders. The deal will raise an estimated $5 billion in federal revenue through the sales of 58 million barrels from the Strategic Petroleum Reserve from 2018 to 2025 if oil prices rise above $80 a barrel from about $46 a barrel today.

In addition, the deal allows the Energy Department to sell another $2 billion worth of oil from the reserve, or another 25 million to 40 million barrels, and raise money to upgrade the reserve's capacity to respond to any emergency oil disruption.

The Obama administration has said that much money is needed to fix port and pipeline problems highlighted by last year's test sale from the SPR.

"Fixing the SPR is job one, because it doesn't do any good unless you are able to use it," said David Goldwyn, who was the State Department's energy envoy from 2009 to 2011. "But it was disappointing to see ... there was no hint that would be the limit of the raid on the reserve."

With Congress already passing two other bills to tap the reserve for other purposes, Goldwyn worries that selling too much from the reserve could limit its ability to protect the economy in the event of a global oil price spike.

Shouldn’t be used as an ATM

Thanks to the fracking boom that has helped boost U.S. oil production 80 per cent since 2008 and slashed the country's crude imports, the SPR is brimming. The world's largest supply of government-owned emergency oil holds 695 million barrels, the equivalent of about 137 days' worth of U.S. imports, above 90 days' worth required under international agreements.

But two other bills have also sought to sell oil from the reserve, one to raise funds for a drug program and the other to help fix highways.

The transportation bill passed by the Senate in July would sell more than 100 million barrels from the reserve. Lawmakers in the full House of Representatives who are expected to debate the bill this week will likely have to rein in that number after the budget deal, which mandates that the reserve should not slip under 530 million barrels.

Jason Bordoff, a former Obama energy adviser, said in an opinion piece in The Hill newspaper last week that the SPR "should not be used as an ATM" as it remains a "critical energy security asset, notwithstanding the sharp drop in U.S. oil exports."

But even though the budget deal will sell a total of up to 98 million barrels, there could be room for more sales. Lawmakers could pass legislation allowing 70 million more barrels of sales from the reserve before reaching the 530 million barrel minimum in the budget deal.

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