DOE - Fossil Energy Techline - Issued on: July 13, 1998
DOE Sends Report to Congress Analyzing Costs, Benefits of Regional Oil Product Reserve
Study Finds Fuel Oil Reserve Makes Sense Under Narrow Set of Economic, Energy Conditions
Washington, DC - A Department of Energy (DOE) report, commissioned two years ago when high prices and low stocks of heating oil raised consumer concerns, has concluded that a Government-controlled "regional petroleum product reserve" would make economic sense only under a very narrow set of conditions.
The report, which DOE forwarded to Congress late last week, concludes that the benefits of a Government stockpile of heating oil in the Northeast would exceed its costs only if the reserve was relatively small, approximately 2 million barrels, located in leased terminals, and filled by trading crude oil from the government's Strategic Petroleum Reserve for the distillate product.
Storing distillate product in dedicated salt caverns at the Strategic Petroleum Reserve along the Gulf of Mexico coastline would improve the cost-benefit characteristics, the study found, but products would take 7-10 days to reach consumers in the Northeast.
A larger product reserve, sized at around 6.7 million barrels to meet the worst weather contingencies, would not be attractive based on the cost-benefit analysis unless it was constructed entirely within the existing Strategic Petroleum Reserve sites.
Moreover, the study found, the positive economic benefits would be achieved only if the Government adopted the policy of releasing the entire volume of the product reserve at the point heating oil prices reached a predefined "trigger price." A more conservative policy of releasing only enough crude oil to bring wholesale prices back down to a predefined "ceiling price" would not provide sufficient benefits to offset the reserve's costs.
The two-volume study is titled Report to Congress on the Feasibility of Establishing a Heating Oil Component to the Strategic Petroleum Reserve. The Energy Department undertook the study when in 1995-1996 an unusually long winter, uncertainties about production from Iraq and the Organization of Petroleum Exporting Countries (OPEC), and increased global demand for petroleum led to a gasoline price surge and later, a price increase in middle distillate fuels used for heating oil, diesel and jet fuel. Consumers in New England, which has no refineries, became especially concerned about heating oil inventory levels and the rise in heating oil prices.
The events of 1996 prompted several members of Congress from New England states to urge DOE to carry out a study to determine whether or not Government intervention in petroleum markets in the form of a regionally-cited refined product stockpile could be beneficial.
The Federal Government currently stores only crude oil for emergency purposes, principally to protect the United States from disruptions in petroleum supply, especially imported crude oil. The Strategic Petroleum Reserve currently stores 563 million barrels of crude oil along the Gulf Coast in four sites that are accessible to most refning centers in the country.
Paper copies of the study are available, while quantities last, from DOE's Strategic Petroleum Reserve Office by calling (202) 586-6503.
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