The Strategic Petroleum Reserve: U.S. Energy Security and Oil Politics, 1975-2005 [1 ed.] 9781603444644, 9781585446001

Citation preview

THE STRATEGIC PETROLEUM RESERVE Number Twenty-one: Kenneth E. Montague Series in Oil and Business History Joseph A. Pratt, General Editor

THE STRATEGIC PETROLEUM RESERVE U.S. Energy Security and Oil Politics, 1975–2005

BRUCE A. BEAUBOUEF

Texas A&M University Press, College Station

Copyright ©2007 by Bruce A. Beaubouef Manufactured in the United States of America All rights reserved First edition The paper used in this book meets the minimum requirements of the American National Standard for Permanence of Paper for Printed Library Materials, Z39.48-1984. Binding materials have been chosen for durability. oy Library of Congress Cataloging-in-Publication Data Beaubouef, Bruce Andre. The strategic petroleum reserve : U.S. energy security and oil politics, 1975– 2005 / Bruce A. Beaubouef. — 1st ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-1-58544-600-1 (cloth : alk. paper) ISBN-10: 1-58544-600-9 (cloth : alk. paper) 1. Petroleum reserves—United States. 2. Energy policy—United States. 3. Gasoline—Prices—United States. I. Title. HD9566.B28 2007 333.8′230973—dc22 2007003215

There is no substitute for energy; the whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not “just another commodity,” but the precondition of all commodities, a basic factor equally with air, water and earth. —german economist e. f. schumacher, september 1964

CONTENTS List of Figures List of Tables

ix xi

List of Abbreviations

xiii

Introduction The SPR and the American Political Economy 1

1

The Energy Crisis Begins, 1970–75

2

Building the Reserve, 1976–79

3

The Energy Crisis Returns, 1978–80 93

4

Maturation and Ascension, 1980–86

5

Drawdown for War, 1990–91

6

Smoothing Price Cycles, 1996–2000

7

Conclusions The SPR and U.S. Petroleum Reserves Policy 219 Epilogue

41

246

Sources and Bibliography 301 323

116

149

Notes 251

Index

8

181

FIGURES Figure 1.1 Figure 1.2 Figure 1.3 Figure 1.4 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 3.1 Figure 4.1 Figure 5.1 Figure 5.2 Figure 5.3 Figure 5.4 Figure 7.1 Figure 7.2 Figure 7.3 Figure 7.4 Figure 7.5

Figure 7.6 Figure 7.7

U.S. Proved Reserves (end of year), 1967–77 U.S. Crude Oil Production and Petroleum Imports, 1967–77 Consumer Price Index, 1962–82 U.S. Petroleum Consumption and Imports Patterns, 1967–77 Strategic Petroleum Reserve Sites SPR Pipeline Distribution Systems SPR Marine and Pipeline Distribution Systems Typical Leached Caverns in SPR Salt Domes Stages of Leaching SPR Caverns Size Comparisons SPR Fill Rates, Planned and Actual, 1978–83 SPR Fill, 1978–95 U.S. Crude Oil Production, Petroleum Demand, and Petroleum Imports, 1985–90 Crude Oil Imports into the U.S., by Country of Origin, 1973–93 SPR, Days of Net Import Protection, 1977–97 SPR Crude Oil Types, 1990 Overall U.S. Petroleum Consumption by End-Use Sector, 1973–2000 Overall U.S. Petroleum Consumption by End-Use Sector, 2000 U.S. Energy Consumption, by Source, 1973–2000 Overall U.S. Energy Consumption, by Source, 2000 U.S. Total Net Petroleum Imports as a Share (Percentage) of Total U.S. Petroleum Demand, 1973–2000 U.S. Petroleum Imports from the Persian Gulf as a Share of Total U.S. Imports, 1973–2000 U.S. Economic Growth Versus Energy Prices, 1973–2000

TABLES Table 2.1.

SPR Fill Rates, Planned and Actual, 1976–83

Table 5.1.

OECD Emergency Response Program

Table 7.1.

World Oil Supply Disruptions, Percent of World Oil Consumption, 1951–91

Table E.1.

SPR Sales and Exchanges

A gallery of photographs follows page 109.

LIST OF ABBREVIATIONS API

American Petroleum Institute

BP

British Petroleum

CAFE

Corporate Automotive Fuel Efficiency (standards)

DCAA

Defense Contract Audit Agency

DFSC

Defense Fuels Supply Center

DOD

Department of Defense

DOE

Department of Energy

EBV

Erdlbevorratungsverband (German stockpiling corporation)

EEC

European Economic Community

EEPA

Emergency Energy Preparedness Act (1982)

EPA

Environmental Protection Agency

EPCA

Energy Policy and Conservation Act (1975)

EPAA

Emergency Petroleum Allocation Act (1973)

ERDA

Energy Research and Development Administration

ESR

Early Storage Reserve

EU

European Union

FEA

Federal Energy Administration

GAO

Government Accounting Office

GPO

Government Printing Office

GNP

Gross National Product

IEA

International Energy Agreement; Administration

IEP

International Emergency Program

IOCG

Industrial Oil Consumers Group

IPAA

Independent Petroleum Association of America

IPE

International Petroleum Exchange (London)

IPR

Industrial Petroleum Reserve

JNOC

Japan National Oil Company

LOOP

Louisiana Offshore Oil Port

MER

Maximum Efficient Rate (of production)

NOAA

National Oceanic and Atmospheric Administration

NOJC

National Oil Jobbers Council

NDS

National Defense Stockpile (NDS)

NPC

National Petroleum Council

xiv

List of Abbreviations

NPR

Naval Petroleum Reserves

NSWA

National Stripper Well Association

NYMEX

New York Mercantile Exchange

OECD

Organization for Economic Cooperation and Development

OMB

Office of Management and Budget

OPEC

Organization of Petroleum Exporting Countries

OAPEC

Organization of Arab Petroleum Exporting Countries

PB / KBB

Parsons-Brinckerhoff / Kavernen-Bau-Betriebs

PIRINC

Petroleum Industry Research Incorporated

PRC

Petroleum Reserves Corporation

Pemex

Petroleos Mexicanos

RPR

Regional Petroleum Reserve

SPR

Strategic Petroleum Reserve

SPR-PMO

Strategic Petroleum Reserve-Project Management Office

UAE

United Arab Emirates

THE STRATEGIC PETROLEUM RESERVE

INTRODUCTION: THE SPR AND THE AMERICAN POLITICAL ECONOMY

On December 22, 1975, in response to the continuing energy crisis, Congress passed and President Gerald Ford signed the Energy Policy and Conservation Act, an omnibus energy bill which, among other things, created the Strategic Petroleum Reserve (SPR) program. At the time, the SPR was one of many energy policy tools the federal government had created to deal with the crisis, including price controls, supply allocation, synthetic and alternative fuels programs, conservation, and demand restraint measures. Over the years, however, the federal government gradually abandoned all but the SPR. By 1990, the reserve had become the federal government’s primary energy emergency response tool, and a key part of U.S. energy policy. From this, some basic questions naturally flowed: How did the SPR attain this status? Why did it survive when so many other energy policy tools fell by the wayside? What role does the SPR play in the U.S. economic and political arenas? What role does it play in U.S. foreign policy? This study seeks to address those questions by examining the history of the SPR program in the context of the American political economy and U.S. energy policy in the twentieth century. Broadly defined, the political economy is the arena where politics and economics meet, where business, government, and public policy are inextricably intertwined. The underlying belief is that a systematic analysis of the SPR’s history can answer some important questions about the nature of American energy policy, economic national security, foreign policy,

2

The Strategic Petroleum Reserve

business-government relations, and the political economy of oil, all of which became increasingly intertwined in the twentieth century. Scholarly interest in energy policy grew dramatically in the wake of the second oil shock of the 1970s, and there was an outpouring of relevant literature. Most historians, unsurprisingly, turned to the past to explain the present. Thus the works of Michael B. Stoff, Irvine H. Anderson, David Aaron Miller, David S. Painter, and Stephen J. Randall all focused on the origins of the U.S. relationship with the Middle East, and the roles that the federal government and international oil companies played in that relationship. The topic of the SPR, and other nations’ oil stockpiling programs, was taken up largely by economists, engineers, political scientists, and professors of business administration, such as Edward N. Krapels, David Leo Weimer, George Horwich, and many others. Their works sought to inform future policy. They used econometric models to determine optimal stockpile size, the appropriate public-private mix for the SPR, and drawdown trigger scenarios. They often presented little in the way of historical narrative and analysis. Besides the National Petroleum Council (NPC) studies on the program, which were also descriptive and oriented toward future policy, Weimer’s The Strategic Petroleum Reserve: Planning, Implementation, and Analysis (1982) is the only work dedicated solely to the U.S. oil reserve. Weimer, who in 1980 was a member of the Department of Energy’s Policy and Evaluation staff, produced a work that was a hybrid: half historical analysis and half econometric models.1 In contrast, this work emphasizes the SPR’s historical development, and places the program in the context of the U.S. political economy and U.S. petroleum reserves policies in the twentieth century. It examines how the actions of business and government officials, consumers, and even foreign governments have shaped the SPR over time. Relevant policy issues, such as the reserve’s optimal size and drawdown policy, are examined in the context of a historical narrative. And a lot has happened since the early 1980s, when most of these works were published. Since then, the SPR has reached and surpassed the target 500-million barrel mark, and has become the government’s primary energy security tool, and arguably its most important energy policy tool. The reserve had been drawn down on a large scale in a time of war, and, by the turn of the century, was increasingly used to smooth out high price cycles. In this work, there will be a number of themes and premises. A crucial and obvious one is the national security implications of oil and petroleum products. By the early twentieth century, the U.S. government had recognized the strategic importance of petroleum, as the navy and

Introduction

3

then the army began to use it as a transportation fuel. Access to oil had become a crucial aspect of military national security. Throughout most of the twentieth century, the U.S. political energy economy had been dominated by the producers of oil and petroleum products, historically the most powerful segments of the U.S. oil industry. American consumers demanded affordable energy, and, for the most part, the industry delivered. The industry’s ability to consistently provide affordable petroleum products made it politically powerful, even while it was divided by majors and smaller companies; integrateds and independents; producers, refiners, and transporters. When Presidents Taft and Wilson set aside lands in California and Wyoming for exclusive use of the U.S. Navy, they encountered endless opposition not only from the industry, but other parts of the government as well. Secretary of the Navy Josephus Daniels’s plan to have the government produce and refine oil from the Naval Petroleum Reserves before and during World War I made scant headway in Congress. The Teapot Dome scandal further attested to the difficulty of finding a workable policy for these reserves. In time, much of the naval reserves would be rendered useless not only by drainage from adjacent production, but also seemingly endless litigation.2 By the 1940s, Secretary of Interior Harold Ickes and other government officials recognized that oil was strategically important not only for the military, but the national economy as well. Ickes’s efforts to secure access to Middle Eastern reserves during World War II were testament to that fact. But his efforts to do so through the Petroleum Reserves Corporation (PRC), a government entity, foundered upon the same shoals as the Daniels’s plan—a hostile industry, a suspicious Congress, and an indifferent public.3 The episode does, however, highlight another major theme of this work: the economic, as opposed to strictly military, national security implications of oil. By the time of World War II, both business and government officials recognized that oil was a strategic commodity. Opinion leaders in both arenas realized that access to oil was vital not only for military national security but economic national security as well. But with the industry able to satisfy consumers, the philosophy of limited government prevailed and led to a cooperative public-private relationship between the federal government and the major U.S. international oil companies. From the 1930s through the 1960s, the government accepted and used the U.S.-based multinational oil companies as arms of foreign policy, to help ensure U.S. access to foreign oil.4 That relationship was one in which the government deferred to

4

The Strategic Petroleum Reserve

the majors while using them as arms of national foreign policy. Both Presidents Truman and Eisenhower recognized the national economic security implications of oil, and looked into the possibility of creating government-owned oil reserves or stockpiles. Their proposals, however, foundered. In times of surplus supply, the government was constricted by the nature of the U.S. political economy. Efforts to create a government-owned reserve system were overwhelmingly opposed by the industry. Although divided within itself by functional segments (producer, refiner, transporter, and marketer), the industry invariably united to fight such proposals. In addition, a diverse and divided industry meant diverse interests which, in turn, meant that any active, coherent public policy would be supported by few and opposed by many. Consumers were happy as long as the industry delivered the energy goods—gasoline, heating oil, fuel oil, for example—at an affordable price. Also, a historic U.S. aversion to Big Government permeated not just the industry but the population at large. That aversion also contributed to the failure of these early reserve proposals. With industry able to deliver the petroleum products that the economy needed, there was no public consensus on the necessity of government action. Thus another theme herein is the complexity and contentiousness of the U.S. political economy, and the ways in which it shapes and often hinders policymaking efforts. By 1970, the depletion of U.S. in-situ oil reserves, meaning reserves naturally in the ground, shifted the political paradigm profoundly. Historically, the U.S. domestic oil industry—complex, competitive, and often divided within itself—had been able to resist government entry into the marketplace of oil. However, depletion of domestic reserves and rising consumer demand opened the door for cheap foreign oil, especially from the hydrocarbon-rich Persian Gulf. Increasingly, a tide of relatively cheap foreign oil posed a threat to the U.S. economy by undermining its energy security. Growing dependence on foreign oil made the U.S. economy vulnerable to a politically induced oil supply disruption, or as it came to be known, the “oil weapon.” The energy crisis of 1973–74 brought a number of important changes to the U.S. economic and political landscape. Perhaps most importantly, it seemed evident that the industry could no longer consistently and affordably deliver the goods to consumers. As a result, the industry lost a significant amount of political power. Gasoline lines, spiraling inflation, and economic recession meant angry energy consumers, who became angry voters. The energy crisis thus shifted the balance of power in the U.S. political economy from the industry to

Introduction

5

energy consumers and end-users. To be sure, the industry remained powerful, even while divided. Thus another theme of this work is the rising political power of energy consumers. Their political power had been nascent before 1973, although their economic power was important before then. As the twentieth century progressed, energy consumption became vital to industrial activity, manufacturing, transportation, and higher living standards in general. For all these things, energy consumers needed available and affordable supply. In times when both were present, consumers were satisfied and quiescent, and producers held the reins of political power. When supply was no longer available or affordable, modern society began to fall apart. This was seen in the 1970s when energy consumer outcry compelled political action. In a real sense, the ascending political fortunes of energy consumers were made possible by, but also furthered, the industry’s waning political fortunes. While Robert Engler, Robert Sherrill, John C. Blair, and Anthony Sampson ascribed the cause of the energy crises to the industrial power and arrogance of Big Oil, the contention here is that more emphasis needs to be given to the growing power of U.S. consumerism. The insatiable U.S. appetite for oil and energy, from the industrial user to the individual consumer, played the largest role in bringing on the energy crises. At the very least, it created an economic environment in which they could occur. Energy historians Richard H. K. Vietor and Martin V. Melosi have pointed out that it was not Big Oil but ever-increasing consumer demand and depleting reserves that were the fundamental cause of the energy crisis.5 After 1973, with the industry’s supply chain broken and no longer able to protect national energy security, energy consumers sought out government aid. Vietor’s contention that market disequilibria focus public attention on policy issues, and in times of shortage, precipitate government initiatives, applies here.6 With the shortages of the 1970s, the federal government intervened in the market, instituting a range of oil and gas price controls and supply (re)allocation measures. Many consumers and end-users of petroleum products—businesses, utilities, institutions, and individual Americans—supported the measures. This was especially true of independent marketers, retailers, and refiners. Only the independent producers and multinational majors, the historically preeminent segments of the industry, were left to oppose such actions, and because they seemed to be able to do nothing to end the crisis (indeed many felt they had contrived the crisis), their political power had been greatly diminished. The major oil companies had to deal with federal price

6

The Strategic Petroleum Reserve

controls and were forced to sell their own reserves (inventories) to their competitors. Their tax breaks, such as the depletion allowance and the foreign tax credit, were eliminated or scaled back. If Big Oil had dominated the political arena before the embargo, that influence had surely waned by the mid-1970s. Thus another theme is the erosion of the oil industry’s political power. After the first oil shock, the political economy of oil had become too important, too controversial, and too much the subject of public debate and investigation for the government to relegate energy policy to the private sector. With the energy crisis, and the industry weakened and vilified, the federal government embarked upon a level of activism in the energy arena that was unprecedented in peacetime. Besides price controls and supply allocation, the government launched synthetic and alternative energy programs, instituted fuel efficiency standards and some forms of rationing, threatened the large integrated oil companies with divestiture, and created the SPR. The establishment of the SPR was made possible by this paradigm shift in the U.S. political economy, in which energy supplies were short of needs, energy consumers were angry and demanding protection, and the industry was discredited. The SPR’s creation was evidence that the United States had recognized the dangers of its dependence on foreign oil and the need to reduce its vulnerability. Oil stored in underground Gulf Coast salt caverns would, it was hoped, help restore some of that surplus oil supply capacity that the United States had lost to depletion, and thereby enhance energy security. The SPR was also a means of protecting U.S. foreign policy prerogatives. Economic dependence brought vulnerability to political blackmail. But the economic security blanket afforded by the reserve provided the president with additional foreign policy options in a supply crisis. As one SPR project manager said, the reserve gave the president “another card to play before he sends in the Marines.”7 Perhaps even more important than the actual physical energy security the SPR provided was the symbolic or “signaling” role it played in the national and international arenas. The establishment of the SPR was a statement, or a signal, to foreign oil producers that the United States was taking steps to reclaim its energy security, and perhaps deter future politically motivated oil supply disruptions. The SPR also served as a signaling device to the oil market. One columnist described it as a “Federal Reserve for oil.” Like the U.S. Federal Reserve’s discount rate, SPR drawdowns, and threat of same, provided a signal, a warning to the industry, especially traders and speculators, that extra oil would be made available to keep prices in check. And from the very start, the creation of the reserve sent a signal to U.S. energy consumers that their

Introduction

7

government was active in defense of their interests. Finally, the existence of the SPR was a signal to industry and consumers that the U.S. government was committed to a petroleum-based energy society.8 There was much about the SPR program that was unprecedented. Government regulation of oil, per se, was of course nothing new, but the successful creation of a government-owned civilian oil reserve system represented a departure in twentieth-century America. Ickes’s PRC had been short lived; proposals for a civilian reserve by Presidents Truman and Eisenhower had come to naught. But in the wake of the energy crisis, national security considerations once again forced the government to intervene directly into the marketplace of oil. However, the SPR represented more than regulation of the market; it was an actor in the marketplace. That it was a limited actor, one that did not compete with the industry in most matters, would be the key to its longevity. As the strategic importance of oil forced the government to officially enter the political economy of oil, the question remained: Could the government overcome the “deadlock of democracy” that inhered in a diverse U.S. oil market to mitigate and prevent future oil supply disruptions? The fate of previous oil reserve and stockpiling proposals did not augur well. By the mid-1970s, the political paradigm had indeed shifted, making more interventionist policies possible. But the American and indeed international oil market was still a turbulent and dangerous place for those who sought to actively implement energy policy. Passage of the EPCA had created a government oil reserve on paper, but as the planners and policymakers were to find out, actually developing and stocking the SPR and developing a policy for its use, was profoundly more difficult.

THE ENERGY CRISIS BEGINS, 1970–75

THE DECLINE OF DOMESTIC OIL RESERVES

1

In the late 1960s, a quiet revolution was taking place in America’s oil fields, one that did not bode well for U.S. energy security: the United States was losing its surplus oil-producing capacity. In the twenty-year period leading up to the 1970s, U.S. energy consumption had doubled while the U.S. population had grown by 30 percent. By 1970, the average American consumed more than three times the energy that his forefathers had at the turn of the century. Taken together, these trends brought an end to America’s ability to step up production to meet demand. Between 1957 and 1963, U.S. surplus oil-producing capacity had been about 4 million barrels per day. By 1970, that figure had been reduced to about 1 million barrels per day, and would continue to decline in the future. The loss of this surplus oil-producing capacity meant three things. One was that the U.S. economy existed in a much tighter energy market, and the second was that its dependence on imported oil would grow. Third, as a result, the U.S. economy would be vulnerable to oil supply disruptions. And excluding the newer Alaskan oil fields, domestic production declined steadily throughout the 1970s. With the depletion of American reserves, imported crude oil and petroleum products flowed into the United States in ever greater amounts to satisfy rising demand (figures 1.1 and 1.2). These developments, whose ramifications would be far-reaching for U.S. economic autonomy, went largely unnoticed by the general populace.

The Energy Crisis Begins

9

Figure 1.1: U.S. Proved Reserves (end of year) in Billions of Barrels, 1967–77

SOURCES: American Petroleum Institute, American Gas Association, and the Canadian Petroleum Association, Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States and Canada as of December 31, 1978, vol. 33, June 1979, 24; Business Statistics, 1977, Supplement to the Survey of Current Business. Washington, D.C.: GPO, 1978, 159; DeGolyer and MacNaughton, Twentieth Century Petroleum Statistics: 1993. DeGolyer and MacNaughton: December, 1993, 18, 21, 61.

Figure 1.2: U.S. Crude Oil Production and Net Petroleum Imports, 1967–77, in Millions of Barrels per Day

SOURCES: American Petroleum Institute, American Gas Association, and the Canadian Petroleum Association, Reserves of Crude Oil, Natural Gas Liquids, and Natural Gas in the United States and Canada as of December 31, 1978, vol. 33, June 1979, 24; Business Statistics, 1977, Supplement to the Survey of Current Business. Washington, D.C.: GPO, 1978, 159; DeGolyer and MacNaughton, Twentieth Century Petroleum Statistics: 1993. DeGolyer and MacNaughton: December, 1993, 18, 21, 61.

10

The Strategic Petroleum Reserve

Figure 1.3: Consumer Price Index, 1962–82, by Annual Percentage Change

SOURCE: U.S. Bureau of Census, Statistical Abstract of the United States: 1982–83. 103rd edition, Washington, D.C., G.P.O., 1982, 461.

A TIGHT ENERGY MARKET The United States had long had the world’s largest oil appetite. By 1970, it represented 5 percent of the world’s population, but consumed about one-third of so-called “free world” oil. By 1973, American per capita energy consumption was six times the rate of the rest of the world, and oil was supplying about half of U.S. energy needs. Thus by the early 1970s, three developments, or trends, would profoundly undermine U.S. energy autonomy: growing demand, declining domestic production, and growing dependence upon Middle Eastern oil. With demand chasing supply in a tight market, a huge wave of general inflation spread throughout the nation, driven by rising oil and energy prices. By 1970, the consumer price index was nearly 6 percent (figure 1.3). The ensuing public outcry over high prices and energy shortages brought forth a level of government intervention into the economy not seen since World War II. The vast regulatory program that resulted would be as complex and confusing as it was controversial.

THE GOVERNMENT INTERVENES The initial federal response came in August 1971 when President Richard M. Nixon announced an unprecedented across-the-board series of wage and price controls. Importantly, they included controls on crude oil and natural gas prices. While most controls were lifted by 1974, continuing public disenchantment with energy shortages and price increases meant that crude oil price controls would be continued, in various forms, until 1981. However, the controls had ironic and perverse

The Energy Crisis Begins

11

Figure 1.4: U.S. Petroleum Consumption and Imports Patterns, 1967–77, in Millions of Barrels of Oil

SOURCES:

Business Statistics, 1977, Supplement to the Survey of Current Business. Washington, D.C.: GPO, 1978, 159; Houston Post, October 9, 1983, E-1; DeGolyer and MacNaughton, Twentieth Century Petroleum Statistics: 1993. DeGolyer and MacNaughton: December, 1993, 61, 106.

effects. By holding down domestic prices, they reduced incentives for domestic production. At the same time, they encouraged consumption, furthering U.S. demand for and dependence on imported oil. Notably, these price controls may have been the first example of the government’s policy of protecting energy consumers. As demand continued to rise, other regulatory restrictions on supply—instituted in an age of abundance—were lifted. The U.S. oilproducing states ended prorationing in 1971 and 1972, and the federal government abandoned import restrictions in 1973. Following this, net imports quickly ramped up to 6.2 million barrels per day, a 180 percent increase from the 2.2 million barrels per day of 1967. As a share of total oil consumption over that time, imported oil increased from 19 to 36 percent. By 1977, imported oil would account for nearly half (48 percent) of total U.S. petroleum consumption (figure 1.4).

THE WHITE HOUSE CONSIDERS STRATEGIC STOCKPILING It was in this context that the White House began to consider the merits of strategic oil stockpiling. By January 1972, James E. Akins, the head of the State Department’s Office of Fuels and Energy, had become President Nixon’s de facto energy advisor. In the periodical Foreign

12

The Strategic Petroleum Reserve

Affairs, Akins noted that Arab oil-producing nations had threatened, on fifteen separate occasions, to use oil as a weapon against their “enemies.” Given traditional U.S. support for Israel, the United States risked becoming an enemy. And given the tight energy market, Akins warned, the U.S. should take seriously the growing penchant of Arab oil-producing nations to use the “oil weapon.” In November 1972, he was formally assigned to the White House to draft a comprehensive energy program. To that end, he recommended drastic conservation measures, exploring energy alternatives, increased cooperation and solidarity among the oil-consuming nations, and “measures to build up reserve stocks.” Akins was thus one of the first high-level federal officials to advocate the establishment of a publicly owned oil stockpile in the pre-embargo, post–World War II era. Such reserves, he contended, were necessary not only “for bargaining purposes” but also “for their own sake.” But the dire tone of Akins’s predictions and the potential unpopularity of his proposals were unwelcome in the White House, and he returned to the State Department in May 1973.1

THE NATIONAL PETROLEUM COUNCIL STUDY Yet the issue of energy security would not go away, and increasingly, the Nixon administration was forced to deal with it. In January 1973, Interior Secretary Rogers C. B. Morton, concerned about the increasing vulnerability of the U.S. economy, called upon the NPC to assess the nation’s energy needs. In particular, Morton asked the Council to consider the impact of a 1.5-million barrel per day supply disruption lasting three months, and a 3-million barrel per day shortfall lasting six months.2 In July 1973, the Council completed and submitted an interim version of its ongoing study, Emergency Preparedness for Interruption of Petroleum Imports into the United States. In this preliminary report, the Council looked at two hypothetical scenarios: one in which an oil supply disruption occurred in January 1974, and one which occurred in January 1978, the earliest time by which the Council’s recommendations, if implemented soon, would bear fruit. For the near-term crisis, it recommended curtailing consumption, including gasoline-reduction measures such as car pooling, speed limits, and rationing. It also advocated interfuel substitution, which usually involved power utilities switching from petroleum to coal-based energy sources. Increased production could be achieved by temporarily lifting the statutory maximum efficient rate (MER) of production requirements, and by opening the naval reserves (mostly the Elk Hills, California, site) up for

The Energy Crisis Begins

13

increased development. By 1978, the Council concluded, longer-term programs and policies, such as an emergency petroleum reserves system, could be in place. In particular, the report found that an oil stockpile of 500 million barrels, or more, would protect against a 6-million barrel per day shortfall lasting ninety days. While looking at the full array of storage alternatives, the Council deemed underground saltdome caverns to provide the most secure and least expensive storage possibilities for a large-scale oil reserve program. For the 1978 scenario, the Council was more optimistic about the possibilities for interfuel substitution, but not for increased production. Notably, no significant consumption reductions were deemed possible in the 1978 scenario that would not have been available in the 1974 scenario.3 In its final report, published on September 10, 1974, the Council examined four basic alternatives in planning for a future oil import disruption—conversion to alternate fuels, emergency production, consumption reduction, and development of an emergency petroleum reserve system. The report contended that, in the long run, only the workings of the free market would bring about energy self-sufficiency. At the same time, it recognized that the current political climate would not permit the existing regulatory structure (price controls, allocation) to be lifted in favor of a free market. Recognizing the need for some action, but wanting to avoid intense market intervention, the NPC stressed the need for some sort of emergency petroleum reserve system. It looked at three basic approaches: shut-in or in-situ reserves, man-made crude oil storage, and man-made refined product storage. The storage media examined included steel tanks, underground salt-dome caverns, and hard rock mines.4 The report found that to protect against an import interruption of 3 million barrels per day lasting 180 days, the United States would need to establish an oil reserve system containing 540 million barrels of either crude oil or refined petroleum products. The committee decided against shut-in or in-situ reserves. Such a policy would reduce the amount of domestic oil available to the U.S. economy, and the loss would have to be offset by imports, making the United States more dependent on foreign oil. And, to provide adequate spare capacity, almost 30 percent of America’s continental reserves would have to be shut-in. This would have brought such severe economic injury to domestic producers and consumers that it would have been politically impossible to implement. Moreover, as illustrated by the history of the naval reserves, there were a whole host of potential problems with the policy of maintaining in-situ reserves. Problems included private access to public lands, fair compensation for acquired lands, drainage from nearby wells, whether sufficient quantities could be produced on

14

The Strategic Petroleum Reserve

an emergency basis without reducing productive capacity, and access to transportation and refining facilities. That left crude oil or refined product storage, and the question of storage medium. The NPC advocated crude oil storage for flexibility: it could be refined into whatever mix of petroleum products was deemed best at the moment. As for storage media, as it had in 1952 and in 1973, the Council recommended underground salt-dome caverns along the Texas-Louisiana Gulf Coast. For 500 million barrels of storage, salt domes offered the safest and cheapest form of storage. As a region, the Gulf Coast offered three important advantages: abundant salt domes, a vast refining and pipeline transportation complex, and first-class sea ports, long-established for petroleum commerce. The bulk of crude oil for the reserve, the NPC indicated, would likely be foreign. Relying on imported oil to fill the reserve, of course, held the same dangers that had led to its creation. High prices were also a concern. At current levels, it would cost five billion dollars or more for a 500-million barrel reserve. And, if the reserve were to consist of foreign oil, filling it would depend on the continued goodwill of producer nations. Moreover, at that time, imported oil often had a high sulphur content, which might pose problems for U.S. refiners and run afoul of environmental legislation. Still, using foreign oil seemed preferable to domestic oil, for a number of compelling reasons. For one, all U.S. oil fields were already producing at MER, with three major exceptions—the Alaskan North Slope, the California-Elk Hills Naval Reserve, and the Santa Barbara channel. To increase their production would reduce ultimate recovery. In addition, reservoir decline, ongoing since 1970, further reduced domestic producers’ ability to provide surplus crude. The possibilities for surplus domestic oil were limited and would likely come from the Elk Hills Naval Petroleum Reserve and royalties from producers operating on federal lands. The Council’s report did not expressly state just what mix of public and private involvement there should be in the program, but the very nature of the report—recommendations for public energy policy— suggested that the reserve would be a mostly government-operated program. In August 1975, as the Congress was moving to create the Strategic Petroleum Reserve, the Council would make that position official in yet another report.5

CONGRESS CONSIDERS STRATEGIC STOCKPILING On Capitol Hill, Senator Henry M. (“Scoop”) Jackson (D-Wash.) provided the lone voice of warning about energy security and the need for

The Energy Crisis Begins

15

strategic reserves. As chairman of the Committee on Interior and Insular Affairs, Jackson had been instrumental in the establishment of the Senate National Fuels and Energy Policy Study, which entailed hearings on the issue of (and need for) a comprehensive national energy policy. In April 1973—before the embargo—he introduced the Petroleum Reserves and Import Policy Act (S. 1586), which called for the creation of a “system of strategic petroleum reserves,” to be administered by the Interior Department, and for limiting oil imports to “levels, sources, and forms that are consistent with national security, public safety, and welfare.” Driving the need for these policies, Jackson commented, was an “ominous” trend—the “increasing tendency” of some nations “to use oil for political blackmail.”6 Specifically, Jackson’s bill called for a reserve system that would include government-owned oil reserves stored in salt-dome caverns, increased production at the naval reserves, mandatory minimum inventory requirements for oil importers, and mandatory surge production capacity requirements for domestic producers. The strategic petroleum reserve concept enjoyed a general consensus of support from within the Nixon administration, academia, and even the oil industry. The other portions of Jackson’s bill would prove politically problematic or impossible to execute. Before Jackson’s committee, Bonner H. Templeton, vice-president of Mobil Oil, representing the API, voiced his support for a government-owned oil reserve, to be stored in Gulf Coast salt domes. John H. Lichtblau, of the Petroleum Industry Research Foundation, also supported the strategic reserve idea, but reminded the senators that such a reserve, once established, would be only a short-term solution. Reducing consumption and developing alternative forms of energy would have to be considered in the long run.7 Yet there was also strong opposition to the bill. Domestic producers opposed prorating their production to achieve surge capacity. Oil importers objected to the mandatory inventory requirements, which they argued amounted to a dead asset. Nixon administration officials, while in favor of the strategic reserve concept, said they needed more time to study stockpiling options. The Ford administration also supported a strategic oil reserve, but had problems with much of the rest of S. 1586. The bill was shelved. Despite this immediate defeat, Jackson would remain a critical force in shaping strategic petroleum reserve legislation. But until some dramatic crisis occurred, these early efforts would not receive the attention that they needed, from either legislative or executive branches. That crisis was not long in coming.8

16

The Strategic Petroleum Reserve

THE FIRST OIL SHOCK U.S. economic vulnerability came at a time when Middle Eastern politics, never far from the boiling point, were heating up. On October 6, 1973, the date of the Jewish holiday Yom Kippur, both Egypt and Syria launched an air and artillery assault on Israel. The Soviet Union gave considerable military aid to Egypt in the conflict. The Nixon administration, fearing growing Soviet influence in the Middle East, and keeping in line with traditional U.S. support for Israel, appropriated $2.2 billion in military aid for Israel. Once it became known, this action inflamed and helped perfect Pan-Arab unity. The Yom Kippur War, the prelude to the Arab oil embargo, threatened to become the worst superpower confrontation since the Cuban missiles crisis of 1962.9 Importantly, U.S. dependency upon foreign oil, combined with the loss of spare production capacity, made the United States more vulnerable in 1973 than it had been during previous Middle East crises. While the continental United States still provided nearly 75 percent of U.S. crude oil demand in 1973, 25 percent came from foreign sources. Of that 25 percent, more than 8 percent came from the Middle East.10 Responding to U.S. aid to Israel, on October 16, 1973, ministers from OPEC’s “Gulf Six”—Saudi Arabia, Kuwait, Iran, Iraq, Qatar, and the United Arab Emirates—decided to raise prices by 70 percent, from $2.90 per barrel to $5.11 per barrel. OPEC had already become a trendsetter in world oil prices; by 1973, OPEC producers accounted for nearly 54 percent of the world’s crude oil production. The Yom Kippur War, and U.S. aid to Israel, merely presented the opportunity for the Arab member nations to strengthen their positions vis-à-vis the oilconsuming nations of the West. But unlike the world market of 1967, when the oil weapon was last used, now U.S. and Western dependency on Mideast oil gave OPEC crucial leverage. In December, the Gulf Six raised their crude oil prices again, this time to $11.65 per barrel. With the increase, OPEC had quadrupled its prices from their pre-October 1973 levels.11 However, members of the Organization of Arab Petroleum Exporting Countries (OAPEC) felt that the OPEC price increases represented a fair and necessary readjustment of their economic position, with regard to their own oil reserves. Something else was needed to send another, even stronger, political statement. On October 17, 1973, the day after OPEC had instituted its price hikes, the OAPEC members met and decided to wield the oil weapon once again. They would embargo oil from Israel’s allies, primarily the United States, the Netherlands, Portugal, Rhodesia, and South Africa. Unlike the 1967 attempt, in 1973

The Energy Crisis Begins

17

the Arab oil-producing states cut production in addition to halting exports. The OAPEC production rate declined from 20.8 million barrels per day in September 1973, just before the embargo, to 15.8 million barrels per day in November 1973, nearly a 25 percent decrease. In the following embargo months, OAPEC production did increase, but only slightly. From November 1973 to February 1974, the OAPEC production rate was still 19 percent lower than it had been in September 1973. On March 17, 1974, the OAPEC ministers resumed production and export operations. But they had established new and higher prices, and greater control over their own hydrocarbon resources. For the entire five-month embargo period, the average disruption had been 2.6 million barrels per day.12 Although Western oil companies tried to offset the loss by increasing their efforts in other areas, world oil production fell by 5 percent. United States oil supply, already tight, became even tighter. From September 1973 to January 1974, petroleum imports into the United States fell by 2.7 million barrels per day. With prices high and supply tight, U.S. petroleum consumption was dealt a serious blow. On a daily annual average, consumption fell from 17.31 million barrels per day in 1973 to 16.7 million barrels per day in 1974, a 3.5 percent decline. The effect of that decrease, however, was much larger than that seemingly small number implied.13 With the OAPEC embargo and OPEC price hikes, the United States entered what could arguably be described as its first significant national energy crisis. The domestic oil market had already been tight, and panic purchases sent prices further upward, from the new OPEC price of $5.11 per barrel, to more than $16 per barrel in some markets. In 1973, the nation’s power utilities depended on petroleum for 22 percent of their boiler fuel needs. Many of them continued to operate at full capacity, with limited generating resources. Americans formed long lines to purchase gasoline at retail stations across the country. Tempers often flared as Americans struggled against each other for a decreasing slice of the nation’s energy pie.14 With the shortage in aviation gasoline, airlines had to cut back their flights by 25 percent. In reaction, airline pilots threatened holiday season walkouts if layoffs followed decreased activity. Independent truck drivers, protesting the rising price and scarcity of diesel fuel, went on strike, blocked highways with their vehicles, and demanded aid from the federal government. As a result of the trucker’s strike, many communities in the Northeast and Midwest suffered shortages of foodstuffs and other raw materials, in addition to petroleum products. The energy crisis pitted region against region, producers against con-

18

The Strategic Petroleum Reserve

sumers, economic class against economic class. American society was being rent asunder.15

PROJECT INDEPENDENCE In a nationwide radio and television address on November 7, 1973, President Nixon announced that the U.S. economy would fall 10 percent short of its petroleum needs in the upcoming winter. To meet the immediate crisis, Nixon called for authority to allocate crude oil and petroleum products; increase production from the Elk Hills, California, and Alaskan NPR sites; reestablish daylight savings time; a number of mandatory and voluntary conservation measures, including lower thermostat settings for businesses and individuals; and set restrictions on gasoline purchases. To address the long-term crisis, Nixon announced “Project Independence,” a series of proposals whose lofty goal was energy selfsufficiency by 1980. These proposals included deregulation of natural gas prices, lower air quality standards for factories and the automobile industry, acceleration of the building and licensing of nuclear power plants, suspension of electric utilities’ efforts to switch from coal to oil for power generation, incentives to increase coal and lignite production, and increased offshore drilling. The president also asked Congress to pass enabling legislation mandating that no further environmental hindrances be placed upon the Alaskan pipeline project. Other proposals that became law included lowering the highway speed limit to 55 miles per hour and tax breaks for home and office insulation. There was, however, no proposal for a strategic petroleum reserve.16

THE EMERGENCY PETROLEUM ALLOCATION ACT Responding to the emergency, in a bipartisan vote, Congress passed the Emergency Petroleum Allocation Act (EPAA) [Public Law 93–159], on November 27, 1973. The primary goal of the EPAA was to maintain competition by aiding vulnerable “end-users” of oil, including independent and small refiners and marketers. This included a “Buy / Sell List” program, which often entailed a federally mandated reallocation of crude oil from well-stocked majors and larger oil companies, to small and independent domestic refiners and retail marketing firms, at “old” (pre-embargo) prices. The EPAA continued the complex series of price controls on domestic oil and gas, first instituted in 1971, and also provided for gasoline rationing. To implement, administer, and enforce

The Energy Crisis Begins

19

these new regulations, in 1974 Congress created the Federal Energy Administration (FEA).17

THE PROJECT INDEPENDENCE REPORT Besides administering the EPAA, the FEA also had to study the feasibility of the Project Independence proposals. The need for top-level energy planning came in the very midst of the Watergate crisis, the presidential transition from Nixon to Gerald R. Ford, and the first oil shock. In this tumultuous context, the FEA, using state-of-the-art computer analysis, went about the business of brainstorming for ways to reduce U.S. dependence on foreign oil. The two-part Project Independence Report was published in November 1974. In it, the FEA concluded that reducing American vulnerability to oil supply disruptions was a more realistic (and hence more desirable) national goal than achieving energy self-sufficiency. The United States could dramatically cut back its oil imports, but only at a severe socioeconomic cost. It would be much better, the report argued, to reduce the impact of a future disruption. The FEA abstained from making any direct recommendations (and thus political controversy), choosing instead to explore the feasibility and effectiveness of various energy policy alternatives. The agency did conclude, however, that options to reduce vulnerability fell into three categories: accelerating domestic production, energy conservation and demand management, and strategic oil stockpiling.18 While the FEA ostensibly eschewed recommendations, the report strongly supported oil stockpiling. “Emergency storage,” the FEA concluded, “is cost-effective in reducing the impact of an embargo.” The report found that strategic stockpiles, while not inexpensive, were cheaper than most other energy security options. It considered a scenario in which the United States faced a year-long disruption of 1 million barrels per day. Under this scenario, the FEA concluded that a 500-million barrel reserve should be the target goal, with the possibility of going to 1 billion barrels. The agency estimated that the cost of developing a 500-million barrel reserve would be $6.3 billion—far less than the estimated $30- to $40-billion loss in gross national product (GNP) that would result from the disruption scenario considered in the report. The FEA also noted that oil purchases might have some impact on international spot oil prices, but concluded that the effect would be largely contained to the first year of acquisition. Gradually, the market would get accustomed to U.S. government’s presence and role as a large-scale oil purchaser.19

20

The Strategic Petroleum Reserve

In many ways, the FEA’s Project Independence Report, which came out in November 1974, echoed the NPC’s final Emergency Preparedness report, which had been published in September 1974—perhaps because it borrowed heavily from it. As had the NPC, the FEA chose underground salt caverns over in-situ reserves and steel tanks as the best means of storing oil. Government-owned salt-dome storage, the FEA concluded, would be more secure and better protected than would be the case with private, in-situ reserves. The phenomenon of reserve drainage via adjoining oil wells—and the entire history of the naval reserves—made such clear. Also, there would be the issue of compensation for the owners of such wells, for their reduced production and lost income. Salt-dome storage also appeared to be the least expensive alternative and would be significantly cheaper than steel tank storage: $1.50 per barrel in salt domes versus $12 per barrel in steel tanks. Being 2,000 feet underground, it would also be more secure against natural disasters and sabotage. Salt-dome storage would also be cheaper and more secure than other underground storage alternatives, such as mined caverns, salt beds, abandoned mines, and depleted reservoirs. The rock salt that characterized the domes was generally impervious to liquid petroleum and gas. Studies showed that it moved like plastic to seal fractures, even earthquake damage (which was almost unheard of in the Gulf Coast region), and had the compressive strength of concrete. Relatedly, since oil and salt (like water) did not mix, the oil in the caverns would tend to improve in quality over time as impurities settled out. Storing oil underground also avoided the need for aboveground tank farms, considered an eyesore by some. Citing the NPC’s report, the FEA noted that “extensive experience” with salt-dome storage had “proven its safety and reliability.” By the mid-1970s, solution-mining was a 25-year-old practice. In the United States, private firms such as Dow Chemical had been leaching Gulf Coast salt domes for years to create storage space, using the produced brine as a feedstock for petrochemical products such as chlorine. In other cases, companies such as Morton Salt mined the domes for the food-related salt products. If those firms did not utilize the subsequent storage space themselves, they often leased it out to other firms who stored petroleum products in them. By 1976, private firms in the United States had created over 900 solution-mined caverns, with a total capacity exceeding 300 million barrels.20 Policymakers were also able to review the stockpiling programs of other nations. In 1972, the Federal Republic of Germany had instituted a crude oil stockpiling program that used underground salt-dome cav-

The Energy Crisis Begins

21

erns for storage. By 1974, the German stockpile held roughly 3 million barrels, and was scheduled to hold 60 million by 1980. In the early 1970s, France had also undertaken a stockpiling program. It called for 32 million barrels of diesel fuel, to be stored in abandoned iron ore mines, and 50 million barrels of crude, to be stored in underground salt caverns. South Africa, Sweden, and other Scandinavian countries had also stockpiled crude in old coal and iron ore mines and in igneous rock caverns. But underground salt-dome cavern storage was clearly the preferred method of stockpiling in terms of cost, safety, economies of scale, and longevity. That had been made clear by the numerous studies undertaken by the National Petroleum Council and other research bodies dating back to the 1950s. As for the location, the FEA found the Texas-Louisiana Gulf Coast to be the most desirable region for many reasons. The area had numerous salt-dome formations capable of accommodating several hundred million barrels at depths of 2,000 feet or more. Even a relatively small number of salt domes could hold considerable amounts of petroleum. Moreover, with large-scale storage possible, it would be feasible to achieve high delivery rates up to several million barrels per day. Storing crude oil, the FEA concluded, offered the most flexibility. It could be refined into whatever mix of petroleum products were needed at the time. In contrast, stored refined petroleum products could degrade or change quality over time. Any such problems with crude could be remedied through refining. Lastly, crude oil and residual oil (the other fuel the FEA recommended stockpiling) were the least covered by private inventories, and they were also the least costly to store. The best refining and transportation facilities were also in the area. The Texas-Louisiana Gulf Coast region was home to what was arguably the world’s foremost petroleum refining and transportation complex, and had been for most of the twentieth century. The FEA also noted that by 1978, there would be expanded deepwater terminals and seaports along the Gulf Coast, which would enhance shipping access to East and West coast markets, and additional pipelines, which would expand transportation facilities to Rocky Mountain and Midwest refineries. From the Gulf Coast, crude oil and refined products could be sent anywhere in the country. Yet even with considerable existing storage capacity along the Gulf Coast, several hundred million barrels of salt-dome storage would need to be created through leaching. During this process, oil could be pumped into the cavity, displacing some brine and floating on the remainder. It was thus an additional benefit to using salt-dome storage that oil could be stored at the same time as storage space was being cre-

22

The Strategic Petroleum Reserve

ated. In the event of a drawdown, brine would be pumped into the saltdome cavity, forcing up the oil. This leaching process would take about six years, with completion in 1979—about the same time that the extra Gulf Coast port terminals and pipeline facilities would be completed. It was thus feasible, the FEA concluded, to have 500 million barrels of crude oil stored in Gulf Coast salt domes by the early 1980s.21

STAGFLATION The 1973–74 Arab oil embargo and OPEC price increases exposed the vulnerability of the American economy and pushed the United States into its first major recession in the post–World War II era. In 1974 and 1975, the United States had its first bout of “stagflation”—a stagnant economy characterized by energy scarcity, growing unemployment, and high inflation. This dilemma was especially vexing, for it presented an economic mix heretofore unseen in the twentieth century. Historically, U.S. economic depressions had been characterized by excessive supply and severe deflation. But the oil shock proved that energy scarcity could lead to both inflation and recession. While the embargo did cause some immediate shortages, because there was oil in transit or in storage at the time, the worst was yet to come. The United States felt the full economic impact of the embargo after it had ended. In 1974 and 1975, supplies really began to tighten, sending energy prices soaring. Inflation had been a growing phenomenon since the late 1960s, but it became much worse after the embargo. In 1973, the annual inflation rate had been 5.7 percent. In 1974, it rose precipitously to 8.7 percent and then to 9.3 percent in 1975 (figure 1.3). Of the nearly 10 percent increase in consumer prices, a third was due to higher oil prices. Nor did the price controls seem to help. While economists differed on the precise role of higher oil prices, there could be little doubt that in the economic crisis of 1974–75, oil supply disruptions and price hikes, imposed on the U.S. from without, had a very real impact upon the national economy.22 In addition, the first oil shock of 1973–74 had the effect of a new tax, as would the second oil shock of 1978–81. This so-called “OPEC tax” drained money and spending power out of the U.S. economy and into the coffers of the OPEC nations. The resulting transfer of wealth meant that Americans had less disposable income to buy goods and services. It led to balance-of-payments and trade deficits, and for a while, at least, a weaker dollar on the international currency market. Already a growing problem, the U.S. trade deficit, and the related balance-ofpayment deficit, became much worse after the oil shock. By one es-

The Energy Crisis Begins

23

timate, in 1974 the OPEC nations had a current account surplus of $64.7 billion from the United States and other major oil-consuming nations. Others placed the figure at $80 billion. In January 1975, the Senate Subcommittee on Multinational Corporations concluded that the OPEC countries had reaped “an unprecedented transfer in the world’s wealth.”23 Rising inflation lowered real wages for U.S. workers. In the mid1970s, for the first time since World War II, real wages did not increase. Between November 1973 and March 1975, consumer purchasing power fell by almost 9 percent. Making less money in real terms, U.S. workers bought less and saved less.24 Rising inflation also took a toll on productivity. With so many industries depending on petroleum to fuel manufacturing, transportation, and a myriad of other functions, soaring energy prices meant a higher cost of doing business. Rising production and transportation costs, in turn, lowered productivity. Falling business productivity, in turn, led to layoffs. Unemployment, which had been roughly 5 percent in 1973, jumped to 9 percent in May 1975, and averaged 8.5 percent for the year. Ultimately, the embargo cost approximately 500,000 American workers their jobs.25

THE NEW POLITICS OF OIL In the wake of the first oil shock, the theory that the majors had contrived the crisis, by holding oil supplies off the market, spread like wildfire through the news media and the public consciousness. Nor did public cynicism limit itself to the industry. Both the federal government and the Arab oil-exporting nations were also blamed for the energy crisis. Reports in Time, Newsweek, The New Republic, The Washington Post, and journals and newspapers throughout the nation suggested that the majors had urged Saudi Arabia to raise prices, had held production in check, had oil tankers sitting off the U.S. East Coast until prices increased, or had otherwise manufactured the crisis in some fashion. In the same muckraking investigative vein as Ida Tarbell’s History of Standard Oil, books such as Anthony Sampson’s The Seven Sisters and Robert Engler’s The Brotherhood of Oil began to appear, claiming that the energy shortages had been the result of collusive machinations by the international majors, the OPEC nations, and the U.S. government.26 This perception was abetted by the fact that the majors reported vastly increased profits during the embargo. In early 1974, a number of the largest oil companies released their 1973 earnings. They were up

24

The Strategic Petroleum Reserve

dramatically. The leading thirty oil companies averaged a 71 percent increase in 1973 over 1972. Exxon had an 80 percent increase while Gulf Oil enjoyed a 90 percent increase. Even worse, from a public image perspective, was that in 1974, many of the top industry executives received advances in their salaries. All of this tended to heighten public suspicion of the industry. While public suspicion of the industry remained so would stringent government regulation. It was in this context that government took on a much larger role in the energy arena—not just price and supply controls, but also new programs designed to secure supplies of traditional energy and support development of alternative energy. As for oil stockpiling, public distrust of the industry would preclude its involvement in a program whose very purpose was to protect energy consumers from the vagaries of the oil market. For its part, the industry would be only too glad not to be burdened with the mandate of building and funding the reserve.27 The political economy of oil changed dramatically after the first oil shock. Until the 1970s, oil companies, especially producers, had held the upper hand. As long as they produced the oil that a modern society needed, at a fair price, government had largely acceded to their wishes. This could be seen with the oil import quotas for the independents, the foreign tax credit (the “golden gimmick”) for the international majors, and the depletion allowance and prorationing for domestic producers. By the early 1970s, however, Lower 48 producers had lost their surge production capacity. This eroded the industry’s ability to consistently and affordably deliver petroleum products to the American public. Once the industry could no longer step up production in an emergency, the decades-old deference melted away. Political power then shifted to U.S. energy consumers and purchasers, including individual end-users, manufacturing businesses, utility companies, and certain downstream segments of the oil industry such as independent refiners, marketers, and transporters. After the first oil shock, energy consumers gained power—and for a time, ascendancy—in the U.S. political economy of oil. The disruption underscored the important role that energy consumption played in the economy. Public officials, recognizing this, sought to protect it through legislative and executive action. Later, consumer organizations and groups would develop and actively defend their interests. But in the early 1970s, government officials went out of their way to protect energy consumption patterns. Much of the 1973 EPAA had been written to protect energy consumers, and the congressional protections for consumers and end-users continued throughout the 1970s. Even in the wake of the embargo, only with

The Energy Crisis Begins

25

reluctance did policymakers even think about demand restraint. “It’s not our job to force the country to change consumption patterns,” said Jared G. Carter, Deputy Undersecretary of Interior, in October 1974. Nor was that sentiment limited to the Nixon-Ford administration. After the first oil shock, as an article in the journal Environment put it, the consumer was now “in charge.”28

THE IEA EMERGENCY RESERVES SYSTEM Even before the first oil shock, most of the major oil-consuming nations—besides the United States—had already instituted energy security programs that included either government-owned oil stockpiles and / or mandatory inventory requirements placed on their domestic petroleum industries. The nations of Japan, West Germany, and Italy established publicly owned stockpiles, as well as industry inventory requirements. In fact, most of the European, Pacific Rim, and other nations that came to comprise the International Energy Agency (IEA) would depend heavily on mandatory inventory reserves for their emergency petroleum reserves systems. The 1973–74 crisis motivated the governments of those nations to increase and expand those emergency reserve systems already in place. In fact, among the various civilian strategic oil reserve programs established by the major oil-consuming nations, most mandated inventory requirements on their domestic oil industries. Germany, the Netherlands, France, and Denmark used both compulsory industry inventory requirements and public stockpiling corporations in their emergency reserves systems. Only the U.S. strategic reserve system would be entirely government-owned without compulsory industry inventory reserves. The reasons for this were many. The size of the U.S. reserve, at least 500 million barrels, would be much larger than any other nation’s target stockpiling goal. That meant that it would need funding on such a large scale that the bulk would have to come from general revenues. Moreover, the nature of the U.S. political economy precluded the use of tools that were used in other IEA nations. Even in its politically weakened state, it would be impossible to tax the U.S. oil industry to the extent needed to raise the necessary funds; and it would be unwise to expect the industry to accept mandatory inventory reserves at the level needed to raise that amount of oil. And in a society that protected energy consumption, it would be politically impossible to implement energy consumption taxes to the amount needed to fund even a significant portion of the reserve.

26

The Strategic Petroleum Reserve

Following the embargo, the Rockefeller Foundation sponsored a major comparative study of the stockpiling programs of the Western alliance, to be undertaken by petroleum consultant Edward N. Krapels. His work, published in 1980 as Oil Crisis Management, found that Europe and Japan had more oil supply protection than did the United States. The reason for this was twofold. For one, while the nations of Europe and Japan were more dependent on foreign oil than the United States, their economies did not demand nearly as much petroleum. It was easier for them to achieve energy security.29 Secondly, those countries had always been oil-poor. This meant that their petroleum industries were not as politically powerful as that in the United States. Their governments could therefore more easily impose inventory requirements on their energy industries. It was true that there had been a revival of the anti-industry sentiment in the United States, and that the industry had lost a great deal of political power. Even so, the world’s largest petroleum industry was not politically powerless. It would stand in united opposition to mandatory inventory requirements. The Japanese energy industries, for example, accepted a significant amount of guidance from MITI in a way the U.S. industry never would from the U.S. federal government.30 Third, the diversity of the U.S. oil industry tended to make it impossible to formulate an equitable distribution of the inventory requirements. The United States was home to the world’s largest, most complex oil industry, with larger and smaller integrated majors, and thousands of independent producers, importers, transporters, refiners, and marketers. The fact that its stockholding facilities were dispersed throughout the nation added to the potential regulatory debacle. In Oil Crisis Management, Krapels concluded that the U.S. strategic reserve “should not be modified to transfer part of the emergency storage burden to the petroleum industry.” The West German experience, he contended, had shown that it was “practically impossible to devise a fair storage obligation in a competitive and complex oil market.”31 In addition to implementing their own stockpiling programs, the major oil-consuming nations began to act in concert in the wake of the 1973–74 oil shock. In fact, even before the embargo, discussions concerning emergency oil crisis management had been conducted under the auspices of the Organization for Economic Cooperation and Development (OECD), an organization that had grown out of the Marshall Plan. After the embargo, the oil-consuming nations especially felt the need for the “consumer solidarity” that Akins had called for. A key step in this effort came in February 1974, when the Nixon administration convened the Washington Energy Conference in the

The Energy Crisis Begins

27

nation’s capital to promote consumer solidarity. Great Britain, West Germany, and Japan joined the United States in a common desire to collectively plan for future energy crises. The participants agreed on the need for common policies on international energy matters.32 The next step came on September 27, 1974, in Brussels. There, sixteen nations drew up an International Energy Agreement. The nations included the United States, Canada, the Federal Republic of Germany (West Germany), Italy, the Netherlands, Belgium, Luxembourg, Denmark, Ireland, the United Kingdom, Austria, Spain, Sweden, Switzerland, Turkey, and Japan. The signatory nations agreed to establish emergency supply measures that could sustain consumption for at least sixty days with no net oil imports. This commitment could be satisfied with oil stocks (private or government-owned), fuel-switching capacity, standby (in-situ) oil-producing capacity, or demand restraint. The agreement also established the IEA to oversee implementation of these measures and coordinate emergency response in a future crisis.33 In November 1976, the IEA Governing Board decided to implement a gradual increase in member nations’ net import protection targets, from sixty to ninety days, to become effective in January 1980. In particular, the United States, West Germany, Italy, and the Netherlands agreed to commit to the ninety-day level. So would France, even though it did not officially join the IEA for many years. In practice, almost every member nation beside the United States would meet its IEA obligations with some form of industry inventory requirements. In contrast, U.S. policymakers concluded that it would be far easier to build a government-owned and operated reserve than to impose inventory requirements on industry or force consumers to change their behavior through demand restraint.34 The 1974 agreement also established the IEA’s International Emergency Program (IEP). A key feature of the IEP was an emergency oil sharing program among IEA members. In the event of a future crisis, it would be the IEP’s first line of defense, followed by demand restraint, fuel switching, and surge (or surplus) production, for those members that had such capacity. Strategic reserve drawdowns would be the last line of defense. Unlike some earlier OECD agreements, the IEA member nations agreed to share oil supplies rather than just imports. And although the oil sharing scheme did not promise to provide proportionately equivalent supplies to all members, it did imply that, in a very severe energy crisis, the United States would have to share its domestic oil supplies, possibly including its strategic oil reserves, with other member nations.35 Notably, the original goal of the IEP was to replace lost volumes

28

The Strategic Petroleum Reserve

when imports fell, rather than mitigate high prices. It would be triggered if the imports of one or more members fell below a predetermined level. This was initially pegged at shortages of at least 7 percent of available supply, compared to a base period of the previous four quarters, with a one-quarter lag for data collection. Ultimately, the IEA came to operate under the auspices of the OECD, which served as an umbrella organization for various sorts of collective action.36

THE FORD ENERGY INDEPENDENCE PROPOSAL When Gerald R. Ford assumed the presidency in August 1974, he also inherited the energy crisis. In contrast to his predecessor, Ford desired a more pro-market response to the crisis, based largely upon price decontrol as a means of spurring domestic production. Many of the senior officials in the Ford Administration felt that the Project Independence Report had called for an excessively large governmental role in the marketplace. Besides lifting price controls, a number of strategic oil stockpiling programs were also part of the Ford “Energy Independence” legislative package. In early 1975, Robert L. Davies, a systems analyst for the Department of Defense (DOD), led a group of FEA officials in developing the parts of the bill pertaining to a civilian strategic oil reserve. Davies came to the job with plenty of relevant experience. Under the DOD, he had advocated oil stockpiling as an alternative to naval requests for more ships to protect the growing number of super tanker fleets of the world. During the Arab oil embargo, he joined the Federal Energy Office, predecessor to the FEA, and participated in the writing of the Project Independence Report. Under Davies, the FEA group undertook a number of studies considering the costs and benefits of salt-dome storage, man-made cavern storage, aboveground steel tank storage, and their environmental impact. It is hard to imagine that they did not also examine the National Petroleum Council studies, which had been the authoritative source on these issues for years. For the Energy Independence bill, the FEA recommended a 500-million barrel crude oil reserve for a three-month (ninety-day) disruption scenario, and a 1-billion barrel reserve for a six-month disruption scenario.37 Ford’s Energy Independence Act was presented to Congress in January 1975. In the bill, the president proposed the creation of a domestic civilian oil reserve of up to 1 billion barrels, and a military oil reserve of up to 300 million barrels. He also called for increased development of the naval reserves. Much of the rest of Ford’s energy program was dedicated to removing the government from the marketplace. He proposed

The Energy Crisis Begins

29

an import fee of up to $3 per barrel (a tariff being less bureaucratic than a quota); decontrol of domestic crude oil and natural gas prices; increased coal production and increased use of coal for power generation; and relaxation of environmental laws. The bill also proposed a synthetic fuels program. In accord with the Project Independence Report, Ford called for a windfall profits tax, to be tied to price decontrol. Yet the president’s desire for a more market-oriented approach came at a politically inopportune time. A significant portion of the American public had become suspicious of the U.S. oil industry. In this political climate, it would be hard for Congress to pass anything that might be interpreted as a “giveaway” to the industry, and a publicly owned strategic oil reserve seemed like a useful insurance policy.38

PETROLEUM STORAGE FOR NATIONAL SECURITY The National Petroleum Council supported the idea that the U.S. strategic reserve should be a government-owned and controlled program. In the last days of 1974, as the Ford White House was developing the legislation on the reserve, the Interior Department once again turned to the Council for advice. On December 31, 1974, Acting Interior Secretary Jack W. Carlson wrote to the Council’s chairman, John E. Swearingen, and noted that the Council’s recommendation for “an emergency petroleum security storage system” had been of “particular interest” to the Interior Department. “The United States is now in the position where it needs to move decisively and promptly in this most critical area of national security,” Carlson wrote. For this reason, he requested that the Council “undertake as a matter of urgency a study of the major factors involved in the implementation of a security storage system similar to that recommended by you in your summary report of September 10,” referring to the Council’s final Emergency Preparedness report. Carlson requested that this study include, but not be limited to, the issues of the optimum size of the reserve, including the 500-million barrel and the 1-billion barrel targets; whether crude and / or petroleum products should be stored; storage medium alternatives; the financing of the reserve; actions that might expedite its establishment; and related geographical, logistical, and environmental issues.39 On August 6, 1975, the NPC published Petroleum Storage for National Security. In many respects, its conclusions repeated those of the September 1974 Emergency Preparedness report. But the 1975 report provided more in-depth analysis to support its recommendations. As it had in its 1952 Underground Storage for Petroleum report, and the September 1974 Emergency Preparedness report, the Council again rec-

30

The Strategic Petroleum Reserve

ommended leached underground salt-dome caverns as the safest and least expensive form of storage for a large-scale oil stockpiling program. It again chose crude oil for the refining flexibility it offered. And inasmuch as one-third of U.S. oil imports were low-sulfur (or “sweet”) at the time, the 1975 report recommended that at least one-third of the reserve be filled with low-to-medium sulfur crude oil. Also like the 1974 report, the NPC concluded that the TexasLouisiana Gulf Coast was the most appropriate site for the reserve, not only because of its numerous salt domes, but also its existing and planned refining and transportational infrastructure. The goal of a 500million barrel reserve, again roughly the same as in the 1974 report, was a “sound objective.” The Council projected that between 1980 and 1990, the United States would average an import level of 8.1 million barrels per day of crude oil and petroleum products, 5.5 million barrels per day of that crude oil. Conservation measures could reduce demand by 1.0 to 1.1 million barrels per day by 1980. In the event of a total interruption of crude and petroleum product imports, there would be a net shortfall of 7.0 to 7.1 million barrels per day; in the case of a crude oil import loss, the shortfall would be 4.4 to 4.5 million barrels per day. A 500-million barrel security storage supply could, therefore, “protect against a total imports denial of about 70 days, and a crude oil only . . . denial of about 110 days.” A smaller volume, the committee reasoned, would provide little import protection; a larger reserve would be excessively costly, divert needed manpower and resources away from industry, and provide “diminishing security benefits.” “Moreover, over the longer term,” the report stated, “genuine security can be obtained only by reducing the Nation’s dependence on imports.”40 Unlike the previous reports, Petroleum Storage for National Security addressed the environmental issues raised by an underground salt-cavern storage program. The report recognized that proposed surface storage area requirements, freshwater requirements, pipeline construction, and brine disposal all raised environmental questions with regard to the marine life both offshore in the Gulf, and onshore in local bays, marshes, and estuaries. To address these issues, the report recommended that biological, chemical, botanical, and oceanographic studies be undertaken, including environmental impact statements on the program’s potential effect on the local and regional environment. The report also recommended that the brine created through leaching be disposed of in the Gulf at a far enough distance to produce adequate dispersion. Ongoing monitoring of the leach and fill process should be undertaken to insure that the operations were in compliance with environmental regulations. In short, while the report recognized the

The Energy Crisis Begins

31

validity of environmental concerns, its message was that with proper safeguards, the program could soon be underway, while meeting environmental standards. The report also presented some new information on the economic cost of the program. The estimate of the reserve’s cost—up to $7 billion for a 500-million barrel reserve—was not that different from other estimates. But its high cost dictated, the Council contended, that the reserve be totally government-owned and funded. The report did examine a range of alternative financing methods, including industry inventory requirements and industry consortia, but recommended against them. For one thing, the report claimed that private financing mechanisms would have to be backed by government loans and incentives. And because there was no way for private investors to earn a return on their security storage investment, they “must ultimately seek to recover [their] cost from government.” And “[s]ince there is no profit incentive for a private investor to build, fill, and own national security storage, it will be accomplished only in the interest of national security.” Just as monies for military national security came from general tax revenues, so should funds for a national economic security program. Therefore, the report concluded, “the Federal government should finance, own and control . . . the entire security storage capability . . . utilizing private industry expertise in design, construction, management, and operation.”41 The recommendation that the strategic reserve be totally governmentowned and funded stemmed from four considerations. One was that beneficiaries of the reserve would be “the Nation as a whole, its economy, and all its people in their roles as producers and consumers.” Second, there was the “very large financial burden of the program,” which would be impossible to equitably distribute upon industry. Third, the petroleum industry had to be left unencumbered by additional regulations, so that it could set about the “very formidable task of increasing domestic energy supplies.” It was important “not [to] lose sight of the real keys to long-term security of supply—the strenuous implementation of fuel conservation measures and a greatly expanded effort to increase production of domestic oil, gas, and other forms of energy.” The industry could not build the strategic reserve while also increasing energy supplies for the U.S. and international market. “There simply is not enough money,” the report commented, “for the petroleum industry to undertake both efforts simultaneously.” Given the Council’s preference for market-oriented solutions, the report conceded that its support for a government-owned reserve “was a difficult recommendation to make.” It was, however, a measure of the new political econ-

32

The Strategic Petroleum Reserve

omy of oil. Its political power diminished by the energy shortages, the U.S. petroleum industry now merely sought to avoid another costly mandate.42 The fourth reason why the government should own and control the reserve flowed from the Council’s proposal to fill it with oil from the Elk Hills NPR site. With authorization from the president and approval from Congress, Elk Hills production could be increased to 130,000 barrels per day “within several months,” and ultimately produce at an MER of 267,000 barrels per day. At the latter rate, a 500-million barrel reserve could be created within six to seven years. This was interesting, given that the Council had concluded in its 1974 Emergency Preparedness report that the NPR’s “legal and economic problems” precluded its “timely” use in energy emergencies. But if those considerations were resolved, then Elk Hills crude oil should be used to fill the strategic reserve. The logic behind this apparent contradiction became clear, the report contended, when considering all of the other options for filling the reserve. The use of domestic crude oil (not from NPR sites), foreign crude oil, or federal royalty oil would all remove oil from a market that desperately needed it; using untapped Elk Hills oil would not. Using Elk Hills NPR oil would also limit the federal role in the oil marketplace—the government would be using its own oil. This idea would not be acted upon immediately, but it would later, when the Carter administration was desperate to renew reserve fill in 1980, after the second oil shock.43 Looking at the reserve programs already underway, in other oilconsuming nations, the report noted some crucial distinctions between their economies and that of the United States. Japan and the nations of Western Europe had “more compact logistical systems with smaller volumes of unavailable stocks.” The opposite was true in the United States, which was much larger geographically. Because of this, U.S. industry had greater transportation requirements; they therefore had to hold a higher level of working stocks. Moreover, those stocks were widely dispersed over the nation’s large geographical area. Compulsory industry inventory requirements, which comprised a significant portion of the petroleum reserve systems of other IEA nations, were therefore undesirable in the United States. Because of their geographic dispersion, inventory requirements would be a much greater imposition on U.S. industry than for their counterparts in Europe and Japan. These conditions, the report implied, were yet further evidence that the U.S. petroleum reserve should be a centralized program under the government’s control.44

The Energy Crisis Begins

33

While recognizing that it would be impossible to answer all the questions regarding the petroleum security storage program, the Council nevertheless made a number of recommendations to expedite its implementation. One was that a single federal department or agency should be created to direct the program. This would help avoid competition among agencies and overlapping jurisdictions, which might bring delay. The Council also recommended that the Defense Production Act of 1950 be used to expedite delivery of materials, and that the responsible department or agency should be empowered to exercise the right of eminent domain to obtain needed land and rights of ways when necessary. Enabling legislation allowing for the use of Elk Hills NPR oil should be enacted. The legislation creating the reserve should also provide an operational definition of an energy emergency, require conservation measures prior to withdrawals from the reserve, and ease conflict of interest and antitrust restrictions that prevented industry groups from working together to advise the government on the reserve.45 The goals of the U.S. strategic reserve, the report concluded, should include sufficient capacity to “insure against a reasonable range of anticipated risk,” facilities designed and located for “quick and efficient movement of security stocks into the U.S. supply system to replace lost imports,” and an “expeditious” construction schedule. The report noted that “import levels and vulnerability are already significant and growing.” Anxious to emphasize the idea that the reserve should be controlled by the government, and not imposed upon industry, the Council concluded that the “[p]etroleum security stocks” should be “clearly distinguished from working stocks of crude and product maintained by industry”; and that the reserve should “[p]rovide the benefits of petroleum security storage without reducing energy resource development.” Notably, on the basic issues of the reserve—storage medium, location, size, and type of petroleum stored—the FEA and then the Department of Energy would follow what the Council had prescribed in its 1974 and 1975 reports.46 The report also recommended that the government use the reserve only as a last resort, advocating, in effect, what became known as the “rainy day” policy. “Since protection of the national economy is the primary reason for the establishment of a security storage program,” the report commented, “security storage facilities should be utilized only after a declaration of an energy emergency by the President.” “Further,” the report went on, “the government should require that all other provisions of a national emergency preparedness plan be imple-

34

The Strategic Petroleum Reserve

mented before security storage supplies are called upon.” The value of the rainy day / last resort policy would be subject to question in the wake of the second oil shock. In its 1981 Emergency Preparedness report, the Council would reverse its position, advocating an early use of the reserve to help prevent panic in the market.47 Finally, in the 1975 Petroleum Storage for National Security report, the Council emphasized the need for quick action. “It is imperative,” the report concluded, “to underscore the urgency of the Federal government’s proceeding immediately with a crude oil security program.” Perhaps unknowingly, the Council was adding to the pressure to get “oil in the ground” that would ultimately produce delays and slippage for the program.48

THE CONGRESSIONAL RESPONSE The congressional response to the president’s Energy Independence Act was the Energy Policy and Conservation Act (EPCA) [PL 94–163] of 1975. It bore little resemblance to the market-oriented nature of the Ford legislative package. In the midst of rising oil prices, inflation, and recession, the political pressure for continued price controls and supply allocation was overwhelming. Deregulation would be a bitter tonic and would be especially harsh on consumers and end-users. A Democratically controlled Congress, therefore, was less than receptive to the promarket aspects of the Ford proposals. When Congress received the Ford omnibus bill in January 1975, it began gutting the entire package. The Senate began consideration of a strategic reserve program on February 12, 1975, when Senator Jackson submitted his Strategic Energy Reserves Act of 1975 (Senate bill 677). Stating that “the time for study has passed,” Jackson declared that “[t]he need for strategic reserves is well established. We have the capacity to create a workable strategic reserve system. We should now move to do so.” Jackson’s bill provided for the creation and maintenance of a strategic oil reserve to cushion the nation against the impacts of future interruptions or reductions of oil imports. Upon the insistence of the New England congressional delegation, the bill also authorized the creation of a regional petroleum reserve for areas and regions extremely dependent on imports for their residual fuel oil needs. S. 677 also authorized the FEA administrator to obtain crude oil from federal lands to build the reserve, including the Naval Petroleum Reserves.49 According to the Senate Report of S. 677 (S. Report 94–260), there were essentially three possible benefits to be accrued from a strategic oil reserves system. First and foremost, by alleviating energy shortages

The Energy Crisis Begins

35

and related inflation, a reserve would mitigate the adverse impacts of future disruptions. In addition, by mitigating these impacts, the successful establishment of a strategic reserves system might, in and of itself, deter a future oil embargo. Lastly, since energy self-sufficiency was a long-term goal at best, the near-term energy security that a strategic reserve could provide would be all the more welcome. In late June 1975, the Senate began to actively consider S. 677. The strategic reserve concept had broad support in the Senate, and virtually no opposition. On July 8, the Senate passed S. 677 by a vote of 91–0. There was also broad support for the strategic reserve in the House, but its inclusion in the omnibus Energy Independence package (HR 7014) held things up for a while. The majority of the debate focused on the more controversial aspects of the bill, such as price controls, allocation, and the related entitlements program (designed to protect smaller and independent refiners and marketers). There was virtually no debate on the strategic reserve, which enjoyed a consensus in both houses of Congress. After months of deliberation, on September 23, 1975, the House approved the bill by a vote of 255–148. It extended price controls; increased presidential powers to impose gasoline rationing and allocation and prescribe energy conservation measures; required fuel efficiency standards for automobiles and electrical appliances; extended the FEA’s power to require utilities to use coal instead of natural gas; and called for the creation of a national civilian strategic reserve of up to 1 billion barrels of crude oil and petroleum products.50 Ultimately, the House-Senate conference bill on the energy package was reported out on December 9, approved that day, and sent to President Ford on December 17. While a few of the Ford proposals survived, the congressional rendering of the bill meant that the ensuing legislation bore little resemblance to the president’s proposed Energy Independence Act. The EPCA protected consumers and end-users, and had a decidedly stronger governmental approach than the Ford administration desired. It continued the controversial oil and gas price controls, and the allocation authorities were extended as well. The FEA was once again given the authority to implement and enforce the new regulations, and as with their efforts under the EPAA, the attempt to control prices and allocate oil and gas proved to be just as complex, controversial, and difficult.51 The EPCA also mandated higher fuel efficiency standards for a host of products, including automobiles (which later became the Corporate Automobile Fuel Efficiency, or CAFE, standards) and electrical appliances. It required manufacturers of electrical appliances to label their products with information on their energy efficiency. The EPCA

36

The Strategic Petroleum Reserve

also ratified U.S. participation in the International Energy Program, whereby Great Britain, Japan, West Germany, and the United States would all develop emergency petroleum reserve systems that they could coordinate and share in the event of another supply disruption. The EPCA did give the president some of the increased powers he had asked for—the president could require power plants to use coal rather than oil, order the development of new coal mines, and allocate and appropriate domestic oil and gas reserves. The president could also order mandatory conservation measures and oil and natural gas rationing. Ford’s proposal for increased authority to impose tariffs, however, was rejected, as were his proposals for stepping up production on the naval reserves and for the creation of a new military reserve. The only success Ford achieved on the energy reserves issue was the establishment of the Strategic Petroleum Reserve (SPR). Unlike most of the other measures, the oil stockpiling concept enjoyed support from Congress and the White House.52

THE SPR ESTABLISHED The SPR was created under Section 151(a) of the EPCA, which declared that “the storage of substantial quantities of petroleum products will diminish the vulnerability of the United States to the effects of a severe energy supply disruption.” With the EPCA, Congress declared it to be the policy of the United States to provide for the creation of a Strategic Petroleum Reserve for the storage of up to 1 billion barrels, and not less than 150 million barrels of “petroleum products” (defined widely), to be in place three years from the date of passage of the EPCA.53 The legislation in fact contained a number of important storage targets for the SPR, to be reached in a sequential and chronological manner, to the “maximum extent practicable and except to the extent that any change in the storage schedule is justified.” Of these, perhaps most important were three: the 150-million barrel figure for the Early Storage Reserve (ESR) program, which represented the FEA’s estimate of existing storage capacity that could be secured fairly soon; the 500million barrel figure, representing both NPC and FEA estimates of the amount of oil needed to withstand a ninety-day (three-month) disruption in the supply of foreign oil; and the 1-billion barrel total figure, the amount that the FEA estimated would be needed to withstand a six-month disruption. In the EPCA, Congress accepted the 500-million barrel target as the primary, long-term stockpiling goal, a position supported in the NPC’s Emergency Preparedness and Petroleum Storage for National Security reports and the FEA’s own Project Independence

The Energy Crisis Begins

37

Report. It did so in Section 154(c)(1)(A) and (2), with a convoluted formula that involved taking the highest average monthly import level in a three-month period, within the twenty-four-month period preceding enactment of the legislation. That amount, calculated to be 495 million barrels, but usually increased to 500 million barrels for convenience, was to be in place by the end of 1982. The EPCA also established the Strategic Petroleum Reserve Office within the FEA to oversee the establishment, management, and maintenance of the reserve. Mindful of the need for some immediate energy security, the ESR would serve “the purpose of providing limited protection from the impact of near term disruptions in supplies of petroleum products,” and would help carry out obligations of the United States under the IEP. Keeping in mind that the Northeast had been particularly affected by heating oil shortages in the early 1970s, the ESR would “provide for meeting regional needs for residual fuel oil and refined petroleum products in any region which the [FEA] administrator determines is, or is likely to become, dependent upon imports of such oil.” The EPCA also provided that ESR could be used to fulfill the 150 million barrels of petroleum products that was to be in place within three years. The bill also required the SPR Office to submit a plan for the execution of the ESR program within ninety days, ending on April 22, 1976. As it turned out, the ESR would be the first part of the Gulf Coast SPR, with crude oil being stored in existing salt caverns that the FEA purchased from industry.54 The EPCA did recognize the needs of the Northeast with the establishment of the Regional Petroleum Reserve (RPR) as part of the SPR program. In fact, the New England congressional delegation specifically amended the Senate version of the EPCA (S. 677) to include a provision for the storage of residual fuel oil in their region. The RPR would be located “in, or readily accessible to” any region in which imports of residual fuel oil or other refined petroleum product equaled more than 20 percent of such product in any given twenty-four-month period. The FEA administrator was authorized to place in storage crude oil, residual fuel oil, or any refined petroleum product in the regional reserve. Both the Council’s 1974 Emergency Preparedness report and its 1975 Petroleum Storage for National Security report had recommended against the establishment of a Northeast reserve, a decision based on the higher costs of both storing refined petroleum products and the steel tank storage which would be necessary in that region. As a result, the FEA was reluctant to establish a Northeast product reserve. In the latter 1970s, the federal government’s refusal to implement the RPR provision would become a source of controversy for the SPR program,

38

The Strategic Petroleum Reserve

as the New England congressional delegation, led by Massachusetts Senator Edward M. Kennedy (D-Mass.), continually pressed for residual fuel oil storage in their region. The concept of industry inventory requirements met a similar fate, but, like the RPR concept, would not die so easily. The NPC’s 1975 Petroleum Storage for National Security report had come out solidly against industry inventory requirements, but the concept had a number of congressional supporters, and they believed that there were compelling arguments in favor of an industrial petroleum reserve (IPR). For one, it would force the heaviest users of petroleum products—importers, refiners, and consumers—to pay for some of the costs of the SPR so that the entire burden would not fall upon the taxpayer. Additionally, it was hoped that industrial expertise and in-place capacity would facilitate and hasten the reserve’s development. And there was the example of the Japanese and European systems, which relied upon industry inventory requirements to form the bulk of their national oil stockpiling programs. Yet there was serious opposition to an IPR from the industry, the White House, and some members of Congress. Importers had balked at the mandatory inventory requirements in Senator Jackson’s proposed Petroleum Reserves and Import Policy Act of 1973. Their opposition, manifest through their congressional representatives, had played a large role in the death of that bill. But congressional IPR proponents, led by Jackson, had then placed a provision in S. 677 that gave the FEA the power to require importers and refiners to hold inventories as part of the strategic reserve system. Fortunately, FEA administrator Frank G. Zarb facilitated a compromise. In a letter to Jackson, he indicated that the Ford administration would not oppose a bill with discretionary IPR authority, and that the White House was willing to make this concession to get Jackson’s support for the whole package. Thus, while the EPCA would contain an IPR provision, it was to be discretionary and limited. As passed, the EPCA stated that the FEA administrator, at his discretion, “may require each importer . . . and each refiner to acquire, store, and maintain” petroleum products “in readily available inventories.” The EPCA also stated, however, that the administrator could not require any such importer or refiner to store such petroleum products “in an amount greater than 3 percent of the amount imported or refined by such person [firm] during the previous calendar year.” The IPR section also had a provision for the FEA administrator to “grant relief” to any importer or refiner “who would otherwise incur special hardship” or “inequity” from such inventory requirements.55

The Energy Crisis Begins

39

Thus the very limited role for private industry in the SPR program made the U.S. stockpiling strategy unique. Among the IEA nations, the U.S. strategic reserve would be the only such program that was wholly government owned and operated and without obligation on the domestic oil industry. In the United States, this was the natural result of strong public distrust of the industry and overwhelming industry opposition to inventory requirements. It was perhaps ironic that for different reasons, conservatives and liberals both came to agree that the SPR should be totally owned, operated, and funded by the federal government. To facilitate program development, the EPCA empowered the FEA administrator to acquire by purchase, condemnation, or otherwise, land or interests in land for the location of storage and related facilities. The bill also empowered the FEA administrator, whenever he deemed it necessary, to bring an action in any court “to acquire by condemnation” any personal property, facilities, land, or “other interests.” While the EPCA did state that the FEA administrator was to first seek to acquire such properties through negotiation, the FEA’s power to acquire land and other property via condemnation and eminent domain would be a source of dehabilitating controversy for the program.56 The EPCA also required that the FEA administrator submit a Strategic Petroleum Reserve Plan by December 15, 1976. This SPR Plan would, among other things, include an assessment of the program’s environmental implications; a specification of the type and location of the reserve; an estimate of the types of petroleum products to be stored; a projection of the aggregate size of the reserve; justifications for any changes with respect to storage volume or storage schedule; estimates of the cost of the reserve; an evaluation of the economic impact(s) of filling the reserve (on world oil price and supply, for example); the manner in which the ESR, IPR, and RPR provisions would be implemented; and a distribution plan setting forth the method of drawdown and distribution of the reserve. It was notable that the EPCA did require that the sale and allocation of SPR oil in any drawdown scenario be in keeping with the pro-competition, end-user protection rationale of the EPAA. The EPCA also had provisions for congressional review and provided that the FEA administrator could submit amendments to the SPR Plan, to be approved by Congress, whenever conditions warranted.57 The EPCA authorized $1.1 billion for the development and implementation of the ESR and SPR plans, including planning, administration, and acquisition of storage and related facilities. The legislation pointedly excluded oil acquisition from the authorization, most likely

40

The Strategic Petroleum Reserve

due to its recent price instability. The bill did provide that funds for oil acquisition could come from future appropriations. While President Ford did not like much of the EPCA—notably the continuance of price controls and supply allocation and the defeat of his oil import tariff— he knew that it was likely to be the only major energy bill presented for his signature. Anxious to show that he was active on the energy issue, the president signed the EPCA into law on December 22, 1975.58 The legislative establishment of the SPR represented the first time in U.S. history that an emergency petroleum reserve system had been created purely for the civilian economy. The Naval Petroleum Reserve had been created for the exclusive use of the Navy. Ickes’ Petroleum Reserves Corporation had been alternatively designed for military and civilian purposes, but had been short lived. By the 1970s, the political context had changed. Protection of energy consumers was the new regulatory imperative. Among all the various proposals and programs for enhancing U.S. energy security, the Strategic Petroleum Reserve enjoyed the most support because it was the least contentious. Unlike price controls, supply reallocation, rationing, or relaxing environmental standards, the SPR ran afoul of no one’s vested interest—on paper, at least. Moreover, the SPR concept—sans inventory requirements—had been actively promoted by the National Petroleum Council and supported by industry in general. But having created the SPR in law, the challenge of actually building it lay ahead. There would be no shortage of challenges and obstacles. These were physical, technological, political, and bureaucratic in nature and revealed the inherent contradictions and messiness of U.S. democracy.

BUILDING THE RESERVE, 1976 –79

THE FEA AND THE SPR PLAN

2

It was in the SPR Plan of 1976 that the FEA fleshed out the details of the reserve program—what form it would take and how it would be built. The EPCA had created the SPR Office within the FEA and charged it with the responsibility of providing detailed plans and realistic goals for SPR development. In practice, the FEA would bear the ultimate responsibility and report to Congress within one year of EPCA passage. The newly created SPR Office would carry out the task of actually designing and creating the plan. After the passage of the EPCA, Robert Davies became the first director of the SPR Office. He led a group of FEA administrators in developing the SPR Plan. This “Davies group” drew upon the studies on salt-cavern storage that had been underway within the FEA since early 1975. One of the most immediate considerations was the report on the feasibility of the ESR provision, which was due to Congress ninety days after EPCA’s enactment. While studies begun the previous July were not yet complete, the Davies-led group reached a number of conclusions by the April 22, 1976, deadline. First, it would be possible to have 150 million barrels in place by 1978 only by expanding and converting existing Gulf Coast salt caverns. Conventional hard rock mines in Ohio and Kentucky were also considered. The report did not pick out specific storage sites. The ESR stockpiling efforts would in fact be the beginning of the larger SPR program, as allowed for in the EPCA, along the Texas and Louisiana Gulf Coast.1

42

The Strategic Petroleum Reserve

The group undertook a fairly exhaustive analysis to determine how big the reserve should be and how much oil it should hold. In October 1976, the group generated what became known as the “SPR Size” paper. The study noted that to arrive at an optimal size, one first had to determine the basic purpose of the reserve. It contended that there “appear[ed] to be two common perceptions of the purpose of the SPR.” One was “Substantially reduce the vulnerability of the U.S. to interruptions in petroleum supplies”; the other, “Minimize the cost to the economy of petroleum interruptions and of any associated petroleum Reserve.” Notably, the study said “or,” because while the “invulnerability” and “economic” objectives overlapped somewhat (they both involved getting oil in the ground), they were also somewhat exclusive. Perhaps most importantly, the “invulnerability” objective would involve a much larger reserve. The “economic” objective, on the other hand, “recogniz[ed] that the Reserve costs are certain and interruptions are uncertain.” Minimizing SPR-related costs was therefore a key feature of the “economic” objective.2 The study group also examined a number of disruption scenarios, with variables for the level of U.S. imports, total amount of oil disrupted, the U.S. percentage of that disruption, duration of interruption, level of IEA/IEP obligations and involvement, and amount of American demand reduction. Scenario number one assumed that OAPEC would reduce all exports by 25 percent and deny all oil supplies to the United States. Scenario number two assumed that OAPEC would reduce all oil exports by 50 percent and deny all oil supplies to the United States. Interestingly, although the total shortfall grew dramatically between scenario one and two, from 6.5 to 12.9 million barrels per day, each envisioned a shortfall to the United States of 5.95 million barrels per day.3 The analysis noted that scenario one was “thought to have a somewhat higher probability” than scenario number two, although the second scenario was also considered “very plausible.” Other scenarios were deemed to have a “low” probability. Six-month durations were believed “likely” for the two scenarios, and a three-month (ninety-day) disruption was considered “very likely.” If the “economic” objective was accepted, three- and six-month disruptions should be considered; if the “invulnerability” objective was the rationale, then a six- and (possibly nine-) month disruption should be considered. The study conceded that there was “no good factual basis for selecting any one these durations as the ‘best.’”4 As for demand restraint, the study considered that a reduction of up to 3 percent could be obtained with a relatively small impact on GNP, for interruptions with durations of six months or more. In fact,

Building the Reserve

43

3 percent seemed to be the most that could be imposed on the U.S. consumer, without significant economic or political pain, for almost every scenario. Perhaps for this reason, the study commented that the reserve “should be sized to avoid the need for reductions in consumption which would cause significant economic impact or create strong social / political pressures on the Government for alternative actions to bring relief.”5 Five size targets were considered: 250, 400, 550, 750 million barrels, and 1 billion barrels, corresponding with shortfalls from the various disruption scenarios. The first two figures correlated to the “economic” objective, and the last two to the “invulnerability” objective, with the 550-million barrel target falling somewhere in between. It was deemed that the 400-million barrel figure would provide flexibility in a disruption, but would still leave the United States vulnerable to a major, planned disruption. A 750-million barrel reserve would make the U.S. largely invulnerable to an interruption of up to six months duration. It was not clear that a 1-billion barrel reserve “would be of significant additional value.”6 Since the reserve would “not be completed until 1982,” the analysis focused on a 1985 case that involved a “high” U.S. import level of 10.2 million barrels per day. Interestingly, this acceptance of the 1982 deadline was in many ways an affirmation of the 495-million barrel target, implicitly called for in the EPCA. In fact, the study noted that a “strong justification would have to be presented for any proposed size less than 495 MMB.”7 That same October, the FEA solicited comments on the developing SPR Plan from a number of agencies and departments. Those that responded focused, naturally enough, on how much oil the reserve should hold. Brent Scowcroft, Assistant to the President for National Security Affairs, supported the 500-million barrel target. The Commerce Department deemed the figure “not unreasonable,” but thought it unwise to “tie ourselves inextricably to the 500 million barrel number.” Both the Council of Economic Advisers and the Department of the Treasury felt that a 400-million barrel reserve would be sufficient. The Department of Defense, on the other hand, advocated a 1.3-billion barrel goal, so that the SPR could cover military as well as civilian requirements. For his part, Scowcroft recognized that the U.S. needed to get moving on the reserve as fast as possible. In his memo, he noted that it was “important not only to protect us both economically and strategically from future price interruptions, but also to provide a visible political signal to both OPEC and our IEA partners of our determination to reduce our vulnerability.”8

44

The Strategic Petroleum Reserve

Of the government departments and agencies that responded, it may have been the Department of Commerce that offered the most rigorous analysis of what the SPR’s optimal stockpile size should be. Particularly notable was an unsigned memo from the Department’s Assistant Secretary for Policy, to the Office of Energy and Strategic Resource Policy (also within the Commerce Department), dated November 12, 1976. The memo laid out the value that a large reserve could have in avoiding the need to implement demand restraint measures. It thus offered a recognition early on that, in a crisis, enhancing supply was preferable to reducing demand. The memo commented that “In deciding on the optimal size of an SPR, the questions then are: (1) what are the GNP consequences of the shortfall, and (2) how does one deal with these consequences while preserving some degree of international diplomatic flexibility?” On the second question, it continued, “one needs to analyze the difference in cost between funding a large SPR and increased demand restraint.” The memo noted that the cost of building a 150-million barrel reserve “was the same as providing for 240 million barrels,” which raised the following question: “Is it less costly to increase demand restraint than to fund a larger SPR?” In considering this matter, the memo added, “it must be borne in mind that we would probably wish to postpone harsh demand restraint measures for, say, 1–2 months to permit greater diplomatic flexibility.” The answer seemed clear: a large reserve was preferable to demand restraint.9 The FEA presented its larger report on the entire SPR program, the Strategic Petroleum Reserve Plan, to Congress on December 15, 1976. On the issues of size and schedule, location, storage facilities, and type of petroleum to be stored, the Davies-led group largely accepted the logic put forth in the NPC’s Emergency Preparedness and Petroleum Storage for National Security reports and the FEA’s Project Independence Report. The FEA accepted the 500-million barrel goal called for in those reports and reaffirmed in the EPCA. It estimated that when combined with conservation measures, such a reserve could essentially replace lost imports for a period of up to six months in the most likely interruption scenarios, with only a 3 percent loss in oil consumption.10 The plan called for the SPR to have 10 percent, or 50 million barrels, in place by June 1977; 150 million barrels by December 1978, in keeping with the ESR provision; 65 percent, approximately 325 million barrels, in place by December 1980; and 100 percent, 500 million barrels, in place by December 1982. Anything less than 500 million, the FEA contended, would not provide sufficient protection. The SPR Plan provided, however, that a decision could be made to expand the

Building the Reserve

45

reserve past the 500-million barrel mark at a later date. A larger-sized SPR “would be desirable,” the FEA wrote, “if it is assumed that oil imports by 1985 will be significantly higher than 7.5 million [barrels per day].” As American dependence on imported oil continued to increase in 1976 and 1977, a larger SPR would seem increasingly warranted. Indeed, within three months of the FEA’s submission of the SPR Plan to Congress, the Carter administration moved to increase the size to 1 billion barrels.11 As for storage facilities, unsurprisingly, underground salt domes won out as the most favorable choice based on a number of factors: cost, technical feasibility, storage security, availability of capacity on a timely basis, and proximity to nearby refining and transportation systems. Salt domes could also be stored with crude oil in the latter phases of the leaching process, facilitating the stockpiling schedule. The location of the SPR, the Texas-Louisiana Gulf Coast, was the obvious choice. Not only was the Gulf Coast home to a major seaport and marine terminal complex, it was also home to the nation’s largest refining and transportation network. More than 50 percent of the imported crude oil that entered the United States did so through Texas-Louisiana Gulf Coast ports, refineries, and pipelines. The clincher was the fact that the Gulf Coast region—onshore and offshore—had the nation’s largest number and highest concentration of acceptable salt-dome formations. The SPR Office planned to initially use salt caverns created by industry and then begin its own solution mining, or “leaching.” As for the type of petroleum to be stored, the FEA decided against storing petroleum products. Residual fuel oil, a secondary choice of the FEA’s Project Independence Report, was ruled out because it had to be heated during drawdown; lighter fuel stocks also had to be rotated to avoid deterioration. Crude oil was chosen for its flexibility. There remained, however, the issue of what grades of crude oil to store. Choices ranged from intermediate density / high sulfur crude, to low density / low sulfur crude. In consultation with industry representatives and the National Petroleum Council, and based on linear programming models of U.S. refining capacity, and the types of oil imported, the FEA concluded that the most flexible and cost-effective mix would be about 60 percent intermediate density / high sulfur (or “sour”) crude, with about 40 percent low density / low sulfur (or “sweet”) crude. This went even beyond the Council’s 1975 Petroleum Storage report, which had recommended that at least one-third of the SPR’s oil be low sulfur in content. And inasmuch as over 90 percent of the SPR’s costs would be in oil acquisition, the FEA planned to mitigate that cost by having the cheaper sour crudes comprise the bulk of its stocks.12

46

The Strategic Petroleum Reserve

The SPR Plan did not specify specific sites, but did discuss a number of alternatives, most of them along the Texas-Louisiana Gulf Coast. The FEA had been investigating potential sites since 1975, even before the enactment of the EPCA. After more than 300 salt domes and numerous conventional mines had been evaluated, the FEA reduced the number of potential sites to twenty. These were chosen because they met selection criteria, which included locations close to major ports and distribution pipelines. The FEA had investigated three existing leached-out salt domes and five conventional mines (including the two in Ohio and Kentucky) as candidate sites for the ESR. An additional thirteen sites, all along the Gulf Coast, and needing to be leached, were recommended as potentially suitable for the remaining SPR development. Final selection would be made after additional information was obtained concerning costs of acquiring sites, related rights-of-way issues, technical suitability, and environmental impact statements. The SPR Office planned to complete ESR site selection and acquisition in January 1977, and have these sites in place by June 1977. Selection of additional sites for the full SPR would be complete after the relevant environmental impact statements had been made, and candidate sites would be submitted to Congress in the first amendment to the SPR Plan either in late 1977 or early 1978. As for total cost, the FEA estimated that a 500-million barrel reserve would run between $7.5 and $8 billion, 90 percent of that in oil acquisition and transportation costs. In the event of an oil supply disruption and a price hike, it was hoped, SPR oil would be sold significantly above cost.13 Still, there was more that the FEA had to consider. The SPR, by its very size, would become a fairly important actor in the marketplace. Decisions on the method and manner of oil acquisition, whether to impose industry inventory requirements, and who would get SPR oil in the event of a drawdown—all these actions, as well as others the SPR Office might take, could and probably would have a profound impact upon the economy. The FEA’s SPR Plan, therefore, had to take these matters into consideration as well.

OIL ACQUISITION In choosing the manner and source of oil acquisition, the FEA faced four basic choices. One was to acquire oil from the Elk Hills Naval Petroleum Reserve. Another option was to acquire royalty oil from producers on federal lands. The other two options derived from whether the FEA would choose to use the entitlements system when acquiring crude oil on the world market. Acquiring royalty oil and naval reserve

Building the Reserve

47

oil were quickly ruled out. It was deemed that using royalty oil from producers on federal lands posed too many problems. For one thing, existing contracts would have to be canceled, causing economic injury to small independent refiners who depended upon royalty oil for feedstock. For that reason, such a move would have brought a political outcry from those refiners, who were among the industry segments the government was seeking to protect through price controls, allocation, and the entitlements program. Further, royalty oil was composed of a heterogeneous mixture of crudes, not necessarily of the same density and sulfur mix the FEA had chosen for the SPR. A complex oil trading and swapping system would be needed to acquire the appropriate types. Lastly, the federal lands from whence royalty oil came were also widely dispersed throughout the nation, and transportation would have added significantly to cost. The FEA’s reservations about using Naval Petroleum Reserve oil mirrored their objections to using royalty oil. Ironically, years later, the SPR would come to contain both naval reserve and royalty oil.14 Open market purchases, on the other hand, were viewed as administratively more efficient. The complex trading and swapping system would not be needed, and with entitlements protection, they would have less of an impact on the federal budget. While there was a schism within the FEA as to whether the entitlements system should be amended to include and protect SPR purchases, the OMB, trying to keep costs down, weighed in on the side of using the entitlements protection.15 The oil acquisition process would go as follows: the SPR Office would provide its crude oil requirements to the Defense Department’s Defense Fuels Supply Center (DFSC), an established oil acquisition agency. The DFSC would then solicit offers on a competitive basis, awarding contracts based on lowest overall cost to the government. With entitlements protection, the DFSC could purchase domestic and imported crude oil from sellers, at domestically controlled prices, and then grant them entitlements protection to purchase that same amount of oil from the market. In theory, the SPR Office, through the DFSC, would thus be able to acquire imported oil at domestically controlled prices. The new FEA administrator, John F. O’Leary, contended the SPR program would save $500 million using entitlements protection.16 In an effort to expedite the program, the FEA recommended that the DFSC begin solicitation for crude oil procurement in August 1977, months before the opening of the first storage facility. For the most part, the FEA expected to use foreign oil to stock the SPR for three reasons: it was usually less expensive than domestic oil; to keep domestic

48

The Strategic Petroleum Reserve

oil available for the U.S. market; and to possibly break the unity of the OPEC cartel. According to Wayne Cuttrell, Director of Oil Acquisitions for the SPR from 1979 to 1984, this last reason may have played a decisive role. “The reasoning,” he recalled, “was that we really didn’t want to store up our own oil; we should store up theirs, and use it as a bargaining chip.” Thus through the fall of 1978, SPR oil was acquired from various foreign sources. While a significant portion—57.4 percent—of DFSC acquisitions for the SPR in that time came from the United Kingdom (the British North Sea) and Mexico, the remaining 42.6 percent came from OPEC nations Libya, Iran, Saudi Arabia, Venezuela, Ecuador, and Algeria.17

INDUSTRY INVENTORY REQUIREMENTS REVISITED The FEA’s SPR Plan also decided against implementing the IPR provision of the EPCA. Notably, the NPC had argued against industry inventory requirements in its 1975 Petroleum Storage report. The Ford administration, with its market-oriented solutions to the energy crisis, opposed mandatory industry inventory requirements as well, and had accepted the EPCA’s discretionary IPR authority only as a political expedient. Yet the IPR had its defenders in Congress, the Government Accounting Office (GAO), even the White House. Their main arguments included the proposition that placing some of the SPR’s expense on industry and consumers would relieve the taxpayer of some of the program’s costs. It would also place some of the burden of energy insurance on energy consumers, those who stood to benefit most from the program. Also, an IPR might bring conservation benefits, via demand restraint, by inflating oil prices. That is, if oil import tariffs or quotas were used to build up an IPR, that would take supply off the market, raising prices. If importers and refiners used higher-cost steel tanks for storage, that too could raise prices. Of course, such proposals ran afoul of the industry. But more importantly, by threatening to reduce or raise the cost of consumption, they ran afoul of energy consumers and endusers as well. There would be little support for and significant opposition to mandated inventory reserves, especially if they took the form of an oil import tariff. Nevertheless, the FEA commissioned a study on the issue. Completed in December 1976, that report, undertaken by JRB Associates, Inc., concluded that administering an IPR was feasible and that the cost to consumers would be less than one cent per barrel. It also concluded that the economic impact on GNP, industry investment, and competi-

Building the Reserve

49

tion would be minimal. The report questioned, however, whether the IPR would be worth the political cost. The IPR was, in essence (the report stated), a tax on industry throughput and imports. For some firms, IPR-related costs would be as high as 50 percent. Moreover, the conservation benefits of an IPR would be meager. Costs passed along from industry to consumers would reduce consumption by about 11 million barrels per year, less than 2 percent of annual consumption. A reduction of 11 million barrels per year meant little while the U.S. economy was consuming in over 17 million barrels per day.18 The FEA recognized that there would be a number of considerable obstacles to imposing inventory requirements on importers and refiners, and potentially undesirable results as well. The large number of U.S. importers and refiners, and the varying scale and scope of their operations, would make it difficult to design an IPR that complied with the pro-competition rationales of the EPAA and EPCA. In fact, an IPR would arguably hurt the very same small and independent refiners and importers that the government had been seeking to aid through price controls, supply allocation, and the entitlements program. Given the scale and diversity of the domestic oil industry, it seemed impossible to implement inventory requirements equitably and without adversely impacting competitive conditions. Moreover, an IPR would be an administrative nightmare, as the West German experience had made clear. And the United States was a much larger nation, with many more importers and refiners spread across a larger area, with more governmental bodies to reckon with. The FEA also concluded that an IPR would bring no cost savings. Industry set-asides would be small and scattered; only a large, centralized, government-owned stockpile could achieve economies of scale. Indeed, the FEA concluded that an IPR would result in higher costs to the national economy as a whole, both because they would be decentralized and because they would probably be in high-cost steel tank storage. And shifting costs from government to industry and consumers—the only apparent advantage to an IPR, in the FEA’s view—did not in itself offer significant economic or conservation benefits. And, contrary to the contention of some officials within the SPR Office, the FEA concluded that an IPR would not afford any more regional protection than a centralized Gulf Coast reserve. While promising to continue to study the possibilities of industrial reserves, the FEA in the SPR Plan concluded that the “budgetary benefits of an IPR are outweighed by the resulting [higher] national cost, by the programmatic, legal[,] and environmental problems that would result from creating such a reserve, and the potential adverse impact on the competitive environment in the petroleum industry.”19

50

The Strategic Petroleum Reserve

Moreover, the industry was united in opposition. The FEA received an indication of industry sentiment when it held a hearing on the IPR in July 1976. Of the forty-four firms and trade organizations that submitted written comments or offered testimony, only one favored IPR implementation. Importers and refiners would not, of their own volition, stockpile oil in amounts necessary for national economic security—the 1973–74 crisis had proved as much. Private industry, by and large, would keep inventory reserves only insofar as they expected to maximize profits, maintaining only the barest minimum of working stocks necessary for meeting immediate and near-term demand.20 Building a consensus within the industry on the IPR would be impossible; the July 1976 hearing had made that clear. Industry representatives argued that an IPR could not be equitably distributed upon importers and refiners and would result in a competitive disadvantage. In addition, an IPR would entail companies buying and storing reserves they did not control and ultimately would not own. At the hearing, several industry representatives suggested that the IPR would be challenged in court as an unconstitutional taking of property. Whatever the outcome of such litigation, it would inevitably delay and distract the SPR program. Industry officials also argued that, as a national security measure, the SPR should be a government program, funded out of general revenues. In a August 23, 1976, letter to L. William Seidman, Assistant to President Ford, Frank W. Bradley of SoCal (Chevron) stated that while “SoCal endorses the establishment of . . . the Strategic Petroleum Reserve . . . we are opposed to the creation of an oil industry funded Industrial Petroleum Reserve.” In argumentation that closely resembled the National Petroleum Council’s recommendations in its Petroleum Storage for National Security report, Bradley added that “[a]ny expense incurred by the industry for the reserve will divert capital critically needed for future energy development. Equitable cost recovery in the marketplace will not be possible.” SoCal officials estimated that even an IPR that required a set-aside of just 3 percent of previous annual refined products and imports (as provided for in the EPCA) would cost the industry $4 to $4.5 billion. And in a letter to the FEA that same August, SoCal’s Vice President K. T. Derr wrote that “inasmuch as the reserve’s purpose would be to protect the nation against the threat to its economic well-being,” it followed that “funding responsibility should be borne by the national economy, and not the U.S. petroleum industry.”21 Further, heightened public suspicion of the oil industry precluded significant industry participation in the SPR program. For a whole host

Building the Reserve

51

of reasons, FEA officials were determined to keep the SPR’s oil stocks totally government owned. And yet as the SPR program suffered endless delays, and its costs rose exponentially in the years ahead, there would continue to be occasional call for an industrial reserve component of the SPR. But the political and economic costs of an IPR precluded its implementation.

DRAWDOWN POLICY Another key issue the FEA had to decide was exactly when, and under what circumstances, the SPR would (or could) be drawn down. Section 161(a) of the EPCA stated that SPR oil could be drawn down upon a finding by the president that such an action was required either to counter a “severe energy supply interruption,” which the act defined to mean a “national energy supply shortage” that the president determines 1. 2. 3.

is, or is likely to be, of significant scope and duration, and of an emergency nature; may cause a major adverse impact on national safety or the national economy; and results, or is likely to result, from an interruption in the supply of imported petroleum products, or from sabotage or an act of God.22

Section 161(d) added that the SPR could be drawn down to meet U.S obligations under the IEP.23 Thus, as laid out by the 1975 EPCA, an SPR drawdown could only take place in the event of a foreign oil supply disruption or to meet IEA commitments. Other than that, the language of the legislation was fairly vague and gave the president considerable discretion. In the SPR Plan, the FEA also opted for flexibility. Given the complexities facing a drawdown decision, it was “infeasible and undesirable” to specify any precise conditions for the establishment of automatic “trigger” mechanisms. As for the drawdown rate, the FEA indicated that when the SPR reached the 500-million barrel mark, a rate of 3.3 million barrels per day would provide “the flexibility to completely replace lost imports even for severe embargo interruptions.”24 Over time, the IEA also learned the value of flexibility. As originally established in 1974, the IEA’s emergency response program, the IEP, was to be triggered if shortages in excess of 7 percent of available supply occurred in one or more member nations. In the wake of the

52

The Strategic Petroleum Reserve

second oil shock, the IEA would decide that operational decisions on implementing emergency response measures should be made and carried out on a flexible basis, whether the supply shortfall was less than or exceeded the 7 percent level. The move toward flexibility was a move away from trigger mechanisms.25

DISTRIBUTING SPR OIL The distribution of SPR oil, its price, and which firms were allowed to purchase it could also impact the marketplace and the industry. The SPR Office, the FEA, and later the Department of Energy (DOE) had some choices to make. If the highest concern for national security meant the most efficient refining and marketing of SPR oil, then distribution procedures would favor the major oil companies and the few large refining and marketing independents, with their large-scale integrated operations. If, on the other hand, national security was deemed best achieved by the promotion of a diverse domestic refining and marketing industry, then SPR oil would have to be sold to the numerous independent operators, likely at some cost to efficiency. But in late 1976, in the rush of trying to establish the reserve, the FEA and SPR Office were attempting to make the most of limited resources. They therefore spent more time focusing on the immediate issues of oil acquisition and storage facilities and spent less time with downthe-road issues, as with drawdown and distribution policies. The FEA did indicate in the SPR Plan that pricing and allocation (distribution) would be consistent with the objectives of the EPAA and the EPCA, so that there would be an equitable distribution of SPR oil, and that no region bore more than its fair share of the economic impact of a supply interruption. Three years later, in the fall of 1979, the DOE finally submitted its SPR distribution plan to Congress. Groups within the department disagreed over the proper distribution mechanism, with some officials favoring selling SPR oil at the world price and allowing market forces to determine its distribution, essentially putting forth an efficiency argument. Others wanted to integrate SPR oil distribution into the existing allocation authorities, under the EPAA and EPCA, basically putting forth an argument for equity and competition. In January 1979, the groups began to work together on an amendment to the FEA’s 1976 SPR Plan that would set forth specific distribution policies. On October 31, 1979, the DOE submitted to Congress the third amendment to the SPR Plan, on distribution and drawdown procedures. (The first and second amendments, addressed later, dealt with acceler-

Building the Reserve

53

ating and expanding oil fill.) The amendment went with efficiency over equity. The EPCA had mandated that the sale and allocation of SPR oil be in keeping with the pro-competition (equity) rationale of the EPAA. By 1979, however, the prevailing regulatory philosophy had sifted toward “free markets,” with an emphasis on efficiency over equity. The “primary purpose” of the SPR drawdown and distribution process, the amendment stated, was to “substitute for lost crude oil imports [and] for refining, on a timely basis.” The ability of buyers to transport SPR oil to refineries on a “satisfactory schedule,” therefore, would be “an important factor in selecting purchasers.” “The SPR’s petroleum sales system,” the amendment asserted, “will not be the primary means of assuring equitable nationwide access to petroleum by refiners or other users.” And once the allocation authorities expired, independent importers, refiners, and marketers would have to rely more “upon normal market operations [for] equitable distribution of crude oil and products.”26 In an effort to provide maximum flexibility, the amendment gave the SPR Office a full range of options for selling SPR oil to refiners who had basic sales agreements with the DOE. The Secretary of Energy, in consultation with the president, would then choose one of these three methods of selecting refiners eligible to purchase drawn-down SPR crude oil. That oil would then be distributed via competitive sales, in-place allocation authorities, or on some prorated basis according to historical use. If not determined by competitive sales, the price of SPR oil would be administratively set, based on the then-current average landed import price for similar quality crude oil; or, the price could be set comparatively higher or lower, whichever was deemed to be in the national interest. The DOE Office of Procurement and Contracts Management would then award SPR sales contracts in accordance with the procedure chosen by the Secretary of Energy. This move away from government allocation and toward free markets continued in 1982, with the fourth amendment to the SPR Plan, which provided that the principal method of distributing SPR oil would be through competitive sales. Drawdown rates would increase with the amount of oil in storage. When the SPR achieved 538 million barrels, drawdown rates would be 3.5 million barrels per day. With 1 billion barrels, drawdown rate could be 4 to 5 million barrels per day. Drawdown would be accomplished by injecting large-scale amounts of freshwater beneath the oil, displacing the oil from its salt cavern, out into the DOE’s transportation pipelines, then to the Texoma, Capline, and Seaway pipelines, and from there to various regional refining markets (figure 2.2).27

54

The Strategic Petroleum Reserve

ENVIRONMENTAL ASSESSMENT The FEA also considered a number of potential environmental impacts that the program might have. Arguably the most pressing issue was the disposal of the excess brine produced in the leaching process. While some brine would be retained in the salt caverns, the FEA proposed three disposal methods: sale to industry; injecting it 3,000 to 8,000 feet below the ground into porous rock below the freshwater table (so-called “deep-well” injection); and dumping it far out into the Gulf of Mexico via pipeline. The first option was limited because there were only a few firms who used brine for commercial purposes. Deep-well injection did have a number of potential problems, most notably the possibility of possible leakage into freshwater aquifers. As a result, disposing the brine offshore became the most attractive option. While the FEA recognized the potentially harmful effects of brine to marine life, it planned to mitigate the danger by disposing it via pipeline through a diffuser which would shut down if salinity exceeded acceptable levels. It would also be far enough out into the Gulf so that it was at a great distance from the bulk of marine life.28 The FEA also noted that in the past “uncontrolled” leaching of the cavern caprock had caused subsidence and consequent collapse of the unsupported overburden. Those instances, however, had been rare, and the level of the oil-brine interface could be controlled to prevent undue upward leaching. Moreover, the caverns would never be completely emptied, therefore preventing leaching at the roof of a cavern, which would lead to collapse. The risk of such a collapse, the FEA concluded, was thus “extremely low.” The FEA also deemed the environmental danger arising from SPR-related hydrocarbon emissions to be low. Such emissions would occur during oil transfer from barges and tankers to the storage caverns and during times of drawdown. But the fact that crude oil was less volatile than petroleum products such as gasoline mitigated environmental impact, as would the use of vapor flaring and vapor recovery systems.29 Oil spills in and along the Gulf of Mexico, on the other hand, were a much more distinct possibility, because barge and tanker traffic would increase significantly during times of fill and drawdown. The FEA planned to mitigate oil spills, with their adverse impacts upon coastal and marine ecosystems, by using larger (and hence fewer) tankers and by developing oil spill contingency procedures (i.e., containment boons, absorbents) to minimize environmental and ecological damage. While there were thus a number of environmental issues raised by SPR development, salt-dome storage was deemed less of a hazard

Building the Reserve

55

than other options such as steel tank or barge storage. The SPR Office probably expected to have to meet additional environmental safeguards beyond those proposed in the SPR Plan. It probably did not anticipate, however, that meeting those requirements would in itself become a major source of delay and frustration to the entire SPR program.

OBJECTIONS AND APPROVAL While there was a great political imperative to get the SPR program going, there were a number of groups and organizations both within and outside the government that had specific objections to the FEA’s SPR Plan. They made their arguments in a February 16, 1977, congressional hearing on the SPR Plan. For one, the GAO brought up a number of issues that it believed deserved further consideration. Ever mindful of keeping costs down, it urged the FEA to reconsider the use of royalty oil and / or crude oil from the Navy’s Elk Hills Reserve as less expensive sources of oil. The GAO also suggested that the SPR Office finance oil purchases through a tariff on crude oil imports or an excise tax on petroleum products. This would provide an additional source of funding so that the program would not have to rely solely on general tax revenues. At the hearing, SPR official Thomas E. Noel reiterated the arguments against the use of royalty and NPR oil and added that studies of alternative financing mechanisms were underway.30 Environmental groups objected to parts of the SPR Plan. Representatives of both the Petrochemical Ecology Committee of Louisiana and the National Wildlife Federation argued that the plan did not fully take into account the effect that SPR-related activities would have on the coastal environment. Industry organizations objected to the use of entitlements protection for SPR oil purchases. They argued that the SPR was a national security program and as such should be funded out of general revenues.31 The question of regional energy security was easily the most controversial issue at the hearing. Advocates of regional storage, including the New England Regional Council, the New England Federal Regional Council, and the New England Fuel Institute, challenged the FEA’s decision not to implement the EPCA’s RPR provision. In turn, Senator Edward Kennedy filed a resolution of disapproval of the SPR Plan. While stating that he supported the bulk of the plan, Kennedy hoped that his resolution would encourage the FEA to withdraw the amendment and resubmit it with a plan for implementing the RPR provision.32 Overcoming these objections was the sentiment that the government needed to “get oil in the ground,” and in a hurry. This sentiment

56

The Strategic Petroleum Reserve

was expressed by both public and private officials. In his testimony before the Senate Interior and Insular Affairs Committee, for example, John H. Lichtblau, Director of the Petroleum Industry Research Foundation, argued that the SPR program should be accelerated so that 500 million barrels would be in place by 1980 rather than by 1982. “[W]e must adopt . . . a crash-program approach,” Lichtblau explained, “rather than a business-as-usual one in developing our strategic petroleum reserves.”33 In a similar vein, FEA administrator O’Leary urged Congress to approve the plan so that the FEA “could get on with” the pressing matter of building the reserve. By consensus, getting “oil in the ground” was deemed a matter of national survival. O’Leary explained to the Senate committee “that there is a certain overwhelming national requirement to move forward with the storage program. We must begin the stockpiling of petroleum.” Industry representatives and other members of Congress also testified to that national imperative. O’Leary promised that the FEA would continue to consider and study alternate methods of oil procurement, financing, and regional storage, and that the FEA would submit amendments to the plan in the future, as warranted. Kennedy agreed not to press his resolution of disapproval. The SPR Plan became effective on April 18, 1977.34

BUILDING THE SPR Even before Congress had reviewed the SPR Plan, the FEA had been taking steps to expedite the reserve’s creation. In August 1976, FEA administrator Frank Zarb shortened the chain of communication between his office and the SPR Office. Zarb established the SPR Office as a separate entity within the FEA and appointed assistant administrator Thomas Noel as SPR office director. Before that, the SPR office director had to go through both a deputy assistant administrator and an assistant administrator before reaching Zarb. The SPR Office staff grew from 125 to 150 and would soon top 200. Moreover, anticipating long lead times for materials and equipment, the SPR Office began the procurement process in early December, before strategic planning, systems design, and management structures were fully in place. Zarb also established a committee within the FEA that would meet on an ad-hoc basis to resolve strategic planning issues as they came up. As the SPR Plan was being submitted to Congress, negotiations to acquire SPR sites were underway. The SPR Office planned to rely heavily on industry expertise in the systems design, management control, and project execution phases. It thus looked to contract with private architectural, engineering, and

Building the Reserve

57

construction firms with oilfield experience, for all the various SPRrelated activities. The SPR Office expected to award construction contracts in the spring of 1977 so that oil fill could commence in July or August. What the FEA and the SPR Office were attempting to undertake was unprecedented. No government or company had ever attempted to store so much oil anywhere, much less in solution-mined caverns in underground salt domes. By one estimate, a 10-million barrel reserve, 2 percent of the SPR’s projected 500-million barrel total, would fill a ten-story office building with sides the length of a city block.35

ACQUIRING STORAGE SITES In April 1977, the SPR Office, through eminent domain condemnation procedures, acquired three ESR / SPR sites—Bryan Mound, West Hackberry, and Bayou Choctaw. All were salt domes that had or were capable of having many storage caverns. They also had marine terminals on or connecting to the Gulf of Mexico and had access to nearby pipeline transportation networks. The Bryan Mound site in Brazoria County, Texas, was on the Brazos river and near the Intracoastal waterway. Before FEA acquisition, the salt dome had been owned by the Freeport Sulphur Company, which had leased it to Dow Chemical, which produced brine for its chemical operations. The SPR Office acquired four of the resulting salt caverns estimated to have a potential storage capacity of 63 million barrels. The Bryan Mound site had access to the Seaway pipeline. The West Hackberry site in Cameron Parish, Louisiana, was located on the Lake Calcasieu ship channel and had been owned by many companies, including the Olin Corporation, which produced brine for chemical operations, and Cities Service Oil Company, which had used the caverns for hydrocarbon storage. The five caverns acquired by FEA at this site were estimated to have a potential storage capacity of 61 million barrels. The West Hackberry site could tap into the nearby Texoma pipeline. Both the Seaway and the Texoma pipelines went into Cushing, Oklahoma; from there, crude oil and refined petroleum could reach other markets via other pipelines, truck, and railroad systems. The Bayou Choctaw site in Iberville Parish, Louisiana, had pipeline connections to both the Intracoastal waterway and the Mississippi River. Before FEA acquisition, it had been owned by the Allied Chemical Company, which had produced brine for their own chemical operations and leased the resulting caverns to Exxon, Shell, and Conoco, among others, for hydrocarbon storage. The six caverns the FEA acquired there were estimated to have a potential storage capacity of 94 million barrels.

58

The Strategic Petroleum Reserve

In September 1977, the FEA acquired a conventionally mined salt mine at Weeks Island in Iberia Parish, Louisiana. The Weeks Island site, also located on the Intracoastal waterway, had been conventionally mined by the Morton Salt Company since 1901. The FEA acquired the old mine the company had worked and agreed to let Morton Salt continue to develop a new mine nearby. At 72 million barrels of capacity, this “room and pillar” mine—so called because it consisted of two levels of rooms that were up to 70 feet high and 100 feet wide, which were supported by 100 square-foot salt columns—was by itself the largest single SPR salt cavern. Both the Bayou Choctaw and Weeks Island sites could tap into the Capline pipeline at the Saint James terminal in St. James Parish, Louisiana, on the Mississippi River. Capline stretched all the way to Pakota, Illinois. In July 1978, the SPR Office acquired property at St. James terminal. The St. James site would come to include a marine terminal, two tanker docks on the Mississippi river for loading and unloading oil, and 2 million barrels of steel tank storage. Including planned pipeline facilities, the site would have 4 million barrels of storage capacity. In February 1979, the SPR Office acquired the Sulphur Mines site in Calcasieu Parish, Louisiana, which had also been owned by the Allied Chemical Company. The three salt caverns the government used at the Sulphur Mines site would have a 26-million barrel capacity; the site would tap into the Texoma pipeline, the same one that the West Hackberry site would be connected to. To become fully integrated into the national pipeline system, the FEA (and then the Department of Energy) would have to build connecting pipelines from the West Hackberry and Sulphur Mines sites to the Texoma pipeline, and from the Bayou Choctaw Figure 2.1: Strategic Petroleum Reserve Sites

SOURCE: DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” DOE / FE-0214P, January 1991. Washington, D.C., DOE: 1991, 10.

Building the Reserve

59

Figure 2.2: SPR Pipeline Distribution Systems

SOURCE: DOE, Assistant Secretary for Fossil Energy, “Strategic Petroleum Reserve Distribution Systems,” October 1993. Washington, D.C.: DOE, 1993, 1.

and Weeks Island sites to the Capline pipeline at the Saint James terminal. In November 1982 and July 1983, the Department of Energy acquired the Big Hill salt-dome site in Jefferson County, Texas. These sites became the foundation of the SPR program (figures 2.1–2.3). Phase I of the program would entail the conversion of existing caverns at the Bryan Mound, West Hackberry, Bayou Choctaw, Sulphur Mines, and Weeks Island sites. Once converted for crude oil storage, these sites would provide 248 million barrels of capacity. Phase II en-

60

The Strategic Petroleum Reserve

Figure 2.3: SPR Marine and Pipeline Distribution Systems

SOURCE:

DOE, “United States Strategic Petroleum Reserve: Energy Security For America,” DOE / FE-0341, October 1995. Washington, D.C.: DOE, 1995, 10.

tailed the creation of twenty-nine new salt caverns via solution mining at those same sites, creating an additional 290 million barrels of storage capacity. Under the Carter administration’s accelerated schedule instituted in April 1977, Phase I would be complete by the end of 1978; Phase II, bringing the SPR program to 500 million barrels, would be complete by 1980. Phase III would entail the creation of 210 more barrels of capacity by acquiring a new site (Big Hill), and additional storage space was projected to be in place by 1983.36 At the insistence of James R. Schlesinger, President Carter’s energy advisor, and later the first secretary of energy, the first oil for the SPR came from Saudi Arabia. At the time, some reports speculated that Schlesinger had hoped to soften Saudi opposition to the American oil stockpile by buying oil from them for the reserve. Years later, however, Schlesinger commented that the move to use Saudi oil for the first SPR fill had not been “so much to get the support of the Saudis as it was to show that we were going ahead with the program irrespective of any opposition” that might exist from the Saudis or any other nation. And it

Building the Reserve

61

was very “symbolic” of that point, he added, “that we were using Saudi oil, which had played such a large role in the 1973–74 embargo.”37 On July 21, 1977, in a ceremony commemorating the SPR’s first oil fill, both Schlesinger and Louisiana Governor Edwin Edwards opened a valve which began the flow of 412,000 barrels of Saudi Arabian “light” crude into caverns at the West Hackberry site. One year later, the SPR’s first four sites held 32.5 million barrels of crude oil, and the SPR Office hoped to have 125 million barrels in place by the end of the year. From all outward appearances, the program was off to a fine start.38

THE LEACHING PROCESS The process of solution mining, or leaching, salt domes to create storage caverns actually began in the planning stage with a cavern design plan that took into account the size and shape of the dome and the quality of the salt. Major design parameters included cavern size, shape, and separation. The process of separation entailed planning for the structural stability of the cavern by taking a number of possibilities into account. One of these would be an injury to a cavern in the form of a crack, fault, or break in the surrounding salt strata, which was always a possibility owing to the high pressures—from 800 to 900 pounds—that the caverns are subject to at depths of 1,500 to 4,000 feet below the surface. At these depths, the surrounding pressure forces the salt into a “plasticity” that enables the extra brine to move and shift, hopefully covering any cracks in the surrounding salt structure. In this way, in the words of one SPR official, a cavern could “heal itself.” But that very same tendency for the salt cavern to heal itself led to a phenomenon known as “salt creep.” Salt creep is a slow and imperceptible process that occurs when pressure from the weight of the salt, rockface, and earth surrounding the giant caverns is greater than the pressure of the liquid stored inside them, causing the salt dome to congeal or close up. Over time, this phenomenon could endanger the structural stability of the cavern. This problem was solved by creating a “sump,” an area at the bottom of the cavern containing 1 to 2 million barrels of brine, during the original leaching process and then maintaining it during daily operations. The on-site operators would be alerted to the phenomenon of salt creep when cavern pressure became too high. In such a case, the on-site operators could relieve that pressure by cycling or bleeding-off brine out of the cavern from the sump area. Also taken into design considerations was cavern growth, which could result from cycling or rotating the crude oil. It would definitely occur during a drawdown, because by injecting freshwater to get the oil out,

62

The Strategic Petroleum Reserve

the DOE would be essentially leaching the cavern further. To some extent, cavern growth could be controlled by regulating the freshwater at different depths. The caverns that the DOE would create (as opposed to the ones they purchased) would have a twenty-year life cycle and a design that permitted them to be drawn down and refilled five times without a failure. Actual solution-mining operations began by drilling one or more wells into the top of the salt formation. To protect freshwater beds and to seal off intervening formations, the wells were lined with steel casing that began at the surface, ran through the overlying sediment and caprock, and extended into the salt. The casing was cemented into the caprock, forming a tight bond, with the bottom end of the cemented casing referred to as the casing seat. The well was then drilled to a depth of 700 meters (about 2,300 feet) below the casing seat. Three suspended concentric rings of pipe were then inserted through the cement casing and into the well: the middle pipe for freshwater injection; the innermost pipe for brine ejection; and the outermost pipe for crude oil injection. The cavern was then leached by injecting freshwater into the dome, creating a cavern by sending the brine out of the dome through one of the pipes. Early in the process, a small layer of “blanket oil” was injected into the cavern formation to float on top of the water and protect the salt roof from being dissolved. After a sufficient amount of brine was displaced, crude oil was then pumped in through a third outer concentric ring of pipe. Along with the pumped-in salt or freshwater, the injected crude also displaced the brine. Through what was sometimes a trial-and-error process, the SPR Office found out that approximately 80 to 90 million barrels of water had to be circulated to develop a single 10-million barrel cavern; officials also discovered that it took about three years (roughly 990 days) to build that cavern. Several SPR storage caverns were developed simultaneously, with oil being injected during the process. Once complete, the oil in the caverns floated on the liquid brine. To draw down the oil, freshwater would be pumped in, forcing the oil out. Most of the DOE-created salt caverns averaged about 10 million barrels of storage capacity, up to 12 million if the sump was included. Each cavern that the DOE developed would be typically 200 feet in diameter by 2,000 feet deep, large enough for one tower of the New York World Trade Center to fit comfortably inside it. To make sure that sufficient caprock was maintained, the top of the cavern would by typically 1,000 to 1,500 feet below the surface; the bottom of the cavern would be 3,500 to 4,000 feet below the surface. But as huge as the SPR storage caverns came to be, they were essentially—to use the DOE’s own language—“pinpricks” when placed in the context of the massive underground salt-dome formations along the Gulf Coast. These

Building the Reserve

63

formations, often measuring up to 5 miles across, and 5 to 10 miles deep, were the results of a process that had taken millions of years, in which ancient seas had evaporated, been covered by sedimentary rock, and then been pushed by geologic forces upward through the overlying rock (figures 2.4–2.6).39 Figure 2.4: Typical Leached Caverns in SPR Salt Domes

SOURCE:

DOE, “United States Strategic Petroleum Reserve: Energy Security For America,” DOE / FE-0341, October 1995. Washington, D.C.: DOE, 1995, 4.

Figure 2.5: Stages of Leaching

SOURCE: DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” DOE / FE-0214P, January 1991. Washington, D.C., DOE: 1991, 6.

Figure 2.6: SPR Caverns Size Comparison

SOURCE: DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” DOE / FE-0214P, January 1991. Washington, D.C., DOE: 1991, 5.

Building the Reserve

65

THE SETBACKS BEGIN In early 1977, the FEA had to abandon its plan to have 10 percent of the SPR, or 50 million barrels, in place by June 1977. Requisite storage capacity would not be in place; perhaps neither would the oil to fill it. And while oil did begin to flow into the first four SPR sites in July 1977, by mid-1978 it had become clear that the SPR program would not be able to meet its fill schedule. By July 1978, the SPR Office had stored 32.5 million barrels in the Bryan Mound, West Hackberry, Bayou Choctaw, and Weeks Island sites. Ultimately, by the end of 1978, the SPR had 67 million barrels of crude oil in storage, considerably short of the goal of 150 million barrels set forth in the SPR Plan. In November 1978, the SPR Office established a more realistic schedule, which called for 500 million barrels to be in place by 1985 rather than by 1982. It would be well into the 1980s before the SPR program began to meet its original stockpiling goals. What went wrong? The answer included a whole host of technical / physical, organizational / bureaucratic, and political problems, which all intertwined and negatively reinforced each other. One particular source of trouble was the government’s gamble on a cost-schedule trade-off. The Congress, the White House, and the media all placed severe pressure on the program to “get oil in the ground.” This became the mantra for the SPR Office. The pressure to get oil in the ground as soon as possible led SPR officials to try to remove all possible sources of delay. Ironically, hurried efforts to avoid delay often helped bring about that very result. Anticipating long lead times for materials procurement, SPR officials decided to begin the process in December 1976, just before the FEA had submitted its SPR Plan. Officials began to develop specifications for equipment and materials, such as pumps and pipes, before strategic planning had taken place, storage sites were chosen, and systems designs were developed. Preliminary design and cost estimates incorporated into the SPR Plan, completed by officials without engineering and / or petroleum industry backgrounds, had not fully anticipated the range of technical problems and consequent higher costs that would arise. Moreover, available resources were spent in project execution to the neglect of management oversight. As project development proceeded in 1977 and 1978, management systems failed to fully account for or control costs. The SPR Office, however, was willing to endure some costs overruns to achieve near-term energy security. That cost, however, in terms of flawed systems design, faulty equipment, inappropriate management structures, and unanticipated on-the-ground setbacks resulted

66

The Strategic Petroleum Reserve

in financial costs that were much higher than expected. Delay and cost overruns, in turn, led to criticism and political problems.40 Political pressure to get oil in the ground also led to problems in the contracting system. Prior to the SPR program, most FEA procurements had been for studies and research. As a new agency without much experience in contracting with the private sector for materials, equipment, construction, and services, the SPR Office likely would have ran into some snags even under a slower-paced schedule. A large number of the firms participating in SPR equipment and construction contracts were unfamiliar with government procurement procedures and the relevant federal procurement regulations. This resulted in a lower than expected number of bids for some procurements, unresponsive bids, a need to re-advertise some procurements, and extended negotiations with firms that did respond. In addition to contracting for analytical, design, and management services, the SPR Office had to initiate and monitor eighty-five major construction efforts at various sites in the first year of SPR development. The fledgling agency was soon stretched thin. Political pressure to get oil in the ground also created problems in the procurement process. For example, to facilitate early fill, the SPR Office procured used and nonstandard pump systems purchased on an availability basis. Some of the older pumps were difficult to maintain and frequently fell into disrepair. And since many of them were nonstandard, architects and engineers had the difficult task of designing around them. In turn, lack of standardization led to other maintenance problems. Pressure to get oil in the ground also led to the barging of crude to sites before pipeline systems were in place, resulting in delays and higher costs. When anticipated salt-cavern storage capacity turned out to be unavailable, the expedited shipments brought demurrage charges, because there was no place to put the oil. Sometimes the unpredictable Gulf Coast weather prevented barges from docking at marine terminals, bringing additional demurrage costs.41 The SPR Offfice in Washington, and then the newly created SPRProject Management Office (PMO) in New Orleans, had more procurement and contracting decisions than they could deal with on a timely basis. For an established agency with slack resources, such challenges might have been met more easily. The SPR-PMO staff of roughly 125 in New Orleans had been hired for their experience in contracting with the private sector. Still, making the necessary contractual and procurement decisions in the short time frame provided, while establishing the PMO, proved to be a daunting task. “It was obscene,” said Ted Siomporas, who had been Director of Procurement at the SPR-PMO in

Building the Reserve

67

the late 1970s and early 1980s. “The biggest problem we had,” he later observed, “was schedules. All these activities had to be worked against an integrated schedule, and we had no really interrelated software. So it took a lot of work just trying to keep a grip on what the demurrage would be, if you delayed bidding on a particular construction project. It was quite intricate, and we didn’t have the tools that you would have today, or the sophistication.”42 The DOE tried to streamline the process in 1977 by renegotiating several of the former FEA contracts. In particular, the DOE wanted to change and increase the role of the construction management contractor, Parsons-Gilbane, from one of background support staff to serving as the overall integrator and schedule master, under DOE supervision. Under the new approach, Parsons-Gilbane and other contractors would be responsible for building the SPR facilities by hiring local subcontractors to design and construct the SPR facilities. Theoretically, this would have enabled the SPR-PMO staff to focus on planning, monitoring, and approving Parsons-Gilbane’s major subcontract awards and administration. “The problem,” Siomporas later observed, “was that we were partially pregnant, because the die had been cast with the long lead times, so the construction manager was like picking up the pieces, and essentially all you were doing was transferring a project in process, as laid out by the government people, to the contractor.” In addition, the civil service constraints “made it very difficult to bring in enough people. But the biggest problem that we had was that we inherited a project that was in process, the die was cast by the FEA, and the schedule was unrealistic.”43 The situation was ripe for fraud and contractor abuse. In the very early days of the program, it may have been that because contractors answered directly to the FEA on cost overruns, and not to the SPR Office, the firms in question often did not have a strong incentive to monitor costs stringently. Following that, the SPR-PMO’s policy of granting greater overall responsibility to the primary contractor created a further opportunity for fraud and abuse. Investigations by the FBI, the U.S. Inspector General’s Office, and congressional committees revealed extensive fraud. They found that there was a serious lack of effective property management, record keeping, quality control, and quality assurance systems within the program, which placed too much reliance on the primary contractor, with too little oversight. Examples of contractor fraud and abuse abounded. Materials were stolen before they arrived at the various sites; used valves were sold to the government as new; and drill bits were sold, stolen, and then leased or sold again to the government. In some cases, the government purchased

68

The Strategic Petroleum Reserve

the same drill bits twice; in others, the SPR program paid new drill bit prices for used drill bits. Two federal grand juries were called in to sift through the evidence. In a number of cases, indictments were brought and convictions obtained against contractors and subcontractors. In one case, the top property management official with Parsons-Gilbane, the primary contractor, was sentenced to five years in prison for stealing and selling eighteen truckloads of SPR equipment, at an estimated cost of $427,000, that the government had held in stock at the West Hackberry site. In another case, one employee of a contractor pleaded guilty and another was indicted in the theft of a half million dollars worth of pipe. A supplier who changed the manufacture date stamp on valves to indicate that they were new—while they in fact dated back to the 1920s—received a conviction and jail term.44 On another occasion, in 1977–78, it was alleged that one contractor defrauded the government by substituting, according to different reports, 9 million barrels of either hazardous and toxic wastes, or lower caliber crude—so-called “slop” or “sludge” oil—for $8 million worth of higher-caliber crude oil originally earmarked for the Bayou Choctaw SPR site. According to one field auditor for the Louisiana Office of Conservation, the contractor in question had made away with the oil the DOE had purchased and substituted waste materials, which had then been pumped into the Bayou Choctaw salt dome. The charge was repeated, and made national, on ABC’s 20 / 20 news program in the fall of 1979. It was a charge that DOE officials steadfastly denied. At the worst, they contended, their investigations had proved that the government might have acquired a lower grade of crude oil than it had paid for. “In the early days, we did not really have the tight controls over quality and quantity measurements that we needed,” recalled John W. Bartholomew, who in his seventeen years with the program spent time both in Washington, D.C., and New Orleans. “And so you’d have barges come in, or tankers, and they would pump their sludge out, out of the bottoms of their tanks. You’d get your tanker of oil, but they wanted to get rid of their sludge too. And so, a lot of tank and barge bottoms got pumped into the SPR. It wasn’t a problem from a quality perspective, because the waste would settle out in the bottom of the cavern just like it did in the tanks. That was the worst case scenario—that there were some tank bottoms or barge bottoms that got pumped into the SPR. In the early stages of the program, things were moving so fast and furious that we weren’t dotting ‘i’s, or crossing ‘t’s. We didn’t have documented evidence that we had our act together, and therefore it fueled some of the allegations that we couldn’t refute cleanly.” Later investigations,

Building the Reserve

69

which sampled crude oil from the caverns in question, refuted the allegations about “junk” oil. But the belief that the SPR was filled with undesirable crude oil lingered for many years and was part of a series of events that brought the program’s credibility into question.45 In some cases, the FBI and the PMO staff worked together—including wiretapping the field office telephones—in order to catch contractors attempting to defraud the DOE. At one point, in the late 1970s, the PMO had over two dozen fraud investigations going on with either the Inspector General’s office or the FBI involved. In over a dozen of these cases, the FBI referred the contractor to the U.S. Attorney for prosecution. “And smack dab in the middle of all this,” recalled Siomporas, “we were still trying to get the contracts written, and get the construction work done. It was unfortunate that this was a federal program, because this was typical of practices of construction in the oil patch . . . because when it becomes a federal program, people don’t know any different, but now you’re subject to the federal jurisdiction and the FBI for doing things where previously all you had to deal with was the Parish Sheriff.” The instances of fraud and abuse in the SPR program, Siomporas recalled, “were easily twenty times, maybe a hundred times greater,” than other federal programs he had worked in. “It was like every other day, something new would come in. In many cases, it was just small stuff. But also in many cases, it was real enough to get the federal attorney involved, who then came up with indictments.”46 The SPR Office also encountered a number of problems with some of the first salt caverns it acquired. To get Phase I of the program going (to 250 million barrels of storage capacity), the SPR Office acquired existing underground salt caverns from Allied Chemical, Dow Chemical, and Olin Corporation. Many of these caverns—those at the Sulphur Mines site in particular—required high maintenance and posed endless problems. These caverns had been developed as a result of an uncontrolled leach and fill efforts and were the by-product of industrial development of brine. They had not been created with hydrocarbon storage in mind. Subsequent hydrocarbon storage by oil companies had been raised as a possibility only afterwards. A number of these existing salt caverns were not initially suitable for crude oil storage; they had to be inspected and modified, and in some cases, leached further. With the assistance of scientists from the Tulsa-based firm of Fenix and Scisson, and also the Albuquerquebased Sandia National Laboratories, and employing sonar technology, the SPR officials examined and inspected the existing (Phase I) caverns. The SPR Office preferred to have, and would have when they contracted to create their own caverns in Phases II and II, a carrot or flower-pot

70

The Strategic Petroleum Reserve

shape to underground salt caverns. Some of the existing Phase I caverns, however, had shapes that, in the words of SPR officials, were more like a flat pancake, or saucer, or donut; there were even some with a Christmas tree-like shape. These were rejected. Often, these caverns were too shallow to support oil storage under the 600- to 800-pound pressure range the SPR Office deemed most desirable for underground oil storage. Some of the existing caverns had numerous wells left over from the chemical companies’ solution mining; they too failed to hold pressure at the desired levels.47 All of this led to the loss of a significant amount of planned storage capacity. Roughly 25 percent of the salt caverns purchased turned out to be unusable. At the Bryan Mound and Sulphur mines site, the amounts lost were relatively small, about 2 to 3 million barrels at each site. At the West Hackberry site, however, the loss turned out to be nearly 10 million barrels of capacity. The largest loss of expected capacity was at the Bayou Choctaw site, where 38 million barrels was lost when a number of caverns failed to hold pressure. In addition, another 20 million barrels of capacity were lost at Bayou Choctaw when the state of Louisiana, in an effort to protect local firms which depended on leasing cavern space to petrochemical companies, protested their displacement by the SPR program. The Weeks Island site, a conventionally mined salt cavern, turned out to have 14 million barrels less capacity than anticipated. Operations at that site were further held up by the fact that the SPR Office agreed to let the Morton Salt Company continue operations at the old mine for a time before oil fill began. Altogether, 87 million barrels of expected storage capacity turned out not to be available. And when the anticipated capacity was not there, the SPR Office had to postpone and delay scheduled barge and tanker deliveries for approximately a year and a half. The loss of expected storage capacity was compounded by the accelerated oil delivery schedule. As oil-filled barges waited at Gulf Coast ports for storage capacity to become available, the SPR Office incurred over $7 million in demurrage costs by the end of 1978. Then a GAO study completed in August 1978 added further uncertainty by questioning the long-term structural suitability of six of the SPR’s nineteen salt caverns. The GAO feared that many of the caverns might grow together. The report also questioned the safety of the Weeks Island mine and found contractors’ methods of testing salt-cavern pressure wanting. A Bayou Choctaw salt dome turned out to have no salt roof, raising concerns about its structural stability; a study needed to be done before construction started there. John Scango, Assistant Project Manager for Engineering in this time, later noted that “[w]e didn’t have the luxury

Building the Reserve

71

of creating our own caverns at the time.” Referring to the White House, Congress, and the upper tiers of the FEA, he added that “they wanted to store oil right now.” Thus the decision to use (pre)existing caverns, particularly at the Sulphur Mines site, that were less than optimal. “Those were the ones that were available,” Scango added, “and those were the ones we used.”48 When the SPR Office embarked upon Phase II of the program, to 500 million barrels of total storage capacity, it would create its own salt caverns, and do so more systematically, with large-scale crude oil storage its first and foremost objective. Most DOE-created caverns would be on the order of 10 million barrels of capacity each. Traditionally, the storage capacity of most individual salt caverns used by industry had been less than 1 million barrels; a few had been as large as 4 million. Thus while underground salt caverns had been used for petroleum storage since the 1950s, the scale of the SPR program presented new challenges. In Phase II, the SPR Office had to create at least twenty-eight salt caverns that had, on average, a roughly 10-million barrels capacity—more than twice as large as those normally used by industry. This presented even more engineering, construction, and solution-mining challenges. “Our biggest problem,” Scango recalled, “was the size issue.” It was necessary to make huge extrapolations from previous saltdome storage experiences, large scale-ups, and predictions of the sort that had never been tried before. “We were talking about monumental increases in quantities, compared to what had been done before. We had to move more oil and store more oil,” Scango added, “than had ever been done before.”49 There was much the SPR Office and its contracting firms did not know about long-term crude oil storage in underground salt caverns. To learn more, in 1978, and for a number of years thereafter, SPR officials traveled to West Germany to observe the results of their storage program, underway six years at that point. The West Germans, and to a lesser degree the French, had used underground salt caverns as the storage medium for their oil stockpiling programs. But, in some ways, the German experience would be incomparable to what the SPR Office wanted to do. First of all, the German program involved storing 30 million barrels of oil in underground salt caverns (more would be placed in other storage media); the SPR would have at least 500 million barrels in salt caverns. Many of the things the SPR officials learned from the West German program had to be extrapolated exponentially. Moreover, German environmental restrictions were not as stringent as those in the United States, and thus the issue of brine disposal was not as big a problem for the German program as it would be for the SPR.

72

The Strategic Petroleum Reserve

Nevertheless, SPR officials looked at the solution-mining process the Germans had used, and liked what they saw. John Scango was one of those who made the trip to West Germany. “We went over and looked at [their program],” he later said, “and clearly, that was the engineering we wanted.” A German engineering firm, Kavernen-Bau-Betriebs (KBB), had developed the engineering concept for the West German storage program. In 1978, the Department of Energy hired the joint venture of PB / KBB, an alliance of the German firm KBB and ParsonsBrinckerhoff, a New York-based engineering firm. The joint venture assisted SPR officials in their efforts to develop computer programs that would model the leaching process and monitor the caverns after they had been created. The PB / KBB venture also helped periodically inspect and recertify the caverns thereafter. Together, the SPR Office and PB / KBB established entirely new testing and certification procedures for the SPR’s exceptionally large salt caverns.50 The SPR Office also turned out to be overly sanguine in their projected brine disposal rates. About eight barrels of brine would be created for every storage barrel produced; with an ultimate goal of 1 billion barrels, roughly 8 billion barrels of brine would be produced. The SPR Office had hoped to dispose of 30 million barrels per day for each well; in practice, rates of only 10 to 15 million barrels per day were possible. A number of factors led to the drastically reduced disposal rate. Technical problems such as inadequately dissolved brine and clogged well and filtration systems slowed disposal rates. “[W]hen we started to pour the brine that was in these caverns out to let the oil in,” Project Manager Joseph R. DeLuca lamented, they found that “the brine did not dispose.” The SPR Office had projected the design rate for the disposal beds—the deep injection wells—to be about 30,000 barrels per day, but the SPR field officials quickly found that the actual rates were 10,000 to 15,000 barrels per day. “So immediately our disposal of brine was cut 50 percent, and that had to back up the oil. The pipelines were working, the pumps were working, the pressures were working, but we couldn’t swallow the brine.”51 The SPR program also ran into a number of construction delays. The leaching process itself turned out to take longer than anticipated. Salt properties at the site turned out to have a much higher insolubility than the SPR Office had expected. This meant leaching larger sumps, and the longer leaching time held up oil fill by almost six months. In addition, labor problems between contractors and their employees brought on court-ordered injunctions, halting construction at the West Hackberry, Saint James, and Bryan Mound sites for a number of weeks. Construction of the government pipeline that would connect the West

Building the Reserve

73

Hackberry site to the Texoma pipeline was also delayed by an injunction over right-of-way disputes. Ultimately, Phase I facilities projected to be in place by the end of 1978 were not completed until September 1980.52 And as the SPR Office went through project execution, it discovered that it had to add fire-fighting systems and other safety precautions. On September 21, 1978, a blowout at the West Hackberry site’s cavern number six caused an explosion and fire, killing one worker and seriously injuring another. The fire burned for five days before it was fully extinguished. A channel had to be dug from the adjacent Black Lake to the salt cavern to furnish water for fire-fighting efforts. Roughly 72,000 barrels of crude oil were released, approximately 52,000 of which were recovered and stored in another cavern at the site; some of the oil, however, escaped into the adjacent Black Lake before containment booms were deployed. The accident cost the SPR Office an additional $15 million in lost oil, equipment damage, and fire-fighting and cleanup services. The DOE accident investigation committee found that while the failure of an inflatable packer (used to control the flow of mud and oil in pipes) started the chain of events, the disaster was compounded by the “failure to follow the written workover procedure, an inadequate safety valve on the rig, and inadequate emergency response equipment and procedures onsite.” The underlying cause, the committee concluded, was “inadequate attention to critical safety problems, procedures, and emergency response capability.” Some blame was laid on the management approach of the firm Parsons-Gilbane, the on-site construction management contractor. But the investigation committee did not spare the DOE or the SPR Office. Their primary “deficiency” included “a policy of giving predominant priority to getting ‘oil in the ground’[,] which was allowed to override prudent safety and contingency planning and implementation.”53 While the fire was certainly a “catastrophic event,” as one SPR official later put it, one thing that it did show was the value of using underground salt caverns for storing oil on a large scale. Nearly 6 million barrels of crude were stored in the West Hackberry cavern number six at the time of the fire, the equivalent of over a dozen steel tanks that the industry often used for storage, which usually had a storage capacity of 500,000 barrels of oil each. If a similar fire had taken place in such a commercial environment, the results might well have been much more horrific. In the case of the West Hackberry fire, roughly one half of one percent of the oil stored was lost. Roughly half of this amount was consumed in the fire and evaporation; most of the rest was recovered in retrieval efforts. In fact, the fire-fighting response team at the West

74

The Strategic Petroleum Reserve

Hackberry site, after having determined that the oil was coming out of the ground based on the natural pressure of the cavern, decided not to attempt the hazardous task of capping the well, but decided instead to let the cavern pressure reach equilibrium and allow the fire to burn itself out. With proper equipment, underground salt-cavern storage was proven to be a safe and environmentally acceptable method of storing large amounts of oil. These positive aspects of the consequences of the West Hackberry fire were recognized only in the longer term and did nothing to mitigate the tragedy of what happened in the fire. In the immediate term, the problems continued to mount. The SPR Office found out that additional marine terminal facilities would be needed; so would more cavern entry and brine disposal wells. More containment dikes around cavern entry wells were needed as well. Drilling costs turned out to be more than double previous estimates. The SPR Office discovered that planned instrumentation, drawdown, and distribution systems were deficient and had to be upgraded. It also failed to realize that it needed to rinse drill rigs constantly with freshwater to prevent anhydrites—impurities in the salt—from corroding the drill strings. In the early 1980s, the program would have similar problems with anhydrites dissolving, or “scouring,” a groove into and through the brine disposal pipelines. In both cases, equipment had to be replaced much sooner than expected. Such needs might have been better anticipated if more strategic planning had preceded project execution. Thus to a large extent, the cost-schedule gamble was lost. Unanticipated problems held up project development and increased costs exponentially. Operations were also slowed by phenomena that were wholly unpredictable, including hurricanes, floods, and the mating seasons of Louisiana alligators and brown pelicans. The SPR Office also had the immensely challenging task of creating an organizational bureaucracy capable of acquiring millions of barrels of crude oil, storing it thousands of feet underground, and drawing it down in an emergency. Management and performance control systems had to be established and improved; so did systems engineering. The staffing of the SPR Office in Washington, D.C., and then the Project Management Office in New Orleans took time. Employees had to be trained, and experienced personnel had to be acquired—even while OMB placed the Department of Energy under a hiring freeze.54

THE POLITICS OF LOCALISM AND ENVIRONMENTALISM In addition to these physical and technical problems, the SPR also encountered a great deal of political opposition which further delayed

Building the Reserve

75

the program. As had been the case with the Naval Petroleum Reserves and the Petroleum Reserves Corporation, state governments, their representatives, and other local interests protested various aspects of the SPR. These groups proved quite adept at using federal policies and statutes, particularly environmental protections, to make sure that the program conformed with local concerns and needs. One of the biggest controversies stemmed from the federal government’s policy of acquiring land via eminent domain / condemnation. Eventually, over 200 miles of pipeline right-of-way was acquired in this fashion, involving some 500 individual sections of land and several thousand individual landowners. Louisiana landowners claimed that oil and gas companies had traditionally paid much more for right-of-way than the federal government was offering. The SPR Office had to enter negotiations with hundreds of affected property owners, many of whom opposed the government’s actions. Ultimately, the DOE went into federal court to seize the land through condemnation proceedings. In many cases, properties were not acquired until further negotiations had occurred even after judicial proceedings. The DOE obtained the rights to the land it needed, but it left a lot of hard feelings among Louisiana landowners. That resentment created a political climate wherein a local versus federal control controversy could flare up. Decrying the federal government’s methods and tactics, Louisiana Governor Edwin W. Edwards led a virtual one-man crusade to block the SPR program until its actions were consonant with state interests. In the process of creating the sites, Edwards accused the DOE of ignoring the environmental protections that the state and the federal government had been trying to inculcate. The DOE’s actions pursuant to the SPR program were “the perfect demonstration of federal hypocrisy,” he said. “They completely bypassed state laws which they themselves encouraged that we establish,” said Edwards. “And so we stopped them by using some of the very tools that the government sometimes uses, and that is environmental protection.” SPR politics became the politics of cooperation for concessions. Thus Edwards, along with other state officials, was able to use U.S. Corps of Engineers regulations, which were sensitive to the concerns of state governments, to block and delay the program through adjudicatory hearings.55 In December 1977, Edwards objected to the Corps’ issuing of permits for oil pipelines that would serve the Weeks Island and West Hackberry sites, in an effort to ensure that local property owners received appropriate compensation for their lands. Finally, in February 1978, Edwards removed his objections after reaching an understanding with DOE Deputy Secretary John F. O’Leary about SPR implementation in

76

The Strategic Petroleum Reserve

Louisiana. Ultimately, in return for the state’s cooperation, the SPR Office agreed to take no measures that would result in the loss of local jobs and to meet local environmental concerns. Condemnation agreements at Bayou Choctaw and West Hackberry provided that the former owners, Allied Chemical and the Olin Corporation, could continue to produce brine even after federal acquisition, an action the GAO feared would damage the caverns. In order not to deprive local firms of leasable salt-dome storage capacity, the SPR Office agreed to relinquish storage capacity at the Bayou Choctaw site. In order not to disrupt the roughly four hundred local jobs associated with the Morton Salt Company’s operations at Weeks Island, the SPR Office let the company for a time continue to work the old mine, the one that the SPR Office would ultimately acquire. That concession led to an eleven-month delay at that site. The SPR Office also agreed to let Morton continue to work a nearby salt mine while SPR operations began. In effect, both Morton and the SPR Office would jointly utilize the Weeks Island site. This agreement required development of alternative mine conversion plans to allow joint utilization of the mine shafts. In addition, the Louisiana Department of Natural Resources objected to a proposed water intake system on Black Lake, adjacent to the West Hackberry site, on the grounds that it would lead to “the impingement of shrimp larvae” in the intake screen, causing a deleterious effect upon the shrimp harvest. The SPR Office relocated the water intake system on the Intracoastal waterway, over 4 miles away, at an additional cost of $8.8 million dollars.56 There was also wrangling over where the DOE would locate the SPR-PMO. Originally, the DOE had planned to locate the field office in Houston. But to work things out with Edwards, the federal government agreed to place the PMO in Louisiana, just outside New Orleans. Years later, one DOE official who had been an original member of the PMO staff in New Orleans indicated that the agency’s decision to locate the SPR field office in Louisiana had also been part of a “quid pro quo” under which the DOE obtained the requisite permits from the Louisiana State Environmental Protection Agency to build a pipeline across the Atchafalaya Basin. In return for all these concessions, or on these conditions, Edwards ceased his resistance to the SPR. Some DOE officials viewed this compact in more one-sided terms. “Edwards didn’t agree,” said Harry A. Jones, who had been Deputy Assistant Secretary for the SPR in the early 1980s. “He insisted on it. He strong-armed the DOE. We called it a treaty.”57 In fact, Edwards objected to the basic concept of the SPR program, which he deemed to be an example of wasteful federal spending. But the

Building the Reserve

77

DOE’s decision to locate the SPR-PMO in Louisiana, along five other storage and terminal sites, would inject large amounts of federal funds into the Louisiana economy. This helped cement the understanding between the DOE and the Louisiana state government. “If the federal government is going to pour money down a rat hole,” said Edwards, “I would just as soon it be a rat hole in Louisiana.”58 But it was not just Edwards who raised objections. Fishermen’s and environmental groups objected to the FEA / DOE plans for disposing brine out into the Gulf of Mexico. In this case, physical-technical setbacks led to more political problems, which created further delay. The SPR Plan had called for displaced and created brine to be disposed of via deep-well injection in the short run and dumped out into the Gulf of Mexico in the long run. But it turned out that many of these underground wells could not absorb the brine as fast as had been hoped, and there was just too much brine to be injected into the ground without raising serious environmental concerns. Thus, the bulk of the brine would have to be disposed offshore. In April 1977, the SPR Office applied to the U.S. Environmental Protection Agency (EPA) for a permit to discharge brine from the Bryan Mound site through a pipeline and diffuser, 5 miles out into the Gulf of Mexico. It would later seek to build a brine pipeline from the West Hackberry and Big Hill sites as well. There were no EPA guidelines on ocean discharge at the time, so the SPR Office sought the advice of a panel of experts assembled by the National Oceanic and Atmospheric Administration. The panel conducted studies of the biological life in the Gulf, at distances of 5 miles and 12.5 miles out from the shoreline. The panel found no significant biological differences between the two distances and concluded that there would be minimal ecological impact from discharging the brine 5 miles out into the Gulf. An EPA consultant supported these findings. Gulf coast fishers and shrimpers, however, feared possible damage to the ecosystem and the potential impact upon their livelihoods. Local groups such as the Gulf Coast Fishermen’s Environmental Defense Fund and the Texas Environmental Coalition took scant note of expert approval from Washington, D.C. At a meeting arranged by DOE officials at Freeport, Texas, in September 1977, fishermen’s and environmental groups demanded that the brine pipeline and diffuser be built at the farther distance of 12.5 miles out in the Gulf and threatened to request adjudicatory hearings. A number of other town meetings and hearings along the Gulf Coast on the issue provoked similar opposition. In view of local sentiment, the EPA’s regional office agreed to the 12.5-mile distance. It also became necessary to file additional

78

The Strategic Petroleum Reserve

environmental impact statements with and obtain permits from the EPA. More than a year later, the SPR Office agreed to the farther distance. Final agreement on a monitoring plan was not reached until August 1979, twenty-eight months after the original permit application. And to fully assuage environmental concerns, the Bryan Mound brine disposal pipeline was extended 14.5 miles out into the Gulf. The SPR Office estimated that the extra pipeline and its delayed construction cost an additional $28 million. Similar, if lesser, delays lay in store for the brine discharge systems at West Hackberry (twelve months) and Big Hill (three months). The SPR Office hired scientists from the Texas A&M Research Institute and McNeese State University to go out in boats and monitor the brine discharge plumes in the Gulf. Ironically, they found that there was little if any environmental or ecological damage, and that coastal shrimp were actually attracted by and migrated to the diffuser, especially in the winter, when the brine discharge provided comparatively warmer waters. And as some shrimpers had predicted, the increased salinity aided the shrimp-catching industry. Huge amounts of rainfall in the Gulf coast region in the latter 1970s injected large amounts of freshwater into the Gulf of Mexico, driving the shrimp farther offshore in search of “saltier” water. The SPR brine discharges brought them back into waters closer to land. The shrimp migrated to the SPR brine discharge diffusers, and the shrimp boats followed them there, sometimes creating problems. “I can’t tell you,” one SPR official later remarked, “how many shrimp nets we’ve had hung up on our diffusers.”59 But the safety of the SPR’s brine discharge system would only be proven over time. In 1977 and 1978, the SPR Office was confronted with opposition and delay. As a result, only about half as much brine could be disposed of as anticipated, holding up the fill process, which led to further delay and increased costs. The SPR Office was confronted with excess brine and no place to put it. Joseph DeLuca, who became SPR Office director in mid 1978, commented that “[f]ive months ago I did not know what the hell brine was . . . [n]ow I live with it.” In turn, a much lower rate of brine disposal meant that the leaching process had to be slowed. That, in turn, constricted oil fill rates. The SPR Office estimated that storage of 20 million barrels of crude was lost in 1978 due to brine controversy.60 In fact, for the better part of its first two years, the SPR Office devoted considerable resources to meeting environmental regulations and obtaining permits. The process itself became a major source of delay. Between April of 1977 and the end of 1978, the SPR Office completed a programmatic environmental impact statement (EIS); nineteen

Building the Reserve

79

site-specific environmental impact statements; and four additional EIS, in keeping with the National Environmental Policy Act of 1969. In that time, the SPR Office obtained four permits for the discharge of substances into surface waters; fourteen permits from the Corps of Engineers for dredge and fill operations in navigable waters and wetlands; and a number of other similar permits from state agencies. Even without any outside opposition, the process would have slowed SPR development. Taken together, all the physical and technical setbacks and politically induced delays forced the SPR Office to readjust its projected cost for 500 million barrels by an additional $705 million from $766 million, estimated in 1976, to $1.47 billion, estimated in 1978.61

ACCELERATION AND EXPANSION In the wake of the first oil shock and enactment of EPCA, oil markets had stabilized, although prices remained high. But in the immediate years after 1975, the United States became more, not less, dependent on foreign oil. In fact, the country became more dependent than ever before with imports of crude oil filling nearly half, 47 percent, of U.S. energy demand, up from 36 percent in 1973. Notably, some 45 percent of that foreign oil came from the Arab producers. In February 1977, U.S. oil imports reached an all-time high of nearly 10 million barrels per day. Jimmy Carter came into the presidency more aware of the nation’s energy woes and more committed to solving them than any other president in U.S. history. In the campaign of 1976, he had pledged to have an energy plan submitted to Congress within the first ninety days of his administration. Even before the 1976 election, Carter met with James R. Schlesinger, an economist who had served as Chairman of the Atomic Energy Commission, Director of the Central Intelligence Agency, and Secretary of Defense in the Nixon and Ford administrations, to formulate this plan. Perhaps more than anyone else, Schlesinger had made his mark in public service by stressing the economic aspects of national security. In the early days of the Carter administration, Schlesinger served as the president’s chief energy advisor. Later, he would become the nation’s first Secretary of Energy. During the preparation of what would become Carter’s National Energy Plan (NEP), Schlesinger persuaded the president to accept an acceleration and expansion of the SPR program—250 million barrels by the end of 1978, 500 million barrels by 1980, and 1 billion barrels by 1985. In the plan, Carter would also call for the United States to scale back its oil imports to 30 percent of its oil consumption. “We didn’t know,” Schlesinger later commented,

80

The Strategic Petroleum Reserve

“how successful we would be in getting that percentage down.” And as Carter later wrote in his memoirs, many Americans “deeply resented that the greatest nation on earth was being jerked around by a few desert states.” A 1-billion barrel SPR would, Schlesinger and Carter decided, go a long way toward mitigating the source of that resentment—energy dependency.62 It may have been true that Schlesinger’s experience as defense secretary led him to believe that in a program dealing with national security, personnel and resources could and would be redirected following a presidential edict. But the staff and resources of the SPR Office were already being strained under the SPR Plan of 1976. As it turned out, expecting both an acceleration and an expansion of the SPR program without a substantial increase in staff, funding, and other resources was unrealistic. “What they did not do,” said FEA Assistant Administrator and SPR Office Director Thomas E. Noel, “is fully consider in a pragmatic, practical way what the impact of . . . scratching out 150 [million barrels] and writing 250 [million barrels] might have.”63 But with analysts warning of another energy crisis, the president agreed to the Schlesinger plan. “The one billion barrel goal,” Schlesinger later commented, “seemed to me to be a very modest objective, given the kinds of objectives that we had previously set for the United States after World War II with regard to the strategic reserves of copper and manganese.” Following the war, these and other critical materials had been stockpiled with the purpose of supplying the United States through a three-year war. As compared to the FEA’s original schedule, Schlesinger observed, “the petroleum reserve was quite modest in relation to that, because it would have only sustained us for three or four months, given the level of imports at the time.” Years later, Schlesinger allowed that the acceleration and expansion amendments had the effect of straining an already over-burdened SPR Office.64 At the time, however, the political pressure to reduce America’s growing dependence on foreign oil superseded all else. On April 18, 1977, in a televised broadcast from the White House, Carter announced his National Energy Plan, whose broad goal was to wean Americans away from their over reliance on oil. In the address, Carter called for price decontrol and deregulation, with the idea that letting prices rise would dampen demand and encourage production in the U.S. and nonOPEC areas. The president also called for increased use of alternative sources such as solar energy. But the stockpiling of crude oil remained as appealing as ever. On April 20, the president submitted his NEP to Congress. Among other measures, he called for a 1-billion barrel SPR to be in place by 1985.65

Building the Reserve

81

On May 25, 1977, the SPR Office submitted the first amendment to the SPR Plan, calling for the SPR to have 500 million barrels in place by 1980 instead of 1982. The acceleration would be accomplished by acquiring additional sites with existing caverns, increasing brine disposal rates through the construction of an additional pipeline out into the Gulf of Mexico, and accelerating construction of a tanker terminal and a pipeline connection to the Weeks Island site. Thus the SPR Office argued that the acceleration would actually save $200 million in comparison to the original SPR Plan, because more oil would be bought sooner, before prices increased. With memories of the traumas of 1973–74 still fresh in their collective mind, most members of Congress were willing to accept the new plan without much reservation. The first amendment to the SPR Plan, accelerating the SPR program to 500 million barrels by 1980, became effective on June 20.66 In the fall of 1977, however, the newly created Department of Energy still faced resistance from the OMB, which was skeptical of the need for (and the cost of) a 1-billion barrel reserve. As the DOE prepared its fiscal year 1979 budget, the SPR appropriation of $4.3 billion was the single largest item in the DOE’s $12.6-billion budget. Schlesinger, as Energy Secretary, argued that the $4.3 billion was necessary to meet the accelerated plan. When the OMB cut most of the funding, Schlesinger appealed to the president. In a meeting with OMB officials, Carter sided with his Energy Secretary, and the 1-billion barrel target was reaffirmed. But the rift that had been developing between the FEA and the OMB over the proper size and cost of the SPR grew even wider with the Department of Energy. In February 1978, Schlesinger appeared before the House subcommittee on Energy and Power to present his arguments. The DOE assumed that 500 million barrels would cost $8.8 billion and 1 billion barrels $20.9 billion. He placed these assumptions in the context of three import interruptions scenarios—2.1, 3, and 6 million barrels per day, lasting ninety days to one year. The DOE found that in terms of GNP savings to the economy, the larger SPR size was justified in all cases except for the least-worst case scenario, a 2.1 million barrel per day shortfall lasting ninety days. On March 28, 1978, the DOE submitted the second amendment to the SPR Plan, calling for the SPR to have 1 billion barrels in place by 1985. In the amendment, the SPR Office noted that the United States had become “far more dependent on imported oil today than it was prior to the 1973–74 embargo,” and until the nation could drastically reduce its dependence on imported oil, “a large SPR is the best protection against a severe petroleum supply interruption.” The SPR Office

82

The Strategic Petroleum Reserve

Table 2.1 SPR Fill Rates, Planned and Actual, 1976–83, in Millions of Barrels Year

The FEA Plan (1976)

The Accelerated Plan (1977–78)

Actual Fill Rate

1978

150

250

67

1979

—

—

91

1980

325

500

108

1981

—

—

230

1982

500

—

294

1983

—

750

379

SOURCES: Strategic Petroleum Reserve Office, Federal Energy Administration, Strategic Petroleum Reserve Plan, December 15, 1976 (Washington, D.C.: GPO, 1976), 14–15; SPR Office, FEA, Amendment No. 1 to the Strategic Petroleum Reserve Plan: Acceleration of the Development Schedule, Energy Action No. 12, May 25, 1977 (Washington, D.C.: GPO, 1977), 1; U.S. Energy Information Administration, Monthly Energy Review (Washington, D.C.: DOE / EIA: December, 1994), 47.

also observed that a 1-billion barrel reserve would also reduce the need for “forced conservation,” which would cause “substantial economic disruption and hardship.” There was a recognition of the economic and political problems inherent in trying to reduce energy consumption. The establishment of a 1-billion barrel SPR, with all its fiscal, physical, and logistical challenges, seemed less daunting than taking strong measures to induce consumers to consume less. The 1-billion barrel amendment became effective on June 13, 1978.67 As it turned out, the Carter administration would have to scale down its goal of 250 million barrels in the ground by the end of 1978, readjusting the target to 195 million barrels by the end of 1979. Even that goal would turn out to be overly sanguine (table 2.1). The acceleration decision actually hurt the SPR program in a number of ways. First, it diverted effort away from the design of permanent facilities to the effort of arguing the necessity of the acceleration. In particular, SPR Office staff were forced to focus on preparing and submitting the amendments to Congress and temporarily abandon work on pipeline facilities at the SPR sites. Secondly, it forced the SPR Office to rely even more heavily upon the cost-schedule trade-off. The SPR Office would have to hope that the accomplishment of accelerated development would shield it politically from the increased costs that were bound to occur. And third, by placing more strain on an already overburdened SPR Office, it inevitably guaranteed more delay while at the same time raising expectations. Taken together, it added to a general loss of credibility that the SPR program suffered in the late 1970s and early 1980s. A July 1981 investigation conducted by the DOE

Building the Reserve

83

inspector general concluded that the SPR’s massive cost increases were due in part to inflation and “poor estimate costs” in the early years of construction. But the report also commented that the cost increases also came from the fact that the “management of the reserve . . . overreacted to the pressures inherent in the schedule and to the possibility of another embargo.”68

THE DEPARTMENT OF ENERGY During the 1976 campaign, President Carter had also pledged to create a new Department of Energy to streamline the myriad energy agencies that had proliferated since the 1920s, and get them all in some measure of philosophical-regulatory unison. Congress also hoped that the department would bring coherence to the energy bureaucracy. Thus with little controversy, in March 1977 Carter submitted and in August Congress passed the Department of Energy Organization Act, creating the DOE [PL 95–91]. The DOE merged the FEA, the Federal Power Commission, and the Energy Research and Development Administration (ERDA). Carter named Schlesinger to be the nation’s first Secretary of Energy, and the DOE began operations in October. The FEA became the Economic Regulatory Administration (ERA), but still handled entitlements and price controls programs.69 But it was a point of no small irony that the establishment of the Department of Energy, intended to elevate the energy issue to the highest level, was, at least in its first few years, detrimental to the success of the SPR program in a number of ways. The first problem encountered was the switch from the FEA procurement system to that of the ERDA. Because the ERDA had the largest procurement system among the agencies merged into the DOE, it took over procurement duties for the new department. But the ERDA system, designed for large-scale research development projects, proved cumbersome to the SPR Office. The system was especially difficult for firms dealing with the SPR Office because these firms often had little experience in dealing with the government procurement process. Acquisitions that usually took weeks under the FEA system now took as long as nine months. For a six-month period in late 1977 and early 1978, the procurement process virtually ceased altogether. It was in this context that Carlyle Hystad, the acting SPR Office director, recommended the establishment of the SPR Project Management Office. This field office would undertake the design and procurement work and directly contract with various companies for program development. It was hoped that by allowing these firms to deal with the SPR-PMO directly, and avoid the circuitous DOE

84

The Strategic Petroleum Reserve

procurement and contracting system, greater efficiencies and lower costs would be attained. The SPR Office in Washington, D.C., would still have responsibilities for strategic planning and budgeting and addressing environmental issues. The SPR-PMO was established in March 1978, and opened in New Orleans in May 1979. As Hystad anticipated, the climate of southern Louisiana, the poor reputation of the state’s public school system, and the difficulty in attracting experienced personnel away from industry to government service all posed obstacles in staffing the field office. Some DOE employees left the SPR program rather than move to New Orleans. By late 1978, the PMO numbered less than 120 employees; it had been expected to have more than 150 of its 206 total employees by that time. With some difficulties, the SPR-PMO gradually gained the needed experience and worked out the problems of contracting with and procurement from the private sector. The merger with DOE also caused the SPR Office severe personnel problems, which hampered organizational effectiveness. Since the number of employees in its constituent agencies outnumbered its personnel ceiling, OMB immediately imposed a hiring freeze on the DOE. The SPR Office was unable to hire persons already recruited who had much-needed engineering and managerial skills. As a result, strategic planning staff had to be reassigned to managerial duties. And while requests for hiring permission were eventually granted, the extra documentation further diverted energies away from the implementation process. In addition, the shifting of personnel staff to the new organizational structure also caused some problems. Upon DOE’s creation, Thomas Noel, who had been assistant administrator for the SPR under the FEA, became assistant secretary for resource applications. In setting up his new office staff, Noel took more than a dozen SPR officials, including former SPR Office director Robert Davies, with him to his new position. Carlyle Hystad, who became acting SPR Office director for nine months following Noel, faced the problem of replacing the lost staff. Meanwhile, Hystad’s acting status as SPR Office director, which lasted until his departure in July 1978, created further uncertainty and made dealing with personnel problems that much more difficult. Moreover, the SPR Office’s access to the locus of decision-making power suffered with the advent of DOE, at least initially. Under the FEA, the SPR Office had been directly under the agency’s administrator; that direct access had enabled the SPR Office director to readily obtain both critical resources and quick decisions. Under DOE, the SPR Office director reported to the deputy assistant secretary for resource applications, who, in turn, reported to the assistant secretary for resource

Building the Reserve

85

applications. That person reported to the DOE undersecretary, the deputy secretary, and finally the Secretary of Energy. In terms of access to the decision-making level, the SPR Office had fallen five rungs in the wake of the merger. As a result, it often took more time and effort for SPR officials to find support for their positions and recommendations within DOE. Requests for waivers from the OMB / DOE hiring freeze, for aid in expediting the procurement process, and for presidential exemptions from environmental permit requirements had to go through multiple levels of bureaucracy, which had diverse goals and competing interests. Things improved somewhat after the SPR Office was placed directly under the Undersecretary in December 1978. But upon his retirement as Deputy Undersecretary for the SPR in October 1979, Jay R. Brill wrote a letter to Energy Undersecretary John M. Deutch detailing his frustrations within the department. “In my approximately twenty years of management experience in major programs like DOD, NASA, and DOE,” Brill wrote, “the SPR has been my most difficult management experience. [M]y biggest problem in the SPR [program] has been making things happen when external support to the SPR [from within the DOE] is needed. Internally, we don’t seem to have achieved the corporate weldment we need, and I have encountered ‘fiefdoms’ that don’t have a sense of mission and corporate commitment. A significant amount of my time was consumed in ‘pushing wet noodles,’ having to follow up on many commitments, or by having to set up summit meetings or make phone calls to people at the Secretarial level to get support.” Schlesinger would later echo those sentiments. “I have a sort of World War II mentality. If the President says something is in the national interest, I had assumed he would get a more supportive response than we found. But there had been a change in the nation. As Secretary of Defense, everyone not against is with you. Here, on energy, you had interest groups against interest group. You couldn’t put a consensus together. It was distressing.”70 Another change that came with incorporation into DOE was an emphasis upon cost over schedule. Under FEA, adherence to the schedule and getting oil in the ground had been the primary concern. Under DOE, the SPR was one of many programs competing for a slice of the budget. Perhaps necessarily, DOE officials became more concerned about SPR cost overruns than FEA officials had been. It followed that a number of DOE officials became more concerned about the impact of SPR oil purchases on world oil prices, a concern that would lead to the temporary cessation of oil purchases in 1979. SPR Office staff also had to inform and explain operations to DOE officials unfamiliar with the program, a time-consuming process that

86

The Strategic Petroleum Reserve

further diverted energies away from program development. In the midst of all this, Schlesinger and much of the president’s staff were thus simultaneously obliged to formulate an encompassing energy policy plan, deal with an emerging natural gas shortage, and establish the Department of Energy at the same time, while coordinating these actions with the relevant congressional committees. Such an environment did not bode well for an SPR Office struggling with contractors, local officials, and environmental permits. “In the short term,” one SPR official later observed, “we lost the proximity to the head of the agency, or Department,” with the advent of DOE. “We lost visibility as a major program, we had other programs to compete with for money, and we had to adapt to new procedures.” In the long run, however, the SPR benefited from the prestige and political clout that came from the fact that the DOE enjoyed Cabinet-level status than otherwise would have been the case if the program had remained under an independent agency, as it had been under the FEA. In the beginning, however, the advent of the DOE added a bureaucratic maelstrom to a program that was already experiencing troubles.71

MOUNTING CRITICISM As it became clear that the SPR had fallen considerably behind schedule and was mounting significant cost overruns, the perception grew that the program was being mismanaged. That perception was abetted by the charges of waste, fraud, and abuse that had filtered through the media. Short documentaries aired by CBS’s 60 Minutes and ABC’s 20 / 20 news programs furthered that negative image. In mid-1978, the SPR became the subject of intense oversight by congressional committees and subcommittees, reviews by the GAO and OMB, and internal DOE investigations. Inasmuch as these investigations focused largely on decisions already made, they often contributed little in the way of concrete suggestions for improvement. But the continuing charges and criticism meant that SPR officials had to fight seemingly endless battles in Congress and in the media to justify their record. Having to respond to the growing criticism diverted scarce administration resources from the program itself and contributed to a further erosion of morale.72 The OMB, which had questioned the need for and cost of a 1-billion barrel SPR, took the ostensible mismanagement of the SPR to justify cutting funds for Phase IV development (the last 250 million barrels, from 750 million to one billion) in the 1978 and 1979 budget cycles. OMB officials, encouraged by a number of presidential advisors who also questioned the need for 1 billion barrels, contended that stopping

Building the Reserve

87

at 750 million would save $6 billion. As a result, there was an ongoing battle between OMB and the Carter White House over the proper size of the reserve. In the fall of 1978, the SPR Office had to once again re-project its spending needs. Five-hundred million barrels of storage would cost over $10 billion (as opposed to the original estimate of $7 to $8 billion). The DOE estimated that storing 1 billion barrels would cost about $23 to $25 billion—and the estimates seemed to increase with each passing week. Meanwhile, the DOE’s projections for oil in storage by the end of 1978 had fallen from 250 million barrels (under the accelerated plan) to between 60 and 70 million barrels. One Pentagon analyst predicted that the SPR could become “a giant fiscal disaster.”73 In December 1978, Congressman John D. Dingell (D-Mich.), chairman of the House Energy and Power subcommittee, held hearings on the rising cost of the program. He targeted his criticism at the SPR Office in Washington, D.C., while praising the field office staff. Dingell commented that when subcommittee staff members visited the PMO, they “found the field people . . . overworked and understaffed. Given the limited resources that headquarters has provided, these people have done well to bring the program as far along as it is. Clearly,” he concluded, “the failures in the strategic petroleum reserve program are management failures.” Schlesinger conceded that the program had been mismanaged, but pointed to the leadership of recently appointed SPR Office director Joseph DeLuca and his new approach to program development.74

THE “TURNKEY INITIATIVE” Schlesinger hoped to remedy the program’s woes through the appointment of an experienced manager to serve as SPR Office director. He selected Joseph R. DeLuca, a retired Air Force brigadier-lieutenant general who had a reputation as one of the government’s best management experts, to get the program back on course. DeLuca had run military logistics in Southeast Asia during the Vietnam war and had served as Comptroller of the Air Force. When he took over in July 1978, DeLuca inherited a program behind schedule and over budget. “Find out what’s wrong and how to fix it,” DeLuca recalled Schlesinger telling him. What he found was a mess. The SPR, he observed, was “a vast construction job” whose needs had been “underestimated.” The program he found “was under-engineered, under-financed, and under-managed.”75 DeLuca also found that key assumptions did not hold up. For starters, he discovered that the preexisting caverns held significantly less

88

The Strategic Petroleum Reserve

storage capacity than had been anticipated—about 87 million barrels less than expected. The political imperative, DeLuca noted, was “Fill, fill, fill. We had oil coming at us from everywhere,” he recalled, “but nowhere to put it.” He also discovered the problem of brine disposal, which still plagued the program. When the brine turned out to be lumpier than expected, the SPR Office found that they had not provided enough capacity, through oil-brine separators, pumps, and ponds, to filter and process it prior to disposal. “Those salt-properties,” DeLuca admitted in December 1978, “dictate to us what happens.”76 One of the first things DeLuca did was to establish a more realistic fill schedule and cost estimates. To that end, he formulated a fourphased plan for SPR development. In Phase I, the reserve would have nearly 250 million barrels, in existing salt domes, in place by the end of 1980. Phase II would entail the addition of 290 million barrels through expanded leaching of existing salt domes, so that 540 million barrels of storage capacity would be in place by the end of 1986. For Phases III and IV, involving expansion toward the 1-billion barrel mark, DeLuca proposed to streamline the procurement system. This would be achieved by contracting with a private firm, ideally a large construction contractor, on a fixed-price basis for completed facilities rather than for components of facilities. DeLuca felt that the existing procurement system was too fragmented. It entailed hundreds of government contracts for materials, equipment, and construction services at each site. The resulting bureaucracy, DeLuca believed, had played a significant role in slowing the program. “We had too many differing contracts,” he observed in September 1979. “We’d have contracts with pipeline engineers, contracts with dock engineers, contracts with cavern engineers, contracts with sustaining engineers or executive engineers; differing contracts for equipment, differing contracts for services, differing contracts for drilling. And all of these at different sites; and all of these were then umbrellaed in a Washington staff. And as the physical progress of the program came on line, it just became impossible to effectively manage so many differing contracts that had similar endeavors or missions.” When one contractor’s progress was held up or delayed, it invariably impeded another’s progress. In such cases, the government had to step in and sort the matter out and get the ball rolling again. Sometimes it seemed as if the SPR Office had to regulate every phase of construction. DeLuca hoped that a new approach would largely take the SPR Office out of the general contracting business and out of the management of the minutiae.77 What was needed, in his view, was a “turnkey” approach, one in which the DOE would hire a construction firm to serve as a primary

Building the Reserve

89

contractor. That contractor would build the site(s) to completion, hire the necessary subcontractors, and deal with any day-to-day problems that might arise. Under this approach, the government would only have to determine if the completed facility met required specifications. If it did, then the government would pay the primary contractor, who would then turn over the key to the facility. Other government agencies, as well as private sector firms, had recently used this approach with success. Both General Electric and Westinghouse had hired turnkey contractors when building nuclear power plants in the mid-1970s. The U.S. National Aeronautics and Space Administration had also successfully employed the turnkey approach in some of its projects. For the SPR, Phases III and IV came to be known as the turnkey initiative.78 Besides streamlining the SPR’s procurement system, the turnkey approach seemed to promise other advantages as well. DeLuca also hoped to relieve the SPR Office of the tactic of acquiring land via eminent domain, which had caused such an uproar in Louisiana. Under the new approach, land for the SPR would be acquired by private firms assembling land for sites through voluntary market transactions. By relying more heavily on the market, such an approach might bring greater budgetary costs, but it also promised earlier fill and storage. If it achieved these ends, it would be meeting the goals of the recent acceleration and expansion amendments: greater energy security, more quickly, while avoiding expected future oil price increases. Additionally, DeLuca wanted to force a number of issues. For one, he had been advised by executives of private firms that they could do a better job in obtaining and expanding storage capacity. With the turnkey approach, he hoped to invite those firms to make good their claims, while also taking advantage of industrial expertise. Also, DeLuca hoped to force OMB to take a position on the acceleration plan and the 1-billion barrel figure. The OMB had unsuccessfully argued against the acceleration plan on the basis of the SPR Office’s inability to manage the additional burden, given its track record to that point. By taking the SPR Office out of the contracting business, that particular argument against the 1-billion barrel figure (Phases III and IV) would have less salience.79 While DeLuca had Schlesinger’s backing, some of the program’s most important supporters had doubts. Congressman Dingell, a key congressional SPR advocate, was skeptical of the entire turnkey initiative. In December 1978, he argued that the “field people” in Louisiana had gained valuable on-the-ground experience, but with the turnkey approach would “put all that experience on the shelf.” Dingell also

90

The Strategic Petroleum Reserve

contended that the turnkey initiative had been undertaken without consideration of the Defense Department’s “disastrous” experience with “total package procurement.”80 Whatever the merits of the turnkey approach, its life span was short. A Source Evaluation Board (SEB) was established within the SPR Office to solicit and evaluate offers for the construction and expansion of storage facilities. In November 1978, the SEB issued turnkey solicitations to 160 interested firms, which were given the option of offering filled or unfilled facilities. In particular, negotiations were held with the owners of two sites in Louisiana, at Cote Blanche and Napoleonville, and a third in Irontown, Ohio. Together, they would have provided an additional 80 million barrels of storage capacity. By the January 1979 deadline, twenty-three proposals had been submitted. By April 1979, eleven of those had been rejected or withdrawn. Of the remaining offers by firms willing and deemed qualified to participate, however, none had offered bids for filled facilities, owing to the uncertainty over oil prices.81 After evaluation of the proposals that remained, the DOE found that there were no new technical innovations; costs were out of line with the SPR’s previous experience, and firms were unwilling to accept risk of financial loss for missed deadlines. Many firms were in fact leery of the turnkey approach. Not only was the extended period until payment undesirable (the firms would be paid only after the project ended), it also increased the time in which events such as oil leaks or spills, or fires, might occur. All this made financing difficult even for interested firms. And with oil markets in flux, the fixed nature of the lengthy and protracted turnkey contracts became a liability in the minds of DOE officials. When congressional support was not forthcoming, DeLuca resigned the position in February 1979. He had spent the better part of eight months in an effort to improve the management infrastructure and the overall systems design of the SPR program. He was succeeded by General Jay Brill as SPR Office director, who described the firms involved in the turnkey project as “reluctant partners.” With DeLuca’s departure, the turnkey initiative lost its primary advocate. The turnkey negotiations were terminated on August 30, 1979, when the DOE announced the cancellation of the entire initiative.82

THE SPR’S FIRST YEARS, 1976–79 The SPR program began in December 1976 when FEA officials started to procure materials and equipment. But the program really hit the ground running in the spring of 1977, when the SPR Office began to

Building the Reserve

91

acquire storage sites, and the SPR Plan received congressional approval. By mid-1978, however, the program had become bogged down in a political, technical, and bureaucratic quagmire. As a newly created entity, the SPR Office was probably bound to run into problems. It had to organize and staff itself and carry out the SPR Plan at the same time. The SPR Office had little experience with large-scale contracting and cost-management techniques, and often, neither did the firms it did business with. To make matters worse, for two years, until the creation of the SPR-PMO in New Orleans, the SPR Office was trying to run a program located on the Gulf Coast from Washington, D.C. Moreover, at least in the short run, the creation of DOE in 1977 hindered rather than helped. The FEA and the SPR Office, established in 1974 and 1975, were still relatively new organizations when they were subsumed by a newer, larger, and (at least in the beginning) chaotic bureaucratic environment. Under DOE, the SPR became one of many energy programs and had to compete with other agencies and bureaucracies for funding and support. And certainly much—if not all—of the political opposition the SPR program faced was not of its own making. To a great extent, the multiple battles with local groups was an inevitable outgrowth of the tradeoff between environmental safety and energy security. These battles were testament to the difficulty of implementing an energy policy in a complex, modern economy. This phenomenon had become particularly relevant in the post–World War II era as interest groups gained greater access to the policymaking arena. That is not to say, however, that the program did not on occasion antagonize certain groups and individuals. In its urge to get oil in the ground, the SPR Office, the FEA, and the DOE sometimes gave short shrift to local concerns. Perhaps the biggest mistake that can be laid at the feet of the SPR Office, the FEA, and the DOE were the ambitious timetables and schedules. The SPR Office could, of course, respond that severe political pressures abounded from Congress, the White House, the media, and perhaps indirectly, even the public at large. When the SPR was created in 1975, money was hardly a consideration. Getting oil in the ground seemed to be a matter of national survival. In essence, SPR officials were seeking the political goal of energy security at the expense of cost control, management infrastructure, and systems design. In retrospect, the schedule in the 1976 SPR Plan was unrealistic; the accelerated and expansion amendments even more so. By placing further burdens and expectations on an already beleaguered program, the amendments further hampered SPR development.

92

The Strategic Petroleum Reserve

The program was not without accomplishment in its first few years. Despite delays and seemingly endless bad luck, it had begun to get oil in the ground. No government or company had ever before tried to stockpile so much oil on such a large scale, with the intent to store it for so long a period. Given all the challenges that confronted them, Ted Siomporas recalled, “it was incredible what we were able to get accomplished. It was a new agency, and we were kind of unchecked.” Of necessity, to meet schedules, much of what the SPR-PMO had do to in its first few years had been “very innovative. And we had this attitude . . . there was no fear. The staff then—and this was very unusual—the average age was maybe 33 or 34. Really, almost anyone you talk to who was there in that era, in that three years or so when we got the thing built, would tell you it was like they had a whole career’s worth of experience in two or three years. It was just wild.”83 But despite some achievements, the SPR program would not be ready for the second oil shock of the 1970s, a crisis that was yet again born of American dependence on foreign oil. Another oil supply disruption, and the economic havoc it wreaked, would victimize the very program that was created to deal with such occurrences.

THE ENERGY CRISIS RETURNS, 1978–80

3

After the shock of 1973–75, oil markets had begun to stabilize. From 1976 through 1978, the price of Middle Eastern oil rose from roughly $12 to $14 per barrel. In the United States, where domestic oil prices were controlled by the federal government, prices also rose slowly, from $8 to $9 per barrel. These slower rates of price increases allowed the American economy to reach a new, if still uncomfortable, level of stability. The oil supply disruption associated with the Iranian revolution of 1978–79 would shatter that fragile tranquility, renewing America’s energy crisis. Its effects—notably higher energy prices— lasted into the early 1980s.1 This renewed energy crisis forced the Carter administration to make some tough decisions and take some unpopular positions. Yet the nature of American democracy was such that the president felt compelled to respond to the inevitable public outcry. In the energy policy arena, however, responding to immediate concerns often came at the cost of long-term objectives. With the oil market tight and prices skyrocketing in 1979–80, President Carter’s main concerns were keeping oil prices in check, controlling inflation, and obtaining increased oil supplies from alternate sources, namely Saudi Arabia. Within the administration, SPR development—particularly oil fill—came to be seen as conflicting with those goals. For over a year, from March 1979 to July 1980, oil fill was placed on hold by the Carter administration, a victim of the very type of instability it had been created to guard against.

94

The Strategic Petroleum Reserve

THE SECOND OIL SHOCK The Iranian revolution was a theological and nationalistic uprising that brought an end to the reign of Mohammed Reza Shah Pahlavi, the Shah of Iran. The uprising started in earnest in October 1978 when striking oil field workers inaugurated a general strike, bringing the Iranian economy to a screeching halt. Before the revolution, Iran had been the world’s second-leading oil exporter, behind Saudi Arabia. With the general strike, Iranian oil production fell off dramatically, from 5.8 million barrels per day in July 1978 to less than 0.5 million barrels in January 1979—a dramatic 91 percent decrease.2 In 1978, imports of Iranian oil had played a small but important part in the U.S. economy, providing the United States with roughly 555,000 barrels per day, nearly 7 percent of the nation’s demand. It was true that the United States depended more on nations other than Iran for imported oil, particularly Saudi Arabia (which supplied close to 14 percent), Nigeria (11 percent), Libya (7.8 percent), Algeria (7.7 percent), and Venezuela (7.7 percent). Nevertheless, the drop-off in Iranian imports from over 500,000 barrels per day in 1978 to 22,000 barrels per day by March 1979 had a significant impact on the American economy. With the taking of American hostages in November 1979, the United States ceased importing petroleum products from Iran altogether.3 Unlike the events of October 1973, the Iranian revolution was not an overt use of the oil weapon. To be sure, much of the popular sentiment against the Shah emanated from nationalist and religious sources that faulted Mohammed Pahlavi’s close ties to the West and his modernization programs. But the oil supply disruption of 1979 was more the result of a general collapse of Iranian society. If the causal forces of the second energy shock were different from the first, the effects were much the same, or worse. The supply loss was even greater: some 3.5 million barrels per day, from November 1978 to April 1979, compared to the 2.6 million barrels per day lost in the winter of 1973–74. In 1979, world demand was about 65 million barrels per day, so the loss of 3.5 million barrels per day represented just over 5 percent of total world demand. But due to growing demand and government controls, the availability of alternate supplies was more limited, at least in the short term. Thus, the effect was greater than the numbers might have implied. When the revolution brought Iranian oil production to a halt, oil purchasers, importers, and traders, conditioned by the earlier crisis, engaged in a panic-driven, stock-building, oil-buying spree. The disruption canceled just enough contracts to dis-

The Energy Crisis Returns

95

rupt normal oil flows and send new buyers out onto the spot market. This mad scramble exacerbated supply conditions in an already tight world oil market and drove prices upward. Between October 1978 and April 1979, world oil prices increased 20 percent, rising from $14.63 to $17.58 per barrel.4 With rising world oil prices, in late March 1979, OPEC ministers decided to let member nations add whatever surcharges and premiums to their official prices they deemed justifiable. Each oil-producing and exporting nation independently sought to maximize profits. Oil prices, like the mad scramble they resulted from, were now, as energy historians Robert Stobaugh and Daniel Yergin put it, a “free for all.” In June 1979, a number of OPEC countries raised their official prices from $17.58 to $23.09 per barrel; Iran raised its prices to over $28 a barrel. These prices represented an approximate 60 percent increase from 1978 levels, around $12 per barrel in the OPEC nations. In all, the second oil shock, or its effects, would last essentially three years. Hoarding and panic purchases by importers, traders, refiners and end-users drove prices upward, from $12.64 in 1979 to $31.77 per barrel in 1981—an increase of 150 percent.5 Rising crude oil prices translated into higher energy prices, which in turn spiked the consumer price index, the general measure of inflation, upward as well (see figure 1.3 in chapter one). In 1976–77, the inflation rate had been 6 to 7 percent, and while the near 6 percent rate of 1970–71 had prompted Nixon’s wage and price controls, those levels had reached normality, or tacit acceptance, by the latter 1970s. Yet the economic conditions of 1979–81 were arguably harsher than those caused by the events of 1973–74. Indeed, with some spot crude oil market prices reaching $40 per barrel, and the inflation rate an unprecedented 13 percent, this crisis—quantitatively, at least—was more severe than the earlier one. In an energy-intensive society, where industry, government, and individual citizens all depended on the maintenance of available, affordable energy, the political fallout from rising oil prices would be considerable. Interestingly, the disruption of 1979 provided a test for the IEP, the IEA’s emergency program. Unfortunately, it failed the test. The crisis was real enough—Iranian production had fallen by 91 percent and crude oil prices had more than doubled. But the IEP’s oil-sharing program was never triggered, because the lost imports did not rise above 7 percent of available supply in the IEA nations. Strategic reserves were not used because they had been deemed the last line of defense; plus, the reserves were still small—in 1979, the U.S., Japanese, and German reserves together held only 150 million barrels. Instead, stocks at sea and alterna-

96

The Strategic Petroleum Reserve

tive supplies gradually made up for the lost production. Governments did implement wide-ranging demand restraint policies, which mostly failed to restrain short-term demand and did nothing to restrain surging crude oil prices. They remained high as consumers stocked up, fearing further unrest in the Middle East. Policymakers began to realize that the IEA emergency response system, as then configured, did nothing to mitigate rising prices.6 In July 1979, gasoline lines began to appear in the United States, first in California, then in the Midwest and the Northeast. Soon gasoline shortages and rising fuel prices spread throughout the nation’s urban areas. Companies whose refineries had been built specifically for Iranian light crude oil had difficulty switching over to other crudes and thus produced less gasoline and other petroleum products. A strike among the nation’s independent truckers further disrupted transportation and supply channels, worsening the crisis; and, like the first oil shock, these strikes often erupted into violence. In June and July, the nation’s electrical utilities scrambled to keep up with demand, as temperatures rose with the summer heat. Utility demand for petroleum in the U.S. was still significant, accounting for 18 percent of power generation in 1979. The state of Florida declared an energy supply crisis and petitioned the president for a moratorium on the restricted use of fossil-fuel fired electric power plants, in place under the 1970 Clean Air Act.7 The DOE came under intense criticism, most specifically for its controversial energy entitlements program and particularly for its gasoline allocation formulae. The state of Maryland sued the agency for misallocating gasoline, and other states threatened to follow suit. Independent gasoline station owners threatened a nationwide strike unless the DOE granted them an emergency profit margin increase. In July, the president declared a national energy supply shortage under provisions of the EPCA and implemented mandatory conservation measures, including thermostat controls via emergency building temperature restrictions. With inflation rising and gasoline lines growing, public opinion was turning sour against the president. On June 28, Stuart Eizenstat, Carter’s chief domestic policy advisor, sent the president a memorandum detailing the growing energy crisis and ensuing political fallout. “We have a worsening short-term domestic energy crisis,” Eizenstat wrote. “Nothing else has so frustrated, confused, and angered the American people, or so targeted their distress at you personally.” The president’s approval rating sank to 25 percent, a low matched only by Nixon’s ratings in the depths of the Watergate scandal. Congress had already watered down or shoved aside much of his decontrol and free

The Energy Crisis Returns

97

market solutions in favor of protecting consumers, small businesses, and other vulnerable end-users. As the president would soon discover, protecting energy consumers often meant sacrificing long-term objectives to satisfy short-term concerns.8

THE ENERGY SECURITY CORPORATION Seeking to respond to the renewed energy crisis, on July 15 President Carter gave his fifth national address on energy. The address, which later became known as the “malaise” speech, contained a number of new energy goals, some grand, some modest. Bolstering the SPR was not among them. The next day, in another public address, the president expanded on his proposals for dealing with the crisis. His primary proposal was the Energy Security Corporation, a new synthetic fuels program. Like the SPR, the program had antecedents in the Nixon-Ford administration. It would be financed by energy bonds and a windfall profits tax, and by 1990 would produce 2.5 million barrels per day of synthetic fuels by converting coal and oil-shale into petroleum and fuel oil. Other proposals proved to be more controversial. A two-year phased decontrol of domestic oil prices, designed to spark domestic production and curb demand, pleased the industry but infuriated liberals and consumer groups. The president’s proposal to force utility companies to burn coal instead of oil alienated the utilities and ran afoul of environmentalists. His proposal for a windfall profits tax pleased liberals but angered the industry.9 As for the SPR, oil fill had already been suspended by the time of the president’s address, and no move was made to resume it. The reasons were several, but a desire to avoid placing further inflationary pressure on oil prices was paramount. The fact that the SPR had fallen woefully behind its scheduled fill rate, and was not a credible force in the energy arena, made the decision much easier. In 1979, the reserve held 91 million barrels of crude oil, far short of the roughly 370 million barrels called for under the Schlesinger plan. To make matters worse, the administration could not have drawn down that oil if it had wanted to—no pumping mechanisms had yet been installed. An August 1979 report in the Oil and Gas Journal commented that the decision to delay installation of withdrawal pumps made the program a “useless boondoggle.” Truly, the SPR was not ready for the second oil shock of the decade. In such a context, it was not surprising that the program was sacrificed to the political exigencies of the moment. Politically, it had been replaced by the new “synfuels” energy security program, at least for the time being.10

98

The Strategic Petroleum Reserve

SUSPENDING OIL ACQUISITION In many ways, DOE’s decision to suspend SPR oil purchases had been made for it by the market. With panic purchasing and industrial stockpiling at fever pitch, oil traders and suppliers had by March 1979 ceased to submit bids to the DFSC. There was a frantic effort to stockpile ahead of the coming supply crisis, and each segment played a part—importers and refiners, utilities, end-users, manufacturers, and large-scale farmers. Their actions tightened the market and in fact created shortages. In the first quarter of 1979, world stocks of petroleum were about 4.3 billion barrels; a year later, they stood at a record 5.1 billion barrels, 260 million barrels above the minimum level generally considered prudent at the time. Busy building up their private inventories for the predicted energy crunch ahead, few firms were interested in selling their oil to the federal government. In May 1979, the DOE asked the DFSC to suspend SPR oil acquisitions. But there may have been another factor in the decision to suspend oil acquisition. According to a number of media reports, Carter administration officials decided against resuming oil purchases in May 1979 after Saudi Arabian Oil Minister Sheik Ahmed Zaki Yamani warned that the Saudis and others might cut oil production if the United States resumed SPR oil purchases. Reportedly, Yamani delivered the warning shortly after Saudi Arabia, at President Carter’s request, raised its production by 1 million barrels a day to help ease the crisis. Whatever pressure the Saudis placed on the Carter administration, the fact that firms were no longer responding to the DFSC’s call for bids—that in fact stockpiling had already ceased—made the decision to formally halt purchases all the easier.11 In addition, America’s allies were also exhorting the United States to suspend stockpiling. At the Tokyo Economic Summit held that July, the United States and other IEA nations agreed to suspend purchases of oil for their respective emergency reserve programs, so as to not send prices further upward. They also agreed to consult with each other before resuming open market purchases.12 .

THE SAUDIS AND THE SPR It seems evident that Saudi government officials also played a role in the administration’s decision to suspend SPR oil fill. Leaders of the Arab oil-producing nations had been suspicious of and hostile toward the IEA oil-stockpiling programs since their inception. Despite the limited success of U.S. efforts to achieve energy independence by the

The Energy Crisis Returns

99

mid-1970s, those same efforts had threatened the Arab oil-producing community. The Oil Ministers of OAPEC, in particular, were concerned about the political and economic implications of the SPR, the IEA emergency oil-sharing program, and U.S. efforts to produce alternative energy. Throughout the first half of 1976, the OAPEC News Bulletin, in the words of FEA Administrator Frank Zarb, “blasted” the SPR program, along with all the other IEA oil-stockpiling programs. Ironically, despite their recent dramatic success in influencing the flow, supply, and price of international oil, the governments of the Arab oilproducing states, at least as revealed in the pages of the OAPEC News Bulletin, still feared the economic, political, and military power of the oil-consuming nations in general and the United States in particular. They stressed that the oil-consuming nations had far greater economic resources and institutions for collective action, such as the OECD, under whose umbrella the IEA operated. By comparison, OPEC and OAPEC were still relatively new, fledgling institutions. While the nations that comprised them were well-endowed with oil reserves, they had largely single-resource economies. Many were still considered developing nations. The oil ministers of OAPEC stressed that their dependence on the markets of the oil-consuming nations was greater than the consuming nations’ dependence on their oil, especially in the case of the United States. They therefore repeatedly stressed the need for cooperation and interdependence between the oil-producing and oilconsuming nations. In that context, the Arabs viewed the IEA oil-sharing and oilstockpiling programs as threats to their own economic and political power. For example, the March 1976 OAPEC News Bulletin questioned the need for and desirability of government oil stockpiles: “Given the very high cost of building strategic stocks, one is left with the conclusion [sic] that this can only be intended to back up not a policy of cooperation but rather a policy of confrontation.” The “problem” of “oil availability,” the journal added, “surely cannot be resolved by [a] costly confrontation approach, such as strategic stockpiling.” Moreover, the OAPEC ministers viewed the SPR’s 1-billion barrel target (called for in the EPCA legislation) as a further challenge. The “new U.S. scheme to stockpile the equivalent of one year’s imports of Arab oil (one billion barrels),” the June 1976 OAPEC News Bulletin commented, “is only a further escalation of the consumers’ policy of accumulating reserves to use bargaining chips in confrontation with the producers.” The September 1976 issue of the news bulletin also called on the Arab community to respond to the “challenge” posed by the IEA’s oil-sharing program.13

100

The Strategic Petroleum Reserve

Those concerns had been officially revealed to the U.S. government in June 1976 when FEA Administrator Frank Zarb traveled to Kuwait to meet with OAPEC and Kuwait government officials to set forth and explain U.S. energy policy goals. At those meetings, according to a State Department telegram which summarized them, OAPEC Secretary General Ali Attiga “alleged [that] most OAPEC states were concerned with [the] decision by [the] U.S. to stockpile oil.” Such an action, Attiga claimed, “appeared uneconomic and contrary to [the] longstanding U.S. claim that it favors world interdependence.” Attiga also explained that an American oil stockpiling program was much more threatening to the Arab world than the prospect of an Arab oil embargo was to the United States. The embargo, OAPEC officials added, had been undertaken “only reluctantly,” and would not be used again unless “Israel was again supported by the U.S. in ‘expansionist’ action.” This was because the “Arabs [were] much more dependent on [the] U.S. than [the] U.S. [was] on Arab oil.” Even after Zarb related that the goal of the U.S. stockpiling program was to provide a “market cushion,” he noted that OAPEC and Kuwaiti officials “remained apprehensive that USG [U.S. government] action . . . was designed to eliminate oil as a political lever in the Mid East.” Such a prospect was a chilling one for the Arab oil-producing nations, inasmuch as their economic-political power stemmed almost entirely from their massive hydrocarbon reserves.14 Such opposition by the OAPEC nations was ironic, given that many of them, including Saudi Arabia, Iraq, Libya, and the United Arab Emirates (UAE) would, in the mid-1970s, sell their oil to traders and shippers who were clearly going to sell it to the U.S. DOE. In fact, Saudi Arabia had supplied the first oil that went into the SPR in July 1977. Despite this, however, there were those in the U.S. government who felt that the Saudis were concerned that the SPR might become, as U.S. Senator William Bradley (D-N.J.) later noted, an instrument “to attack them economically.” Those concerns were expressed by Arab leaders to the Ford administration and FEA officials and were reported widely in the media in the late 1970s. They must have become known to the Carter administration and DOE officials as well. Such was clear in a memorandum sent by Katherine P. Schirmer, associate director for energy and natural resources of the president’s domestic policy staff, to Eizenstat, chief of the domestic policy staff, on January 23, 1980, on SPR fill rates and budget support. “[Y]ou should be cautious,” Schirmer wrote Eizenstat, “about making any definitive statement that we intend to resume SPR fill.” First of all, there was the agreement by the IEA nations at the Tokyo Summit to consult each other before resuming stockpiling.

The Energy Crisis Returns

101

“Additionally,” she noted, “the SPR issue is very sensitive with the Saudis, who have indicated that they might cut back their production if we started buying oil for stockpiling.”15 On the other hand, there were a number of U.S. officials who contended that, in the summer of 1979, the Saudis’ main concern was getting prices under control. One of these was James E. Akins, who had been a State Department expert on the Middle East, President Nixon’s energy advisor, and U.S. ambassador to Saudi Arabia in the mid-1970s. In 1979, Saudi Arabia was selling its oil $4 to $5 dollars lower than prevailing world market prices, in an attempt to bring unity to OPEC’s pricing structure and help stabilize the market. Their only concern, he recalled, was that a resumption of SPR oil fill would work against both of these goals, both of which were in the U.S. interest. Saudi Oil Minister Yamani told the U.S. government and visiting senators, notably Senator Bradley of New Jersey, that such actions could only drive prices higher. “You draw down stockpiles during periods of shortage,” Yamani was reported to have said, “you do not add to them.” Akins said that Saudi Arabia had “never opposed the SPR per se”; its position related only “to the timing of the purchases.” But the perception would linger, in the media and in Congress, that the Saudis were fundamentally opposed to the SPR and that the Carter administration had caved in to their demands.16 For its part, the Carter administration desperately needed the Saudis to boost their production. The Saudis were in fact willing to do this. Placing extra oil on the world market and forcing a deflationary trend was consonant with their desire to regain control over OPEC’s pricing strategy. On July 9, the president received a personal commitment from Saudi Crown Prince Fahd Bin Abdul Aziz that, “based on their historic friendly relationship with the United States,” his government would step up production from 8.5 to 9.5 million barrels per day later that month. While perhaps a generous gesture, it was not enough to forestall market panic and the second oil shock of the decade.17

THE FILL CONTROVERSY Schlesinger’s resignation in July 1979 opened the door for Charles W. Duncan Jr., a former Texas oilman, investment banker, president of the Coca-Cola Company, and Carter’s Deputy Secretary of Defense to become the new Secretary of Energy. Duncan traveled to Saudi Arabia in late February 1980 to meet with officials from Saudi King Khaled Bin Abdul Aziz’s government and discuss the world’s oil supply situation. Within the congressional energy subcommittees, it was widely

102

The Strategic Petroleum Reserve

believed that Duncan would also inform the Saudis of a U.S. decision to resume filling the SPR. Duncan had testified in early February before the House Energy and Power Subcommittee that SPR purchases would be resumed by the end of the month. Moreover, an interagency committee, composed of officials from the Departments of the Treasury, State, and OMB had been pressing the DOE to make use of royalty oil from the Elk Hills NPR site, which produced at a rate of 100,000 barrels per day. The new Energy Secretary seemed to accept the idea. Before he left for Saudi Arabia, Duncan informed the president that the DOE would soon resume SPR oil fill at a rate of 200,000 barrels per day: some 100,000 coming from Elk Hills and the remainder from spot (open market) purchases. As they left for Riyadh on February 29, one member of the U.S. delegation refuted the idea that there would be a “quid pro quo” of increased Saudi production for cessation of SPR oil fill.18 Yet Duncan was more pragmatic and less of an SPR-hawk than Schlesinger had been. Schlesinger’s acceleration and expansion plans had reflected an overly sanguine view of what was possible in the early years of the program. Duncan was perhaps more realistic about the SPR. Years later, he admitted that given the tightness of the market in 1979, “I was more reluctant to make a major investment in it.” In early 1980, Duncan must have had another objective foremost on his mind, namely getting the Saudis to maintain increased production. Desperate for extra oil, Carter administration officials may have feared an unfavorable Saudi response to a resumption in SPR stockpiling.19 In Riyadh, the U.S. delegation had three meetings with the Saudis, including a private discussion between Duncan and Yamani. At those meetings, the Saudis informed the U.S. delegation that they considered the increased rate of 9.5 million barrels per day to be a temporary policy, put in place to aid the United States and reassert control within OPEC. For a number of reasons—mostly due to domestic political pressures—the Saudis indicated that they would return to their usual rate of 8.5 million barrels per day once they viewed the current crisis to be over. The SPR was also a key conversation point. What exactly was discussed and transpired in those meetings is unclear. But the possible resumption of SPR oil fill was evidently discussed and apparently broached by the American delegation to the Saudis. Afterward, Duncan told reporters that the U.S. delegation did not “seek commitments to specific actions from Saudi Arabia” relating to the SPR, “nor did they seek specific actions from us.” He added that the Saudis told him that they feared that additional stockpile purchases, of either domestic or foreign oil, could disrupt their efforts to help stabilize world oil prices.20

The Energy Crisis Returns

103

Following this meeting, administration officials conceded that if the United States were to resume SPR oil purchases, Saudi efforts to normalize prices at the upcoming OPEC meeting in June 1980 would be undermined. Yet criticism of the administration’s SPR policy continued. “It’s a fact” commented a Senate committee staffer in the spring of 1980, “that the Saudis don’t like the name ‘Strategic Petroleum Reserve’—they don’t like anything to do with it. Their opposition is probably the biggest problem the administration has with [the] SPR.” Given that, the question for the administration became how “[d]o you risk offending . . . the Saudis, who are providing the free world with an extra one million barrels of oil a day? Or, do you say, ‘No, we don’t want to run that gauntlet,’ and then pick up political flak in the U.S., having people say, ‘Who’s running our national security policy—us or the Saudis?’” In September 1981, Richard D. Erb, U.S. executive director of the International Monetary Fund, commented that the Carter administration’s approach in asking the Saudis about the reserve had been wrong-headed. “The Saudis I have talked to said that that was stupid,” Erb observed. Instead, the approach should have been “[d]on’t ask, just go ahead and do it, don’t make a big thing of it.”21 Upon his return to the United States in early March 1980, Duncan announced that the DOE would delay oil fill for an additional fourteen months, resuming purchases in June 1981. Since fill had ceased in March 1979, the Secretary was proposing a more than two-year hiatus. Yet by early 1980, market conditions had begun to improve somewhat. While long-term futures prices continued to be high, spot market prices were beginning to fall as new oil entered the market. In fact, in the first months of 1980, a number of oil firms began to approach the SPR Office with offers to sell oil. In this context, Duncan’s announcement that the DOE would suspend SPR oil purchases for an additional year would not go unchallenged. Criticism of the decision began to mount from a number of sources. The national media jumped on the issue, pillorying the DOE and the Carter administration. In April 1980, Thomas J. Moore of the Chicago Sun-Times reported that the “Saudis threatened to cut production by a million barrels a day” if the United States resumed SPR oil purchases, and that on this point, Yamani had been “specific and blunt.” That same month, William Greider of the Washington Post commented thusly: “Our friends, the Arabs, say no, and we supinely acquiesce.” The Post editorialized that the “retreat from the Strategic Petroleum Reserve is a national embarrassment[,] a dangerous confession of failure[, and] a symbol of American vulnerability.” Other media, such as the National Journal and the Oil and Gas Journal, reported that while

104

The Strategic Petroleum Reserve

no explicit threats had been made, Sheik Yamani had told Duncan that resuming SPR purchases would not help Saudi Arabia gain control of OPEC pricing structure and could hinder their efforts to restrain prices. And it was in the United States’ interest, the Saudis had reportedly argued, to help them succeed in this effort. For his part, Duncan denied that the Saudis ever made a quid-pro-quo demand of suspending SPR oil fill in return for increased production.22 But it wasn’t just the media. Other executive branch departments chimed in. The most direct and open challenge to the administration’s decision, however, came from the congressional energy committees.23

CONGRESS RESPONDS Frustrated by a growing deterioration of American economic autonomy, several members of Congress responded quickly to the developing SPR fill controversy. These congressional SPR “hawks”—ardent supporters of the program—demanded to know why the administration had suspended oil fill and when it would be resumed. In the Senate, hearings were led by Wendell Ford (D-Ky.), chairman of the Senate Subcommittee on Energy Resources. On April 18, Dr. Ruth Davis, an assistant DOE secretary, appeared before the subcommittee. She was fated to be on the receiving end of some heated criticism. When Davis stated that the DOE hoped Congress would delay action on resuming SPR fill until after the June OPEC conference, Bradley gave vent to the outrage that permeated Congress. “[W]hat was the analysis,” he asked, that “we would gain more by going for this hope of price stability versus what we would lose in the eyes of the Arab producers when they are able to push us around and dictate our policy?”24 Davis’s response revealed the intricacies of both foreign and domestic policy as they pertained to the SPR and U.S. energy policy in general. The decision to resume fill, Davis contended, rested on a number of international considerations, including “the impact of our filling the SPR on our allies’ ability to obtain oil from the producing countries”; the “perceived impact . . . on the available production from other countries”; and the “interaction of the national defense scenario . . . and the oil scenario in the Mideast.” The detailed explanation, however, did little to mollify the members of the subcommittee. Senator Bradley took great offense to the idea that the decision to fill the reserve did “not lie within the boundaries of the United States.”25 Bradley was one of the Senate’s most fervent supporters of the program. In April 1980, he went so far as to make a trip to Saudi Arabia to make his own assessment of Saudi intentions. More than a year later, in

The Energy Crisis Returns

105

September 1981, Bradley said that Yamani had told him that the Saudis would cut their production if SPR oil fill resumed. But in April 1980, after he had returned from his trip, Bradley was convinced that the Saudis would not actually follow through on their “threat.” Further, the Senator believed that even if Saudi Arabia did retaliate for resumed SPR oil fill, market conditions were such that it could be withstood.26 The House Subcommittee on Energy and Power, led by Congressman Dingell, held hearings on April 25. Unlike his Senate counterparts, he successfully called on Duncan to testify. Many analysts believed that the market was improving as more supply became available, and Duncan shared that assessment. But if indeed oil market conditions were improving, Dingell inquired, then “when do we anticipate better circumstances for filling [the] SPR than we have today?” Duncan maintained that resuming oil purchases at that time would not be in the best interest of the program, nor the nation in general. He steadfastly denied that the Saudis had threatened to lower their production in retaliation for resumed SPR fill. Mainly, the DOE wanted to see “more assurance respecting price and supply” before resuming oil purchases. The oil market, Duncan believed, was still unstable. It was true that private firms had amassed an amazing stockpile of oil, but it was that very same stockpiling that had contributed to scarcity and price inflation. Duncan stressed that the main question was one of “timing and pace” of resuming SPR oil purchases.27 Duncan also noted that the oil-consuming nations of the Western alliance (essentially the IEA), including the United States, had in July 1979 agreed to suspend oil purchases for their emergency reserve programs, so as not to place additional pressure on prices. The decision to stop filling the SPR, Duncan explained, was thus the result of a “complex mix of political, national security, international, and economic considerations.”28 To further heighten the tension surrounding the fill controversy, the House Energy and Power subcommittee hearings began in the immediate aftermath of Desert One, the Carter administration’s ill-fated attempt to rescue the American hostages in Iran. The rescue mission occurred on the night of April 24–25, just hours before Duncan testified before the subcommittee. The Desert One fiasco seemed only to magnify U.S. vulnerability to Persian Gulf instability and served to underscore the fact that the SPR was not ready to play its prescribed role.29 These frustrations fed the hostility of the congressional SPR hawks. When Duncan informed the committee that the SPR would not reach 500 million barrels until the late 1980s, Representative Anthony

106

The Strategic Petroleum Reserve

Moffet (D-Conn.), whose state and region had been hard hit by the energy shortages, questioned the “willingness of the Administration and the Department to meet legislative mandates.” From the perspective of the SPR hawks, Congress had passed the necessary legislation; the administration had failed to deliver on its own schedule.30 In September, Dingell called on Abram Chayes, an international law specialist brought in by Duncan to revive the SPR program, to testify on the fill controversy. Chayes conceded that the Carter administration had been very concerned over Saudi reaction to resumed oil fill. He also testified that the administration hoped to begin transferring oil from the NPR to the SPR—the same idea that the interagency committee had advocated—some time soon. Congressman Phil Gramm (D-Tex.) pressed Chayes on the rationale for this proposal. “To what extent,” Gramm demanded, “was that decision to take the long, cumbersome road [of using NPR oil] made with [the] idea . . . that somehow this might be less offensive to the Saudis?” Chayes denied that the NPRswapping procedure was cumbersome and maintained that the DOE’s primary opposition to open market purchases came from a desire not to contribute to price instability. But he added that “I would be less than candid with you if I were to say that the consideration you mentioned has no weight in the decision at all.” In seeking to fill the SPR, Chayes added, “it is not a necessary corollary of that policy that you make a lot of unnecessary waves.” While not what the congressional SPR hawks wanted to hear, the NPR oil swap proposal would at least resume oil fill. They began to look for ways to facilitate the proposal.31

THE ENERGY SECURITY ACT OF 1980 As the synthetic fuels bill made its way into the Senate, Senators Bradley and Robert Dole (R-Kans.), in a bipartisan move, attached an amendment to it that required the administration resume SPR oil fill at a rate of at least 100,000 barrels per day, roughly the same rate at which the oil was produced from the Elk Hills NPR site in California. In the House-Senate conference on the bill, Dingell recommended tighter wording designed to compel executive action and stipulate that the continued production and sale of oil from the naval reserves be tied to the continued resumption of SPR oil fill. Thus, as part of the Energy Security Act of 1980 [PL 96–294], the legislation creating the Synthetic Fuels Corporation, Congress required the president to fill the SPR at a rate of 100,000 barrels per day, beginning in fiscal year 1981 and in subsequent fiscal years, with the exception of a drawdown. The amendment also had provisions for mandating

The Energy Crisis Returns

107

the use of NPR oil for the SPR. Duncan urged congressional leaders to delay action on the bill until after the June OPEC conference, to give the Saudis a chance to achieve price unity before forcing the president’s hand. Granting this, Congress presented the president with the bill on June 26, 1980. Carter, needing his synfuels program as his answer to his energy crisis, signed the bill on June 30, 1980, thereby approving the resumption of SPR oil fill. In July 1980, the DOE began the process of moving royalty oil from Elk Hills and other federal lands to the SPR, at the rate of 100,000 barrels per day.32 Even with this victory, the congressional SPR hawks remained unsatisfied. Collectively, they harbored two complaints. One was that the 100,000 barrels per day rate was too slow for rapid SPR development and seemed especially meager in an increasingly slack market. Spot oil prices had begun to stabilize, even fall in some cases. SPR oil fill rates should be faster, they argued. On December 12, 1980, in its Interior Department and Related Agencies Appropriations Act for fiscal year 1981 [PL 96–514], Congress called on the president to “seek to undertake” to fill the SPR at a rate of at least 300,000 barrels per day, although it imposed no sanctions if that rate was not achieved. Bradley wanted the SPR to be filled at a rate of 400,000 barrels per day, close to the physical maximum. And yet while it was feasible to fill the SPR at a rate of 400,000 to 500,000 barrels per day, the SPR Office countered that higher fill rates would not allow sufficient lead times for construction and the creation of additional salt-cavern capacity. The SPR Office and the DOE would soon conclude that a fill rate of 200,000 barrels per day was optimal.33 The other congressional complaint was that the administration was still being oversolicitous of Saudi Arabian sensibilities at the expense of U.S. national security. The use of the complex and secretive intra-governmental oil-swapping technique seemed to be an excessive deference to Saudi concerns and much less efficient than open market purchases. The White House request to wait until after the OPEC conference to resume fill seemed to provide further evidence of such deference. Congressman David A. Stockman (R-Mich.) gave voice to the frustration when he accused the Carter administration of “timidity and abject capitulation” to the Saudis, and declared that the fill controversy had “reached the proportions of a national scandal.”34 In its final days, the Carter administration returned to purchasing oil on the open market, including regular purchase of spot cargoes. By 1980, the SPR held 108 million barrels. The FEA’s schedule in the SPR Plan of 1976, however, had projected that the reserve would hold not 108 but 325 million barrels of crude by the end of 1980 (figure 3.1). The SPR was still behind schedule.35

108

The Strategic Petroleum Reserve

Figure 3.1: SPR Fill Rates, Planned and Actual, 1978–83, in Millions of Barrels

SOURCES: Strategic Petroleum Reserve Office, Federal Energy Administration, Strategic Petroleum Reserve Plan, December 15, 1976. Washington, D.C.: FEA/SPR Office, 14–15; U.S. Congress, Senate, Amendment No. 1 to the Strategic Petroleum Reserve Plan, Hearing Before the Subcommittee on Energy Production and Supply of the Committee on Energy and Natural Resources, 95th Cong., 1st Sess., February 16, 1977. Washington, D.C.: GPO, 1977, 1, 93; U.S. Energy Information Administration, Monthly Energy Review. Washington, D.C.: DOE/EIA: December, 1994, 47.

THE SPR IN THE CARTER ADMINISTRATION The doubling and even tripling of world oil prices between 1979 and 1981 was the basic problem the Carter administration faced. The hostage drama merely reinforced America’s frustration with its vulnerability to the politics of the Middle East. Rising oil prices, in turn, made it very expensive and politically difficult to fill the SPR. Even in the administration’s final days, while there were funds available, the White House remained slow to resume oil fill. Clearly, the SPR had not been ready for the second oil shock. Instead of being able to respond to it, the program was victimized by it. The question was the extent to which the Carter administration was culpable for that result. From February 1977, when Congress implemented the SPR Plan, to the winter of 1978–79, when the Iranian crisis began to affect world oil markets, the president had nearly two years to make good on the SPR’s original and accelerated schedules. By the end of 1980, the last full year of the Carter presidency, the SPR held 108 million barrels of oil, roughly 44 percent of existing storage capacity, but nowhere close to the 500-million barrel goal of Schlesinger’s accelerated plan, or even the original goal of 325 million barrels by 1980. The myriad physical and technical problems that delayed SPR development in the mid- and latter 1970s had not been of the administration’s volition. Neither had the environmental and local political opposition which had further blocked its development. But the president’s decision to create the Department of Energy, with all its start-up

The Energy Crisis Returns

109

troubles, and his acceptance and promulgation of the 1977 acceleration and 1978 expansion amendments placed additional burdens on an already troubled program. It was ironic that these efforts to enhance energy security provided obstacles to SPR development. Once the second oil shock began, it was the president’s responsibility to respond to the crisis and work to mitigate its effects as quickly as possible. If the best answer to the renewed energy crisis was to get the Saudis to increase their production, and the cost was the short-term delay of SPR oil fill, and the reserve did not have enough oil to play a meaningful role, then that may well have been the correct response to that particular crisis. The problem was that to many critics, the decision to suspend oil purchases in 1979 seemed to be sacrificing the very program that had been created to deal with such crises. The administration’s apparent deference to a foreign nation (Saudi Arabia)—one that had played a key role in effecting the Arab oil embargo—further assaulted an already beleaguered American nationalism. As he left office, the SPR must have been at least something of an embarrassment to the president. He had emphasized its development in his 1976 election campaign and again in his National Energy Plan once in office. He had accepted Schlesinger’s overly sanguine acceleration and expansion plans. All of these facts not only provided a context for but also underscored the lack of action that followed and made a hollow point of Carter’s pledge to make the SPR credible. The obstacles that the program encountered from 1977 to 1980 were testament to the power of short-term interests (and politics) to displace long-term planning, especially in the midst of a crisis. One lesson learned was the difficulty of resuming oil fill once it had been suspended. Years later, Richard D. Furiga, Deputy Assistant Secretary for the SPR program, acknowledged this point. “In retrospect,” he commented, “we said ‘let’s never stop completely [filling] again, let’s always keep a little [oil] coming in,’” because, as the DOE learned, once you turned the oil spigot off “it’s really hard to turn it on again.” But it would be the Reagan and not the Carter administration that was able to capitalize on this philosophy, aided by lower oil prices. For the Carter administration, the political embarrassment must have been acute, because the president had so publicly made the SPR a vital part of his energy security strategy. In 1980, FEA-DOE energy consultant Melvin A. Conant summarized the public perception of what had happened to the SPR: “Carter took an objective, greatly inflated it . . . and failed miserably.” Ultimately, filling the reserve during the second oil shock presented too many real and potential negatives. During that time, and for the foreseeable future, America’s energy security would remain in doubt.36

Underground cavern-building at the Weeks Island site, August 15, 1978. Courtesy U.S. Department of Energy.

Rear, aerial view of a tanker unloading crude oil at the SPR’s Sunoco terminal in Texas, October 17, 1978. Courtesy U.S. Department of Energy.

Welders fit together 40-ft sections of pipe to build the brine pipeline to the Gulf of Mexico, October 30, 1980. Courtesy U.S. Department of Energy.

In April 1982, former President Ford, who signed the legislation creating the SPR, spoke at a ceremony at the St. James terminal to commemorate the reserve’s 250–million barrel mark. Courtesy U.S. Department of Energy.

Three-dimensional cutaway view of the Bayou Choctaw site and salt caverns. (aerial photo plus drawing) Courtesy U.S. Department of Energy.

Aerial view of SPR’s marine terminal at the St. James site, showing docked oil tankers and, in background, storage tanks. (n.d.) Courtesy U.S. Department of Energy.

Jacinth delivers 500 millionth barrel of oil to SPR. Courtesy U.S. Department of Energy.

Prover loop on meter skid at the Bryan Mound site, January 1987. Courtesy U.S. Department of Energy.

Meter skid with prover loop for verifying amounts of crude oil moved at the West Hackberry site, January 1987. Courtesy U.S. Department of Energy.

Crude oil pipelines and valves at the St. James terminal, January 1987. Courtesy U.S. Department of Energy.

U.S. Representative Chris John (D-Lou.) fills a sample bottle at the Bayou Choctaw site in May 1999, at a ceremony commemorating the refilling of the SPR after the 1996–97 drawdowns. Standing behind are U.S. Representative William J. Jefferson (D-Lou., left) and U.S. Secretary of Energy Bill Richardson (right). Courtesy U.S. Department of Energy.

U.S. Secretary of Energy Spencer Abraham (left) and Russian Minister of Energy (middle) tour the Bryan Mound site with SPR employee (right) in October 2002. Courtesy U.S. Department of Energy.

MATURATION AND ASCENSION, 1980–86

THE SPR UNDER REAGAN

4

As in the election of 1976, the politics of energy were also important in the campaign of 1980. Yet there was a crucial difference: the role that the public now wanted the government to play was just the opposite of four years before. In the mid-1970s, public fears of a Big Oil conspiracy led to unprecedented federal intervention into the oil industry. In large part, the resulting confusion, chaos, and resentments that intervention had engendered made attacks on Big Government popular. The DOE, in particular, came to be seen as the very symbol of government waste, inefficiency, and overregulation. In the campaign of 1980, Reagan pledged to abolish the DOE, which he called a “social experiment in energy . . . that has run its course.”1 But while the Republicans called for the elimination of the DOE, they were bullish on the SPR. The party’s 1980 platform declared that “the pressing need for insurance against supply disruption[s] should not be made hostage to the whims of foreign governments, as is presently the case under the Carter administration.” While avoiding the kind of specific accelerated fill-rate timetables that Carter had offered in 1976, the platform declared that it was “necessary to resume the rapid filling of strategic oil reserves to planned levels of 500 million barrels in the short-term[,] and ultimately to the one billion barrel level.” Reagan echoed the party line, pledging to build up the SPR at its fastest rate yet. He also said he would move the program to the Interior Depart-

Maturation and Ascension

117

ment, or perhaps the Commerce Department, once the DOE was abolished.2 Once in office, however, Reagan would settle for keeping the DOE, while scaling back many of its programs. The president’s regulatory philosophy was to let free markets work whenever and wherever possible, even in the marketplace of oil—which some argued had never been very free, dominated first by the American oil-producing states, followed by those of the Middle East. But when Reagan’s OMB Director David A. Stockman declared that all the United States needed in the way of energy policy was “strategic reserves and strategic forces,” he may have very well summed up the administration’s philosophy on achieving energy security.3 It followed, therefore, that oil allocation authorities and price controls were allowed to expire in January and September 1981. Subsequent congressional attempts to restore those powers were vetoed by the new president. Energy conservation programs would be cut; so would funding for programs to aid the development of synthetic fuels and solar energy. But unlike virtually all other activities of the beleaguered DOE, the SPR retained the support of the White House. In an effort to boost oil and gas supply, the administration combined decontrol with an accelerated public lands leasing program. Reagan explained the new energy policy at the International Energy Exposition at Knoxville, Tennessee, on May 1, 1982. “Instead of managing scarcity,” he said, “we’ll help ensure continued supplies from a strategic stockpile, alleviating shortages while permitting the private market to work.” Thus, while other energy security programs were falling by the wayside in Reagan’s first term, the SPR would flourish as it never had before. From 1980 to 1984, the president directed the DOE to resume open-market purchases, work government-to-government deals, and fund the program at its highest levels to date. In those four years, the amount of oil in the SPR nearly quadrupled.4 Reagan’s commitment to the SPR, while slashing funding for other DOE programs, served several purposes. First of all, the SPR fit in nicely with his philosophy of limited government. It represented a limited federal presence in the marketplace of oil, especially when compared to other energy security programs. The SPR’s activities, essentially, consisted of buying and storing oil; in a drawdown, it would also be a seller. But it was not an oil-producing, refining, or marketing entity. Its role as a seller would come in ostensibly rare emergency situations. The DOE’s SPR pipelines served only to connect its storage sites to commercial pipelines or terminals; the SPR thus had a limited role

118

The Strategic Petroleum Reserve

in transportation. Thus the four major components of the American oil industry—production, refining, transportation, and marketing—were not threatened by a totally government-funded and owned strategic reserve. Simply put, as a government entity, the SPR was not like statecontrolled firms such as British Petroleum (at that time) or Petroleos Mexicanos (Pemex), which did engage in the major oil and gas industry functions. And while the SPR was expensive, it maintained a commitment to a petroleum-based energy economy. A number of the alternative fuels programs were also expensive, requiring vast federal funding. The Synthetic Fuels Corporation alone was originally projected to cost $88 billion. (It expired in Reagan’s first term, as companies dropped out of the program when oil price deflation undercut its economic rationale.) But being expensive was not their worst “sin” against the free-market regulatory philosophy. They did something more: they challenged an economy that had been based on petroleum for almost a century. The SPR, on the other hand, represented both a tangible and symbolic federal commitment to a petroleum-based energy economy. “The Strategic Petroleum Reserve,” Reagan’s first Energy Secretary James B. Edwards later observed, “was a very realistic and practical way to produce energy.” The synthetic fuels programs, in his view, while important and laudable, “were not a surefire way of insuring that we would have energy to serve the nation’s needs. We felt that if we had a crude oil reserve stored in an appropriate manner, that we could create more energy security for the nation than in any other way,” Edwards explained years later. “And so, we thought that the best way to go about it was to pour oil into that reserve every chance we had.”5 This move to emphasize the SPR, while de-emphasizing alternative energy sources, demand restraint, and conservation programs undoubtedly pleased the U.S. oil industry. It helped to rule out more radical alternative fuels programs. It also pleased energy consumers, the American public in general—even if they did not recognize it consciously. With the internal-combustion engine the primary example, the economic, physical, and transportational infrastructure of American society was committed to a petroleum-based economy. Reagan’s commitment to the SPR above all other energy programs was a commitment to the energy status quo which, in times of available supply and relatively cheap oil, suited the American public just fine. The purpose of the SPR, then, was to help maintain that scenario. When Reagan first came into office in January 1981, he told SPR Project Manager C. Curtis Johnson to “fill that rascal.” This commitment, however,

Maturation and Ascension

119

came at a time when the program’s rising costs and sources of funding were being brought into question.6

FINANCING THE SPR Even while the Reagan administration was pledging to build up the SPR, it had to address the program’s rising cost. As the federal debt continued to grow and became a political issue, the SPR’s growing funding requirements became problematic. Total cost estimates for a 500-million barrel SPR undertaken by the National Petroleum Council, the FEA, and the DOE had risen every year, from $5 to $6 billion in 1973 to just over $10 billion in late 1978. Estimates for a 1-billion barrel reserve were more than twice that figure; some placed the cost at $40 to $50 billion. In 1978 and 1979, the SPR had been the biggest part of DOE’s budget, at $3.2 and $3 billion, respectively. In 1981 and 1982, the SPR was again the biggest single part of DOE’s budget, at $3.3 and $3.9 billion, respectively. The warning from one Pentagon official that the reserve could become “a giant fiscal disaster” seemed all too close to reality. In Congress, there was a growing desire to reduce SPR appropriations. As a result, the concept of taking SPR funding off-budget, through some private financing mechanism, gained political momentum. There were three major arguments in favor of off-budget financing mechanisms, whose political appeal (if not practicality) was growing. For one, officials argued that given the volatility of the world oil market, it was impossible to accurately budget oil acquisition costs. If possible, it would be better to remove that aspect from the planning process altogether. Moreover, off-budget proponents contended, the fact that the government was buying an asset—oil—that would almost certainly appreciate in value in the future, made the SPR different from other goods and services the government consumed immediately or would depreciate in value over time. Additionally, there were those who argued that taking the SPR financing off-budget would also remove political considerations that might delay or slow the program. The most serious of these off-budget proposals included an “in-kind” import tariff fee that harkened back to the IPR concept and the use of government-issued “oil bonds.”7

THE SPR AMENDMENTS OF 1981 With pressure growing for Congress to find some off-budget financing mechanism, a group of proposals, loosely called the “Strategic

120

The Strategic Petroleum Reserve

Petroleum Reserve Amendments of 1981,” developed, and mostly died, in the spring and summer of 1981. The proposals included an in-kind oil import tariff fee, use of government royalty oil, debt equity instruments, and call options. In some cases they were warmed-over versions of ideas that had already been proposed and rejected. For example, despite the fact that it had been categorically rejected by the FEA in 1976, the search for an alternative financing mechanism led to a brief revival of the IPR concept, in the guise of an in-kind import fee. On March 12, 1981, Senator Nancy Kassebaum (R-Kans.) introduced Senate bill 707, which required firms that imported more than an annual average of 5,000 barrels per day to deposit oil each year into the SPR at an annual rate of five times their average daily imports during the previous calendar year. The government would pay the importers an annual fee of 10 percent of their original purchase price of their contributions for eleven years, or until the oil was withdrawn, whichever came sooner. Refiners and importers would retain title to the oil but would not be paid for it until the DOE decided to use it. In the event of a drawdown, the government would sell the oil and use the proceeds to pay each importer the then-current average world price, minus whatever payments (10 percent per year) the importer had already received from the government. In short, the oil importer was guaranteed, on paper, to recover after eleven years 110 percent of his cost in purchasing the oil. On paper, Kassebaum’s plan would provide 25 million barrels per year of oil to the SPR while reducing federal expenditures on the SPR by almost $1 billion in FY 1982. Like the IPR concept, it did so by shifting some of the SPR’s cost onto industry. That, in turn, raised the same issues of administration, competition, and fairness that had torpedoed the concept before. There were other problems as well. For example, the government would have to monitor sales prices in order to determine the fee rate. The size exemption might encourage the proliferation of smaller importing firms, bringing uncertain economic consequences to the industry and the marketplace. The affected firms would suffer financially if there were no drawdowns for long periods of time, while they would benefit from more frequent drawdowns. This raised the spectre of industry influence on the use of the reserve. House Democrats such as Philip R. Sharp (D-Ind.), chairman of the House Fossil Fuels Subcommittee, called the Kassebaum proposal “half-baked” because there had been no detailed analysis of it. With opposition growing to the idea, on March 18, 1981, the Senate Energy Committee rejected the Kassebaum amendment.8 Still the IPR idea was not dead. The revival of the IPR idea came at a

Maturation and Ascension

121

time when more attention was being paid to the role industry inventories played in the world marketplace of oil. Low inventories and lack of inventory policies had led to the panic purchases that followed the Iranian oil supply disruption and had helped create the second oil shock. On the other hand, those purchases had led to high inventory levels in the wake of the disruption. When Iraq invaded Iran in September 1980, cutting off 3.3 million barrels of Persian Gulf oil, oil prices rose only 10 percent, as compared to the 137 percent price spike that occurred in the wake of the Iranian revolution. High inventories discouraged panic purchases lessening pressure on spot prices, and subsequent production increases around the world further lessened the blow.9 With industry reserves running high, in late April 1981 Senator James A. McClure (R-Idaho) introduced a bill calling for the White House to undertake and complete a study on how to implement the IPR provision. Predictably, the idea of federally mandated inventory requirements met with stiff opposition from industry groups. Urvan R. Sternfels, general counsel of the National Petroleum Refiners Association, stated flatly that, in the case of the SPR, “crude oil should be stored by the government and paid for by the government.”10 On the other end of the spectrum, and in line with the prevailing free-market regulatory philosophy, others called for the government to get out of the energy economy altogether. Proposals for building up stocks through the private sector proliferated in the early 1980s. For example, the Heritage Foundation, a conservative think tank, recommended abolishing the SPR altogether, replacing it with a three-tier private stockpiling program that would be partly subsidized by federal tax credits. One tier would be a reserve where refiners, importers, and even speculators could stockpile oil in government facilities; another tier would be set up at plant sites by industrial users of gasoline, propane, residual oil, and other fuels. The third tier would be a home heating oil reserve maintained by private owners, as existed in some European countries’ stockpiling programs.11 Philip K. Verleger of the Yale School of Organization and Management also advocated using market mechanisms to finance the reserve. In an April 1981 editorial in the Wall Street Journal, he proposed that the government sell calls or options on the SPR, essentially selling the rights to purchase SPR oil, in the future, to the private investors. Verleger, and later others, argued that call options on at least a portion of SPR oil might have several benefits: it would automatically inject oil into the marketplace in an emergency or disruption, providing both a calming and deflationary influence on a panicked market; and relying on marketplace mechanisms would, in turn, avoid the problem of al-

122

The Strategic Petroleum Reserve

location by the government. It would also remove political considerations that might delay a drawdown. In addition, call options would appeal especially to independent refiners and other large-scale consumers. By purchasing such options, they would essentially be buying supply insurance, namely the right to buy SPR oil at pre-crisis prices, thereby gaining automatic access to emergency supply. Lastly, selling calls would raise revenue for the SPR while relieving the growing federal budget deficit. The only active federal intervention under Verleger’s plan would have been a temporary oil import tariff, which he argued would act as an incentive to stockpiling by offering firms the prospect of inventory profits during a disruption. The Industrial Oil Consumers Group (IOCG) echoed these themes, advocating that the DOE sell pre-disruption options on a certain percentage of SPR oil, so that industrial consumers could gain supply insurance. It was a measure of the growing strength of the new free-market regulatory philosophy that all these proposals, by providing significant roles for the industry in the nation’s oil security stockpiling program, seemed to have forgotten, or not taken into account, the public backlash that had occurred against the industry in the wake of the first oil shock.12 Meanwhile, by the early 1980s, having built up its reserves, industry now seemed intent on reducing them. Demand was weak, the market was increasingly slack, and losses were mounting in refining operations. Companies were letting their reserves dwindle and not replacing them. It was a trend that would increase in the future, as lean operations became the hallmark of efficiency. But in this case, noted Lawrence J. Goldstein, an economist at the Petroleum Industry Research Foundation, “[p]rudent business sense may run counter to the national interest.” In many ways, that statement explained why the SPR was and would remain a national security program paid for and owned by the federal government. Still, the idea of using market mechanisms to build up the SPR remained appealing in some quarters.13

OIL BONDS In the early 1980s, the idea of funding the SPR through governmentissued oil bonds seemed to present a viable method for addressing the program’s rising costs while keeping spending in check. The oil bonds concept gained ascendancy as oil futures trading became an increasingly common method for some firms—notably refiners, importers, and petrochemical companies—to help ensure supply and price. Oil futures trading took off on the London-based International Petroleum Exchange (IPE) and on the New York Mercantile Exchange (NYMEX),

Maturation and Ascension

123

established in 1980 and 1981, respectively, and in other trading houses as well.14 The idea of using oil futures bonds to fund the SPR had in fact first been raised in September 1979 by David Stockman (R-Mich.), then a member of the House subcommittee on Energy and Power (Stockman would become Reagan’s first OMB Director). Under his proposal, private investors would purchase oil bonds which could be traded on the market, with a return based on an anticipated high price of oil during a supply disruption. The potential advantages were that the bonds would reduce the government’s financial burden by attracting money from the private sector. It was also hoped that using a market-based funding mechanism would lessen the role of government and thereby relieve the program of political influence. In fact, it was in this vein that the oil bonds idea had been revived in April 1980, during the midst of the oil fill controversy. At that time, representatives Stockman, Gramm, and Dingell proposed it as a means of inoculating the program against political pressures that might hinder oil fill. In February 1981, as the Reagan administration began to prepare its budget for FY 1982, it had to grapple with the issue of meeting the SPR’s rapidly growing costs. Committed to moving the program ahead, the administration called for an appropriation of $3.9 billion for the SPR, $3.68 billion of that for oil acquisition. A proposal to raise $40 billion via oil bonds was first raised by officials within the White House, then abandoned because of an intra-administration split on the issue. Both the OMB, and its new director, David Stockman, and the DOE and its new secretary, James B. Edwards, supported the idea. Stockman had been pushing the concept since the new administration took office. Treasury Department officials, however, opposed the idea, contending that the bonds would compete with Treasury issues and otherwise siphon funds from credit markets. With stiff opposition from the Treasury, the Reagan administration shelved the oil bonds idea—for the moment.15 The oil bonds concept was revived in the spring of 1981, when Congress slashed the SPR’s funding. In late March and early April, both the Senate and House budget committees, joining in the popular attack on big government in general and the DOE in particular, forced the administration’s hand by voting to cut $3 billion from the FY 1982 $3.9-billion figure, with the understanding that the difference would be made up via off-budget financing. This action forced the new administration to deal forthrightly with the issue of alternative financing for the SPR. The Reagan administration, however, remained divided on the concept of oil bonds.

124

The Strategic Petroleum Reserve

There were those in Congress, however, who were ready to run with the idea. In the House, representative Phil Gramm, a former Texas A&M economics professor, revived the oil bonds concept. In late March, he introduced the Private Equity Petroleum Reserve Act (H.R. 2304), in which private investors would assume much of the SPR’s costs. They would do so by buying ten-year certificates that would be denominated not in dollars but in barrels of oil. Each bond would be worth a barrel of oil, at the then-current market price. At maturity, the government would pay the investors the existing dollar value of their oil, less storage and handling fees. On the other hand, the investor could (and hopefully would) renew his bond for another ten years. Essentially, the oil investors would be speculating on the price of oil over the next ten years. There were a number of potential attractions. The fact that oil prices had risen sharply throughout the 1970s was the obvious lure. If oil prices continued to rise, the bonds would appreciate in value. Also theoretically, with oil bonds, the government would be injecting revenue into the private sector, and thus the economy, during a supply disruption. Moreover, Gramm contended, by depending on the private sector for funds, the oil bonds would help to remove the SPR from politics and political blackmail. Lastly, by obtaining the participation of private individuals, the oil bonds would help build a political constituency for the SPR outside the government, something the program had lacked. During a drawdown, the Energy Secretary would immediately call for the redemption of the bonds, equal to the number of barrels being removed from the SPR at spot market prices, almost certainly at a premium over the original purchase prices. The oil bonds, Gramm explained, were an “economically sound mechanism” that “would do public good with private financing.” With Congress’s budget-slashing mood, the oil bonds had a renewed momentum.16 Senate Republicans seized the momentum to propose other financing mechanisms. On April 10, 1981, Senators McClure and John W. Warner (R-Va.) submitted Senate bill 998, which authorized the government to receive oil instead of money in royalty payments from companies operating on federal leases. The bill also authorized the government to dip into the Energy Security Fund, the account established by the Windfall Profits Tax Act of 1980, originally created to fund President Carter’s synfuels program. If necessary, the bill also authorized the “sale of Strategic Petroleum Reserve Securities in the private securities market.”17 By late April, the Reagan administration had accepted the political reality of off-budget financing. The method first proposed by the administration, the conventional budget appropriations process, had

Maturation and Ascension

125

been rejected by the relevant congressional committees, which indicated that the SPR should be financed at least in part through some sort of off-budget mechanism. At the same time, administration officials—notably Treasury Secretary Donald T. Regan—were trying to apply the brakes to the oil bonds proposal. In a Cabinet memorandum of April 22, 1981, Regan pointed out that given the administration’s commitment to nearly $4 billion for the SPR in FY 1982, and congressional insistence on an off-budget funding mechanism, “consideration must be given to alternative financing methods. If Congress insists on off-budget funding, however, the substance of the President’s March 10 financing proposal for the SPR should be preserved, that is, the financing should be accomplished through the Treasury. This is the cheapest and fastest financing method. Any alternative of special market issues of ‘oil bonds’ with maturity values indexed to the price of oil (as proposed by Gramm or others) is simply unworkable. The marketability of any such issues would be extremely limited, their issuance would entail substantially higher financing costs, the desired SPR fill rate would not be achieved and the Administration would be ridiculed in financial markets.” Treasury financing of the SPR, he wrote, could be accomplished off-budget either directly from the Treasury, or through the Federal Financing Bank, “since the FFB is an off-budget entity financed by the Treasury through the Treasury’s traditional marketplace borrowing methods.”18 In an April 24, 1981, Cabinet meeting, the president referred the issue of SPR financing to the Cabinet Council on Economic Affairs. In a May 5 memo to the president, the Council agreed with Regan’s assessment, writing that “[i]t appears highly unlikely, given the congressional budget actions to date, that we can achieve full on-budget funding as you originally proposed.” The Council also agreed with Regan that the “most appropriate form of any off-budget financing mechanism provide for issuing conventional interest-bearing debt obligations which would carry the full faith and credit of the United States Government.” Ultimately, both the Treasury Department and the Cabinet Council on Economic Affairs recommended that any legislation to provide an offbudget means of SPR financing use conventional debt instruments.19 On May 8, 1981, Energy Secretary Edwards, Treasury Secretary Regan, and OMB Director Stockman appeared before the Senate Energy and Mineral Resources subcommittee. Their purpose was to provide the White House view on the issue of alternative SPR financing. There, Stockman announced that the administration would support a bill that would build up the SPR by borrowing money that would not be counted as part of the federal deficit. “[S]imply pass a law,” he

126

The Strategic Petroleum Reserve

advised the subcommittee, “that does not count the money. Make it off-budget.” Stockman urged the Congress to create an off-budget account with the financing authority “to go directly to the market”; or, following Secretary Regan’s advice, “use debt in order to finance [oil] purchases.” Administration officials argued that because the SPR’s oil one day might be sold, and since the oil would almost certainly appreciate in value, the government would be acquiring an asset rather than covering current expenses. Most members of Congress, anxious for a way to reduce at least the appearance of federal spending, were receptive to the administration’s message. It was thereafter understood that the off-budget financing would come through Treasury bonds.20 With administration approval, on August 13, 1981, both the House and the Senate agreed to the Omnibus Budget Reconciliation Act of 1981 [PL 97–35], which contained the “Strategic Petroleum Reserve Amendments Act of 1981.” These provisions pertained to SPR funding and the off-budget issue, fill rate, and DOE reports on the program’s progress. For FY 1982, the act appropriated $260 million, on-budget, for SPR costs other than oil acquisition, transportation, and injection, the variable and biggest part of the program’s cost. The funds for those expenses would come from a separate “SPR Petroleum Account” which the act established. Funds for this account could be “obligated” by the Secretary of Energy, and would be paid for by congressional appropriations legislation, and by the Treasury Department sale of government bonds. Those monies, however, would “not be included in the totals of the budget of the United States Government.” In other words, the “SPR Petroleum Account” would be off-budget, but the government, not the private sector, would still pay for it. In the case of FY 1982, the act stipulated that the Energy Secretary could obligate an amount “not to exceed $3.9 billion.” For FY 1983 and after, Congress would have to authorize and appropriate money for the off-budget account. The legislation made no mention of oil bonds, call options, or other financing mechanisms.21 In 1985, the “SPR Petroleum Account” was placed back on-budget under the Gramm-Rudman-Hollings Act, the purpose of which was to force fiscal honesty and responsibility on federal spending. In time, Congress would create another account, the “Strategic Petroleum Reserve Account,” which would be an on-budget account for development, maintenance, and operations, as well as overhead, contractor and government salaries, and planning. But the debt equity instruments—the oil bonds and call options—never took hold as an alternative financing mechanism. Congress would have had to amend the EPCA to allow the SPR Office to become involved in the futures markets, which using

Maturation and Ascension

127

oil bonds would have required. Then the SPR Office / DOE would have had to hire a brokerage firm to process the bonds, and that firm would almost certainly expect to make a profit for their efforts. That, in turn, would have brought into question whether the SPR program was being run on a national security basis or on other (economic) considerations. Moreover, SPR official Rick Furiga noted years later, “the narrow margins we would have offered would just have about paid for the broker’s fees, and [we] wouldn’t have any money left to do anything else.” The SPR oil bonds “just wouldn’t be big revenue generators.” Proposals to fund the SPR through the oil futures markets would persist into the future, but scarcely merited the notice of the White House or Congress. Ultimately, most alternative financing mechanisms entailed a number of risks, but did not generate sufficient revenue to justify taking those risks. What it came down to, Furiga later commented, “was that there’s no free lunch.”22

THE MEXICAN OIL DEALS The nearly three-fold rise in prices between 1979 and 1981 provided the economic stimulus for many nations to undertake and accelerate exploration and production. Some national governments even staked their future on high oil prices, mortgaging high-cost projects with anticipated future windfalls. For the U.S. neighbor to the south, whose entire oil industry was state-owned, this was especially the case. In the latter 1970s, Mexico enjoyed its biggest oil boom ever. By early 1981, however, that stepped-up production was adding to an emerging glut of oil on the world market. Producers started actively seeking out markets, the exact opposite of conditions during the second oil shock. It was in this context that the Mexican government, and its stateowned oil monopoly, Pemex, began looking for buyers for large amounts of Mexican crude over a long-term period. Mexican oil had in fact supplied a significant portion of the SPR’s crude since the program’s inception. Of the 180 million barrels the SPR held by August 1981, 33 million barrels, almost 20 percent, had come from Mexico. That oil had come to the DOE through U.S. companies, who had bought the crude from Pemex. Historically, the Mexican government had a policy against selling too much oil to any one nation, lest it become dependent upon that nation’s market. Thus, before 1981, Mexico had limited the sale of its oil to the United States to 500,000 barrels per day. By April 1981, however, Pemex was looking for long-term customers, and was willing to sell its oil at below-market prices to secure them. When it had demanded above-market prices, private oil com-

128

The Strategic Petroleum Reserve

panies ceased to buy Mexican oil. Seeking assistance for the emerging Mexican “petrotrauma,” Mexican Secretary for National Property and Industrial Development Jose Andreas De Oteyza Fernandez contacted U.S. Ambassador to Mexico John Gavin. One option discussed was for Pemex to sell large amounts of oil to the U.S. DOE for the SPR program, at prices slightly below the market. In the words of one DOE official, there was a “natural marriage” here—Pemex needed markets, the SPR needed oil, and Gavin saw the opportunity to help establish that relationship. The United States could take further steps to mend its historically stormy relationship with its southern neighbor and enhance its energy security in the process. Interestingly, like their counterparts in the Arab oil-producing nations, officials in the Mexican government had heretofore feared and distrusted the SPR as a program that was both unnecessary and potentially confrontational. By the early 1980s, loss of markets had changed that view. With the economic recession on the horizon, the Mexican government, in the words of Energy Secretary Edwards, “agreed to give us as much oil as we could buy.”23 Gavin set up a meeting between himself, DeOteyza, and Harry A. Jones, Deputy Assistant Secretary for the SPR, at the U.S. embassy in Mexico City. Together they worked out the basis for what would become the first “government-to-government” deal between Pemex and the DOE. On August 20, 1981, in a deal described by some energy analysts as a “major bailout,” the DOE announced an agreement with Pemex for the delivery of up to 110 million barrels of Mexican oil, 25 percent of which would be heavy sulfur (or sour) “Mayan” crude oil and 75 percent lighter or sweeter (but still technically sour) “Isthmus” crude oil, over a five-year span through July 1986. Pemex would deliver at least 200,000 barrels per day between September 1, 1981, and the end of the year. It would then supply the reserve at a rate of 50,000 barrels per day through August 31, 1986. By October 1981, in fact, the DOE was receiving more than 400,000 barrels per day from Pemex for the SPR; the oil would soon be straining the program’s storage capacity. This first U.S.-Mexico government-to-government deal was, as one SPR official later put it, the two countries and their agencies “feeling each other out,” and more like a normal commercial arrangement. Ultimately, the parties agreed that the initial purchases would be priced at official Rotterdam (the Netherlands) posted prices. Thereafter, the price for the oil would be negotiated each quarter. According to published reports of the time, it was expected that the prices would fall below those set by the OPEC cartel. “The beauty of this [contract],” commented SPR Deputy Director Richard D. Furiga at the time, “is that it’s a long term contract with a very secure source of supply.”24

Maturation and Ascension

129

One year later, in August 1982, that commercial contract was followed by another that was less commercial and more oriented toward financial assistance. This second deal, even more so than the first, was born from the rapidly deteriorating financial situation that the Mexican government found itself in. On the basis of its massive oil boom in the late 1970s, Mexico had undertaken projects that required massive government spending. The growing oil glut, however, meant that the foundation of Mexico’s future prosperity and financial stability were being eroded by falling oil prices and the loss of markets. These were compounded by high interest rates, a severely over-valued peso, and large-scale government spending. By spring 1982, the government had a severe liquidity crisis and its ability to service its debt was in doubt. Jesús Silva Herzog, the Mexican Finance Minister, began a series of trips to Washington, D.C., to confer with Federal Reserve and Treasury Department officials on a financial aid package. By early August, the Mexican government faced more than a financial crisis; it was on the brink of insolvency. On Friday, August 13, Silva Herzog once again arrived in Washington, accompanied by Pemex officials, this time to meet with DOE and Treasury Department officials. What followed in the next few days became known as the “Mexican Weekend.” Beginning that Friday afternoon, Gavin, Furiga, and other DOE and Treasury Department officials, together with Silva Herzog and his team, worked virtually nonstop until the early hours of Sunday morning. What they came up with was a multibillion dollar package of American loans and credits to Mexico. Part of that deal—one billion dollars, in advance, to be exact—involved another government-togovernment contract, a second term-purchase agreement worked out between the DOE and Pemex for the 1983 delivery of Isthmus oil at the wellhead price. This meant that if the world market price went up, the SPR got less oil; if the price went down, it would get more. The April 9, 1984, issue of Forbes reported that in this second DOE-Pemex deal, the United States paid “about $29 per barrel,” which would have been slightly below the then-current market prices of $30 to $31 per barrel. According to the DOE’s 1984 SPR Annual Report, in 1983 the SPR received 50.7 million barrels of Mexican sour crude from both the 1981 and 1982 supply contracts with Pemex. With the DOE receiving 50,000 barrels per day from the first contract, the DOE would have obtained 18.25 million barrels in 1983 from the August 1981 deal. That would mean that the August 1982 deal netted 32.45 million barrels of oil for the SPR, which, for one billion dollars at $29 to $30 per barrel, would have been about right. Other former DOE officials, however, remembered that under the terms of the deal, the DOE had received about

130

The Strategic Petroleum Reserve

$1.25 billion worth of oil, which would have meant the DOE received approximately 36 to 37 million barrels of oil from the deal.25 Whatever the precise details, this second Pemex contract secured a significant amount of oil for the SPR—over 30 million barrels. And the series of contracts that followed enabled the DOE to finally achieve the 500-million barrel storage objective set forth by the FEA in 1976. These contracts not only gave the SPR a steady and significant supply of crude oil, but also represented a nearby source, which reduced transportation costs significantly. At the time, it cost about four dollars per barrel to deliver Persian Gulf oil to the SPR sites; it cost about sixty cents per barrel to deliver Mexican crude. With geographic proximity, the DOE could hire less expensive smaller tankers, which could bring the oil directly to the SPR’s sites. Between 1981 and 1986, the SPR’s end-of-year total inventory increased substantially, from 230.3 million barrels to 511.6 million barrels (figure 4.1). The FEA’s SPR Plan of 1976 had called for the SPR to have 500 million barrels in place by the end of 1982. Judged against that standard, the program was four years behind schedule. Judged by Schlesinger’s accelerated plan, the program was six years behind schedule. Still, four years behind schedule (arguably the more appropriate standard) was not bad when one took into account the problems of starting up, getting a slower fill rate than expected, and suspension of oil fill in 1979–80. The stepped-up fill rates of the early 1980s made the SPR a more Figure 4.1: SPR Fill, 1978–95, in Millions of Barrels

SOURCE:

U.S. Department of Energy, Assistant Secretary for Fossil Energy, Office of Strategic Petroleum Reserve, Strategic Petroleum Reserve: Annual Report, February 15, 1996. Washington, D.C.: DOE, 1996, 14.

Maturation and Ascension

131

credible and legitimate policy tool capable of responding to and perhaps deterring future supply disruptions. It was a measure of the important role that Mexican oil played that by 1995, almost 42 percent, nearly 257 million of the SPR’s 591 million barrels, had come from Mexico—almost twice the amount that had come from the second-largest source, the British North Sea. By the latter 1980s, the DOE-Pemex relationship had begun to cool. The deals became smaller and fewer. As the SPR reached 500 million barrels, the congressional energy committees became wary of continuing to appropriate large amounts of funding for the program, especially in the context of mounting federal debt. For its part, the Mexican government was growing fearful that it was becoming too dependent on the U.S. energy market. By 1983, largely because of the DOE-Pemex deals, Mexican oil sales to the United States accounted for 60 percent of Mexico’s total oil exports. Thus by the mid-1980s, the Mexican government once again sought to limit its oil exports to the U.S. to 50 percent of its oil export total. And, by that time, the marriage had served its purpose. Pemex had found a reliable, long-term buyer in the DOE, and the deals enabled Mexico to survive the oil glut while it established other markets. From the U.S. perspective, the deals enabled the SPR to finally reach the target goal of 500 million barrels. “It was good for us, and good for them,” one U.S. diplomat remarked of the DOE-Pemex deals. “The reserve wanted the oil, and it gave us a sort of white-knight image, the kind of thing we haven’t had here for quite a while.”26

MILESTONES By the early 1980s, the SPR had achieved some notable milestones. The DOE had resumed open-market purchases in the final days of the Carter administration, and that policy had continued under the Reagan administration, which began buying oil at a rapid clip as soon as it took office. Largely because of the return to open market purchases and even more because of the Mexican deals, the SPR enjoyed a dramatically increased fill rate in these years. By January 1981, the average fill rate had increased to more than 200,000 barrels per day. By May 1981, the rate was 400,000 barrels per day, and by October, it was 600,000 barrels per day. In its first full year in office, the Reagan administration doubled the amount of oil in the reserve, from 107.8 to 230.3 million barrels. To date, that increase of 122.5 million barrels has been the single-largest annual increase in the program’s history. Likewise, the 1981 average daily fill rate of 336,000 barrels has been the fastest fill rate achieved in the program’s history.

132

The Strategic Petroleum Reserve

In April 1982, the SPR reached the 250-million barrel mark, halfway toward the original 500-million barrel objective. On April 5, former President Ford and Energy Secretary Edwards joined with Louisiana Governor David C. Treen and U.S. Representatives Lindy Boggs (D-La.) and Henson Moore (R-La.) in attending a ceremony at the St. James terminal to commemorate the event. Ford praised President Reagan’s efforts toward achieving energy security, while also reducing federal intervention into the energy economy. The president, Ford noted, “has built the Strategic Petroleum Reserve to the point where it can effectively blunt the oil producing countries’ use of the so-called oil weapon.” The United States, Ford added, was “not yet completely out of the woods” regarding its energy vulnerability; the nation still needed to work to develop alternative energy sources. But “tools such as the Strategic Petroleum Reserve have taken us beyond reliance on ineffective and intrusive measures such as price [and] allocation controls.” And fittingly enough, it was a shipment of Mexican crude oil that delivered the 250th million barrel to the SPR which at Edwards’s signal, was pumped into the St. James storage tanks, eventually to be pumped by pipeline to the Weeks Island site. By the end of 1982, the SPR held almost 294 million barrels, and with the U.S. economy consuming imported crude at a rate of 4.5 million barrels per day in 1982, the SPR held enough oil to provide a sixty-five-day cushion if all imports were cut off.27 What was more, falling world oil prices enabled the DOE to accomplish this despite cuts in their funding. The SPR program took a 12 percent cut in oil purchases as part of President Reagan’s plan for across-the-board spending cuts for most government programs in FY 1982. That 12 percent cut meant a reduction of $466 million for oil purchases. With oil prices falling below previous estimates, however, the DOE was able to buy 2 million more barrels of oil than officials had thought they would be able to. Nor did the Reagan budget cuts affect monies set aside for future and ongoing leaching and cavern-expansion efforts. Phase II, bringing on an additional 290 million barrels’ worth of storage capacity, would go forward. The DOE had anticipated that with the recent history of oil prices, oil purchases would be the most expensive part of the SPR’s costs. Meanwhile, energy security continued to be a front-burner issue. The outbreak of the Iran-Iraq war in September 1980 meant that instability in the Middle East would continue, possibly spread and increase. That, in turn, once again raised the spectre of another oil supply disruption. Going into the off-year elections, both parties were determined to pass a bill on energy emergency preparedness. With Reagan’s vigorous

Maturation and Ascension

133

support for the SPR, the program became the obvious focus of the developing legislation. Thus, increasing the reserve’s fill rate and improving its drawdown and distribution capabilities became a major focus of the Energy Emergency Preparedness Act (EEPA) of 1982, which became law on August 3, 1982. The EEPA declared it to “be the policy of the United States that the Federal Government shall be prepared prior to any shortage of petroleum products to respond to energy emergencies.” Accordingly, the act required a fill rate of at least 300,000 barrels per day until the reserve reached the 500-million barrel mark, unless a presidential finding deemed such a rate not to be in the national interest. In such a case, the minimum rate would be 220,000 barrels per day.28 But Congress also wanted to know under what conditions the administration would draw down the SPR, and it wanted to know how the government would sell and distribute the oil. Thus the act also required the president to submit a new drawdown plan for the SPR, as an amendment to the 1976 SPR Plan, by December 1, 1982. The amendment would be effective upon transmittal and would not be subject to congressional review. By focusing on improving the reserve’s readiness and increasing the amount of “oil in the ground,” while making no provision for allocation or price control authorities, the EEPA was a big part of the process in which the SPR became the main cog in the federal government’s emergency energy policy. The EEPA was also “intended to compel all the necessary preparatory work in contingency planning” for an energy crisis, all under existing regulatory authority—that is, without creating new energy regulations. Under the new regulatory philosophy, the EEPA sought to rely more on the private sector.29 After the EEPA’s enactment, the GAO, wanting to keep spending in check, told Congress that the DOE would not be able to buy oil at 300,000 barrels per day throughout FY 1982. Moreover, with such rapid fill rates, the DOE began to find itself running out of salt-cavern space to store SPR oil. They did not want a repeat of the demurrage costs that had occurred in the latter 1970s. Partly because of these constraints, on December 1, 1982, president Reagan issued a finding which stated that it would not be in the national interest to fill the SPR at 300,000 barrels per day. The President based his decision on two things: the fact that with the accelerated fill rates, the program was running out of storage space; and that a 300,000 barrels per day fill rate would greatly expand government expenditures at a time when the administration was looking to control costs. The DOE then announced that it was going to maintain a minimum average fill rate of 200,000 barrels per day until 1989, when the SPR was scheduled to have 750 million barrels in

134

The Strategic Petroleum Reserve

storage. But the agency remained opportunistic. Taking advantage of a slack market, the DOE was sometimes able to buy oil at rates much greater than 300,000 barrels per day.30 To create the extra storage capacity for Phase II, entailing the addition of 290 million barrels of capacity, the DOE would expand three Phase I sites, leaching new caverns at Bryan Mound and West Hackberry and acquiring an additional existing cavern at the Bayou Choctaw site. By August 1981, storage space was being created by leaching at rates three to four times what had been previously thought possible. In large part, this was made possible by the development of techniques that allowed for disposal of unprecedented quantities of brine in the Gulf of Mexico, via pipeline. With monitoring by Texas A&M and McNeese University marine scientists, these brine disposal methods slowly gained local acceptance as an essentially harmless activity whose ecological effects were either minimal or even beneficial, as attested to by shrimp gathering near DOE brine diffusers. Apparently, the shrimp were attracted by the warmth associated with the diffused brine.31 For Phase III, involving the addition of 200 more million barrels of storage capacity, the DOE needed to acquire a new site where many salt caverns could be created. In 1982–83, the agency acquired the Big Hill site in Jefferson County, Texas, from Amoco and individual landowners. Just 20 miles southwest of Beaumont, Texas, the site covered 271 acres, had access to the Intracoastal waterway, and (like the other SPR sites), could tap into nearby oil refining and transportation centers in Beaumont and Houston. Big Hill became the SPR program’s fifth storage site, and the sixth overall, including the St. James terminal (See Figure 2.1, chapter two). The site came to have fourteen caverns with a storage capacity of 160 million barrels and greatly aided the DOE in its efforts to move the program into Phase III toward 750 million barrels in total storage capacity. As the West Hackberry brine disposal pipeline was decommissioned in the 1990s, Big Hill joined Bryan Mound as the only two SPR sites with brine disposal pipelines out into the Gulf of Mexico, both off the Texas coast.32 To prove that it could successfully draw down the oil, the DOE conducted operational tests in February and April 1980. These tests demonstrated the capability of the existing SPR complex of storage sites, terminals, and pipelines to meet the performance objectives of pumping out and transporting one million barrels of oil in a 24-hour period. The February drawdown—in large part a response to the charge that the SPR could not draw down its oil—had been a surprise exercise ordered by Secretary Duncan, requiring 600,000 barrels to be with-

Maturation and Ascension

135

drawn from the West Hackberry site. The April practice drawdown was a planned exercise involving the West Hackberry, Bryan Mound, and Bayou Choctaw sites. Approximately 1.4 million barrels were drawn down at an average rate of 1.2 million barrels per day, 25 percent above the design rate. Oil from the West Hackberry site was moved to the Sunoco terminal at Nederland, Texas; the Bryan Mound oil was moved into storage tanks near Freeport, Texas; and the Bayou Choctaw crude was moved to the St. James terminal on the Mississippi River. In both tests, objective criteria, including getting the oil out from the caverns, through pipelines to the distribution points, then back into the caverns, were met or exceeded. More drawdown tests occurred in 1983, in July at the Bryan Mound and Bayou Choctaw sites and in February 1984, at the West Hackberry site. In the two 1983 exercises and the one 1984 exercise, over a million barrels were drawn down, transported through their pipes to their commercial terminals, and then pumped back in again.33 While Reagan had signed the EEPA, he was reluctant to set forth a detailed drawdown and distribution plan. The administration believed that developing such a plan inevitably entailed the same regulatory evils as the micromanaging policies of the 1970s. Required under the EEPA to submit a new plan, the president decided to devise one that featured the open auction policy and adhered to free market as much as possible.34 As the White House prepared the new drawdown plan, it began to consider distribution options. In its 1979 SPR Plan amendment, the Carter administration had embraced a policy of flexibility, keeping all of its distribution options open from government allocation to market auction. Reagan administration officials, however, had by 1982 already indicated their preference for letting the market, meaning prequalified buyers of SPR oil, determine where and to whom the oil would go, and to a large extent, the price of that oil. In a September 24, 1981, memo to the Cabinet Council on Economic Affairs, Energy Secretary Edwards had written that SPR oil would be sold at prevailing market prices, “reflecting the Administration’s free market philosophy.” Market pricing would encourage the “economically efficient use of SPR oil” and would avoid “needless administrative complexities.” In addition, market pricing, he argued, would also provide the government with “the full value of the stored oil.”35 In November 1982, a working group consisting of DOE and National Security Council officials began to develop the new drawdown plan. White House Executive Secretary Danny J. Boggs and National Security Council official Henry R. Nau led the effort. Further discourse

136

The Strategic Petroleum Reserve

on the subject, however, brought forth the same conclusions as previous discussions within the administration. “From the national point of view,” Boggs wrote in a November 15, 1982, memo to the Cabinet Council on Natural Resources and Environment, “the optimum outcome is to have oil go to the highest valued uses, which would mean a market allocation.”36 The working group also considered the question of whether there should be a “trigger,” specified in advance, for an SPR drawdown. Ultimately, the previous policy of flexibility was affirmed. In that same memo, Boggs set forth detailed reasoning against trigger mechanisms. “There is little or no analytical basis on which to determine in advance that a particular ‘interruption level’ requires use of the reserve,” Boggs wrote. “Any mechanical trigger finds it hard to distinguish between such supply and demand changes. It seems unwise to bind the President to such a rigid rule for the following reasons: the nature of the emergency, such as a known and repairable physical disruption, might mean that a price runup, if one occurred, was clearly temporary, and that the SPR should not be used for such a situation.” Moreover, “[a]ny fixed rule runs the risk of diminishing the additional protection provided by the Reserve. If all oil users or holders know the drawdown rule, they will more easily be able to reduce their own stocks in reliance upon the availability of SPR stocks at a known time and quantity. This problem of trying to ensure that the SPR supplements rather than supplants private stocks is pervasive, and should not be made any more difficult than it [already] is.”37 On December 1, 1982, President Reagan transmitted Amendment No. 4 to the 1976 SPR Plan to Congress, in accordance with the EEPA. The essence of the new drawdown and distribution plan was conforming to the market. Superseding the 1979 plan, the 1982 amendment stated that the principal method of distributing SPR oil would be through competitive sale or auction, with the oil going to those offering the highest prices, and would be open to the largest possible universe of eligible buyers to ensure efficient distribution. This plan, the amendment stated, would be “more in line with the normal workings of the marketplace.” Noting that the EPCA had given the DOE (the FEA, actually) the power to allocate SPR oil at controlled prices, with the new plan, “[n]on-competitive distribution” would occur “only as a limited, extraordinary option.” The Secretary of Energy could, in any calendar month, direct the distribution of up to 10 percent of the volume of SPR oil sold in that particular month; the price of that oil would be the average price of SPR oil sold at the contemporaneous or most recent competitive sale. But clearly the emphasis was upon letting markets

Maturation and Ascension

137

work. It was a sign that the federal political regulatory philosophy was shifting away from the promotion and maintenance of equity and competition to efficiency and market forces.38 As with the 1979 amendment, the 1982 plan specifically rejected trigger mechanisms, but gave the same list of considerations for foreign and domestic policy for the president’s consideration. The president still retained wide-ranging powers over the drawdown decision, which would take place either when the president declared there to be a “severe energy supply interruption,” or as necessary to meet U.S. obligations under the IEA oil-sharing program. In accordance with section 4(c) of the EEPA, the amendment took effect on December 1, the day it was transmitted to Congress.39

EARLY USE In May 1984, the 44-month-old Iran-Iraq war began to spill out into the Persian Gulf, as oil tankers under the flag of third-party nations came under fire from both sides. Iranian officials had pledged that if their shipping was attacked by Iraqi missiles, they would act to shut down the shipping through the Strait of Hormuz by sinking tankers. By mid-May, the so-called “tanker war” had begun to heat up, and rising tensions began to unnerve the marketplace. Spot prices for Mideast crude rose from $28 to $29 per barrel. Another oil supply disruption seemed imminent. In response to growing concerns, President Reagan publicly pledged that the United States would not allow any nation to block the flow of commerce through the Strait of Hormuz. The reason for this hawkish stance was obvious—20 percent of the noncommunist (or so-called “free world”) oil supply was shipped via tanker through that passage.40 It was also true, however, that this conflict did not pose the same threat to U.S. energy security that past Middle East crises had. This was true for a number of reasons. By the mid-1980s, there had been significant gains in conservation and demand reduction. The mandatory fuel efficiency standards, in place under the EPCA, were beginning to have a significant impact on the American automobile industry, which began to produce more fuel-efficient vehicles. Decontrol and rising prices had also dampened demand. Since 1980, U.S. oil consumption had declined by 11 percent. As a result, the U.S. had trimmed its dependence on oil imports from 46 to 29 percent of its total petroleum consumption, which by mid-1984 was down to roughly 16 million barrels per day. Moreover, the share of U.S. imports supplied by OPEC nations had fallen from 70 to 43 percent. With the increase of non-OPEC supply on

138

The Strategic Petroleum Reserve

the world market, U.S. imports of oil from the Middle East had fallen by 2 million barrels per day to approximately 770,000 barrels per day, representing roughly 10 percent of U.S. oil imports. There was also the oil glut that had been growing since 1980. In the summer of 1984, a world surplus capacity existed to the tune of nine million barrels per day, with three million of that coming from outside the Persian Gulf. And the U.S. now had a 400-million barrel SPR, which had not been there during earlier crises.41 But while the United States was itself not as energy dependent as it had been, it was still committed to preserving the stability of the world oil market, perhaps more than ever before. The U.S. Navy was protecting the flow of Persian Gulf oil to world markets, and U.S. commitments to the IEA oil-sharing program furthered its international obligations. Additionally, oil prices were now determined in the world market; in the developing futures markets, a round of panic-purchasing would inflate prices throughout the world. Thus even though the U.S. had reduced its dependence on Persian Gulf oil, were its flow to be disrupted, “[t]here’s no doubt that all U.S. manufacturers would feel the effect,” warned Ann Michel, assistant energy director of the National Association of Manufacturers. Would end-users be protected? If so-how? These questions about American energy security, in turn, raised the issue of SPR drawdown policy. Inevitably, politics played a role, especially in an election year.42 Thus, the growing Persian Gulf crisis renewed the political debate as to how and when the SPR should be used. To date, neither the Carter nor the Reagan administration had given a statement on drawdown policy, although both had spoken to distribution issues. To a large extent, this was because the reserve had not held a large amount of oil. Instead, the questions had been about financing and oil fill, not drawdown policy. But the question was no longer moot. The SPR now held a significant amount of oil. In a crisis, DOE officials estimated, the reserve could be drawn down at a rate of 2 million barrels per day for a ninety-day period and could provide an eighty-day supply if all U.S. imports were cut off, a scenario that the DOE deemed unlikely. With a total cutoff of Persian Gulf imports—a more likely scenario—the SPR could provide over eight hundred days of import protection.43 But the fact that the reserve now held a large quantity of oil merely shifted the questions. At least, Deputy Assistant Secretary for the SPR Richard D. Furiga noted with some irony, “[t]he questions have evolved from ‘Can you get the oil out of the ground?’ to ‘Can you distribute it?’“ This was especially true with the loss of the Seaway and Texoma pipeline systems, which, due to closures and reduced runs at a num-

Maturation and Ascension

139

ber of Midwest refineries, had recently been sold to Phillips Petroleum and the Houston Natural Gas Company, respectively, and converted to natural gas transmission. To compensate for the loss of these lines, Secretary of Energy Donald P. Hodel developed a $100-million spending bill that would enable the DOE to increase its ability to distribute SPR oil by building pipelines from the Bryan Mound site to the Texas City, Texas, refineries; from the West Hackberry site to the Lake Charles, Louisiana, refineries; and by adding harbor facilities. In the meantime, the DOE would rely more heavily upon tanker and barge traffic for transportation and distribution.44 A major disruption seemed perilously close in May 1984. Increasingly, energy analysts were becoming concerned about two things. One was that the DOE would wait too late to draw down the SPR in the event of an oil shortfall. While it was true that non-OPEC production might be stepped up in the event of a shortage, it was unlikely that it could be brought to market early in a crisis, when most economic damage, in terms of lost supply and rising prices, usually occurred. The other concern, held especially by the European members of the IEA, was that while the emergency reserves would probably be drawn down in the event of another major oil shock, on the order of 1973–74 or 1979, they might not be drawn down in a timely manner in reaction to a smaller supply disruption. Ultimately, the Reagan administration’s response to the tensions in the Persian Gulf, and the consequent political panic in the nation’s capital, would be to emphasize a new SPR policy.45 Up to this point, following the advice in the NPC’s 1975 Petroleum Storage report, the DOE had planned to use the SPR only as a last resort, as the last line of defense in an energy crisis. This original policy had been a natural consequence of the experience of 1973–74, and of the fear of future embargoes. Using the SPR too liberally and too soon, it was thought, would increase U.S. vulnerability to a deliberate, drawn-out denial of oil supplies.46 The high cost of the 1979–80 oil price increases gave rise to a revisionist school of thought. These costs, economic and social, changed thinking about SPR drawdown policy. In the minds of government and industry officials, the view arose that prompt use of emergency stocks could have a substantial impact in relieving the ills of a supply disruption. Increasingly, those who had a voice in energy policy expressed the thought that the SPR should be the first line of defense. It was in this context that the NPC, in its 1981 Emergency Preparedness report, had recommended using a portion of the SPR in the early months of a crisis if the disruption was large enough to warrant it. This recommendation

140

The Strategic Petroleum Reserve

represented a change from the 1975 Petroleum Storage report. That change, the Council commented, “reflects a recognition of the need to try to both minimize the harmful effects on consumers of very severe interruptions[,] as well as cushion the significant impacts which may be unnecessarily experienced in [the] early months of even smaller interruptions[,] when the full effect of the cutoff hits the United States, but before emergency supply / demand management measures have become fully effective.”47 Beginning in early 1984, forces in and outside of government had begun to lobby for an early use policy. In January, the Capitol Hill Club, a Republican strategy group, held a half-day symposium on the SPR that included energy experts, oil industry representatives, DOE officials, and congressional staffers. The attendees came to a consensus that a drawdown in the early stages of a supply disruption would benefit both industry and consumers alike. Again, the experience of 1979 came to the fore, and many of the attendees expressed the opinion that had the reserve been well-stocked at that time, an early use would have significantly reduced upward pressure on prices, and, as a result, also reduced political pressure for price controls and allocation measures.48 The House subcommittee on fossil and synthetic fuels had already launched hearings on energy emergency preparedness in February 1984. In letters and in testimony, trade organizations voiced their support for an early use policy. Both the Independent Gasoline Marketers Council and the National Council of Farmer Cooperatives emphasized the importance of early use to companies that had energy-intensive activities, but could not afford to maintain stockpiles or acquire reserves of their own.49 Members of Congress also began to favor an early use policy. One of these was Philip Sharp, chairman of the House fossil and synthetic fuels subcommittee, who commented in February that the SPR “should be used early in a crisis to calm the market.” An additional call for the early use policy came from a May 17, 1984, report issued by the House Government Operations Committee’s energy subcommittee, chaired by Congressman Mike Synar (D-Okla.). The report urged the DOE to prepare detailed plans on various aspects of energy emergency preparedness, including the SPR. Relatedly, it also called on the agency to submit a specific delineation of the administration’s policy concerning when and in what amounts SPR oil will be released during a supply disruption. In such a scenario, the report concluded, “the committee believes [that] the DOE should release SPR oil early and in amounts sufficient to help mitigate the impact of a supply disruption.” Following this, Hodel began to work with Synar on an emergency energy pol-

Maturation and Ascension

141

icy. In those discussions, the secretary indicated that in a disruption scenario, the administration would draw down the reserve quickly and in significant amounts.50 Still, pressure grew for some sort of public policy statement from the administration. Fears about a supply disruption were stoked on May 24, when an Iranian fighter plane attacked and sank a Liberian tanker in the Persian Gulf. On the news of this event, futures prices for July delivery of crude oil rose 15 cents to $30.75 per barrel on the NYMEX. Prices for June heating oil advanced 27 cents to 81.48 cents per gallon, and spot gasoline prices rose between 15 and 25 cents per gallon.51 With the Iran-Iraq war expanding, prices rising, the possibility of a disruption growing, and criticism mounting, the administration concluded that it had to publicly address SPR policy. Acting quickly, officials arranged a press conference at the Washington Press Club, the same day as the Liberian tanker sinking (May 24). There, while seeking to allay growing concerns, Hodel gave the first publicly announced official policy statement on how the SPR would be used in an emergency. It was here that the Reagan administration publicly adopted the early use policy. “We will use the SPR early in the event of a significant supply disruption,” Hodel affirmed. He noted, however, that the draw down would be only to supplement the increased production that the market could bring. If the government were to draw down any less, Hodel explained, it would be contributing to the price spike; if it were to draw down any more, he added, it would be “using the reserve to manipulate prices.” And the Reagan administration had been philosophically opposed to such policies, in whatever arena, from the very start.52 With 400 million barrels in storage, Hodel maintained that the SPR could supply up to 2.1 million barrels of oil per day for six months. He also promised that the administration would act quickly in the event of a disruption, even before consulting with U.S. allies, if need be, to get the complicated process of tapping the reserve going so that panicinduced price inflation could be averted.53 For its part, the DOE finally had a credibly stocked SPR with which it could plan and develop an actual emergency response. In this process, DOE officials concluded that the last resort (or rainy day) approach was “an absolutely unworkable strategy,” Hodel later observed. The reason, he noted, was that “you never know when its the ‘rainy day.’” The best use of the SPR, he concluded, was to use it, and announce its use, early in a crisis. For one thing, quick action was needed to prevent speculation. In past disruptions, speculators had used the crisis to raise

142

The Strategic Petroleum Reserve

prices and profit from panic in the market. A drawdown announcement would instantaneously remove the opportunity for such speculation. For another, given that the drawdown and distribution process might take anywhere from three to six weeks, it was also better to get the process going so that the SPR oil, if needed, would stand a better chance of actually mitigating the crisis.54 And in fact, in the days following Hodel’s announcement, nearterm crude oil prices fell back to what they had been before the price spike, declining by 50 cents per barrel in some cases. While there was no drawdown, the mere possibility of one had a dampening effect on prices. This was because, to a large degree, the market operated on psychology, a point conceded by many industry officials and energy analysts. The government could influence that psychology through the SPR by sending a message, or signal, that it would make extra oil available in the event of a shortfall. And that signal could, by itself, help reduce panic-induced price inflation, independent of an actual drawdown. “The reality is,” Hodel later commented, “that the announcement of the availability of the Strategic Petroleum Reserve is almost as efficacious as the actual use of it.”55 To some analysts, this new SPR policy seemed to mean that the reserve might be used to keep prices in check in a panicky spot oil market, even without a supply disruption. Administration officials were quick to reject that idea, and denied that the SPR had become an “economic tool” to manage energy prices. They insisted that drawdowns were predicated on an actual shortage of oil, rather than an increase in prices. Gasoline prices could rise to two dollars per gallon, administration officials contended, and that would not by itself dictate a drawdown. DOE officials were also quick to affirm this point. The purpose of the reserve, Furiga commented that same May, was not to influence market prices. Instead, the SPR’s purpose was “to mitigate the economic impact of a supply disruption.” It was, he conceded, “a very fine distinction.”56 Following this policy shift, U.S. policymakers began to try to persuade the other IEA members to follow suit. In September 1974, when the United States and the other IEA governments developed the IEP, stock drawdowns had been designated as the last line of defense, behind extremely ambitious demand restraint measures and the international oil-sharing program. But after the experiences of the 1979 oil shock—a major disruption that had nevertheless failed to trigger the IEP—thinking began to change. Throughout the first half of 1984, Reagan administration officials began to state publicly that a coordinated international emergency response, one that featured early stockdraw,

Maturation and Ascension

143

would be the most effective mechanism in any disruption scenario. In a crisis, they also did not want the SPR to supply world markets alone, relieving other IEA members of their obligations. By mid-1984, both the Reagan administration and the IEA had determined that strategic stockdraw should be the first line of defense in an oil emergency. Following a supply disruption, an early and large release of strategic stocks would calm the markets and prevent or temper high prices. At the same time, the IEA developed the coordinated emergency response measures (CERM), which were intended as a quick and flexible response to a supply disruption that was not large enough to activate the IEP. This policy concept had arisen from the distinction between crises and sub-crises. At the London Economic Summit in June, President Reagan called on all nations to build strategic stocks and to use them in a coordinated fashion during a disruption, to increase supplies and calm the market. In July, the IEA Board of Governors officially adopted the policy of coordinated emergency response measures, which recognized that stockdraw would be “particularly effective in the initial disruption stages, when the danger may be greatest of markets overreacting without regard to underlying supply / demand conditions.” Demand restraint would play a role, but much less than before. The IEP’s oil-sharing program would be implemented only as a last (or later) resort.57 As it turned out, aside from the supply interruption that came with the outbreak of the Iran-Iraq war in October 1980, the decade that followed was mercifully free from major disruptions. It was a strange but fortuitous twist of fate for the United States, and the SPR program, given the events of the previous decade. U.S. dependence on Mideast oil remained significant, but the increase in non-OPEC production, buildup in private stocks, and policing of the Persian Gulf by the U.S. Navy reduced the feasibility of the oil weapon and opportunities for disruption. And the emergence of a credibly stocked SPR played a role as well. In 1989, after the war had concluded, energy market analyst Edward Krapels observed that the “very existence of the SPR acted as a deterrent.”58

DRAWDOWN AND DISTRIBUTION In November 1983, before the tanker war erupted, Hodel had written NPC Chairman Robert A. Mosbacher, requesting that the Council undertake a study on the SPR’s drawdown and distribution capabilities. The result, The Strategic Petroleum Reserve: A Report on the Capability to Distribute Oil, was completed in December 1984. It recom-

144

The Strategic Petroleum Reserve

mended, among other things, that with the loss of the Texoma and Seaway pipelines, the DOE shift at least 100 million barrels of oil from the West Hackberry, Sulphur Mines, and Big Hill sites to the Weeks Island, Bayou Choctaw, and Saint James sites. It also called for a more efficient use of tankers and barges, including the relaxation of length restrictions at DOE terminals. It recommended that enhancements be made to the Seaway, Texoma, and Capline complexes including new pipelines, marine docks, and ballast water treatment facilities, so that distribution capacity would match drawdown capability. It argued that the agency should restrict sale of SPR oil to a list of experienced purchasers, marketers, and traders, and suggested that contracts for SPR oil be more in line with industry contracts. The report also recommended that the DOE increase the sweet part of the reserve’s sweet / sour crude mix from 35 to 45 percent. To some extent, this recommendation flowed from industry politics, notably a desire to ensure a source of sweet crude to smaller and independent refiners, which were often only able to process this type of oil.59 By and large, once again, the DOE accepted all the Council’s recommendations, except the one to increase the amount of sweet oil in the reserve. Such a move would have increased budget costs marginally, and in an age of budget deficits, that was enough for the OMB to weigh in against it. But in general, the NPC report gave the DOE some good advice, most of which it followed. But perhaps at least as important as advice was the credibility the report afforded. Coming from a respected industry source, the report gave the program a stamp of legitimacy, or approval. That credibility was important. Whether fairly or not, by the early 1980s, the SPR had gained a reputation as an “ill-starred” program. Media reports in popular magazines, trade journals, and broadcast channels had shined a bright light on the program’s setbacks over its first few years. The DOE’s ability to pump the oil out of the ground, distribute it, and even the quality and desirability of the oil had been brought into question. Examples of waste, fraud, and abuse were highlighted. Those reports, however, were often cast in the worst possible light and were sometimes erroneous. The program’s limited ability to pump its own oil out in the late 1970s was the result of decisions made years earlier. It had indeed lost major pipeline arteries, but inasmuch as the SPR would continue to rely on industry infrastructure, its distribution and transportation facilities might always be evolving to some extent. And while the SPR did hold some very heavy sulfur Mayan oil (over 3 percent sulfur content), it comprised less than 2 percent of its oil. Roughly 65 percent was sour

Maturation and Ascension

145

crude (usually 1.5 percent sulfur content or less), and about 35 percent was sweet crude (0.5 percent sulfur content or less).60 Pursuant to writing the report, the NPC’s SPR Facilities Task Group made a series of trips to Texas and Louisiana to physically examine the reserve sites. The group, consisting of officials from the refining and transportation segments of the petroleum industry, inspected the program’s drawdown procedures, maintenance practices, and quality of crude oil in storage. What they found stood in stark contrast to the then-current popular image of the SPR as a program mired in troubles with undesirable, high-sulfur crude or “slop” oil that it could not even get out of the ground. Years later, the Council’s Deputy Executive Director John Guy recalled that the NPC task group “gained the confidence that the people that were running it [the reserve] were pretty knowledgeable, that the maintenance practices weren’t too bad, that the concept for getting oil out of the ground wasn’t bad, and that the oil in the caverns was pretty decent and useful oil.” The task group was also impressed with DOE’s plans to replace its lost transportation arteries, the Seaway and Texoma pipelines, by building smaller pipeline systems that would enable the affected sites to tap into the Houston-area transportation and distribution network. Thus another major benefit from the report, Guy contended, was that it “built some confidence in the whole [SPR] system . . . because industry was invited in.”61

TESTING THE SYSTEM In late May 1984, the White House decided to give the DOE the goahead to have an actual “test auction” of 1.1 million barrels of SPR oil. In July 1985, Congress passed the EPCA Amendments Act of 1985, which provided the statutory authority for the test. Its purpose was not only to test the actual drawdown and distribution equipment, but also reveal how the open auction-competitive price sales method would work in a crisis. The drawdown, which took place in November 1985, was a success from an operational perspective. The market also responded. Seventeen offers were submitted, with bid prices ranging from $26.50 per barrel of sour crude oil to $31.25 per barrel of sweet crude oil for a total of 7.17 million barrels, seven times what the DOE was offering. By law, the DOE could not sell the oil for less than 90 percent of the market price for similar quality crude. Ultimately, five of these firms were designated as successful bidders with the DOE agreeing to sell 1 million barrels, practically all the SPR oil offered in the test sale. “We could respond to any kind of scenario today in an interruption

146

The Strategic Petroleum Reserve

of imports,” SPR Project Manager C. Raymond Somerlock affirmed in May 1984. “We’re ready.”62

THE SPR IN THE 1980S: THE ASCENSION OF AN ENERGY POLICY TOOL After years of delay, the SPR finally began to meet its original stockpiling goals in the 1980s. The 500-million barrel goal was achieved and surpassed in 1986. By the standard of FEA’s SPR Plan of 1976, the program was four years behind schedule. However belated, the realization of those goals had been made possible by changes in the economic and political landscape. Economically, buying oil became easier in the 1980s as the second oil shock eased, prices fell, and a glut of oil emerged on the world market. These conditions enabled the DFSC to return to spot market purchases. That same glut also helped create the conditions that led to the DOE-Pemex deals, and Mexican oil would come to comprise over 40 percent of SPR crude. Politically, a Republican administration, committed to a freemarket regulatory philosophy with a minimum amount of government intervention, accepted and emphasized the SPR above all other energy policy tools. The administration recognized that economic growth depended upon consumer access to affordably priced petroleum-based energy. Any policy or program that threatened that scenario was therefore shunned. Instruments such as import tariffs, consumption taxes, and alternative fuels programs were abandoned, left unused, or accepted only with reluctance, as with increased gasoline taxes in the early 1980s.63 While almost every other energy policy tool was being purged from the government’s portfolio, the growing success of the SPR program in the 1980s revealed the possibilities and limitations of energy policy in a society that favored consumption, whose economy depended upon petroleum-based transportation. The major energy policy programs could not fall directly or adversely on the energy consumer, or the oil industry, the most powerful segments of the American political economy. It may be appropriate to view President Reagan’s emphasis on the SPR in this light: it was a viable national energy security program that did not challenge the established marketplace of oil. Indeed, it affirmed it. As the U.S. response to energy emergencies evolved and matured, both government and industry officials came to accept that the workings of the market, with all its imperfections, were preferable for the

Maturation and Ascension

147

distribution and pricing of oil and petroleum products, even in an emergency. In retrospect, it was clear to see that price and allocation controls, rationing, and other demand restraint measures often brought perverse market results. As these tools were abandoned, and the SPR embraced as the energy policy tool of choice, it seemed as if the nation’s leaders had learned the lessons of trying to micromanage the economy. The government’s adoption of the SPR as its primary energy emergency policy tool was a key part of the evolutionary process in which it abandoned micromanagement and moved toward using passive or marketconforming policy tools. The history of the SPR program in the 1980s was in many ways a portrait of the growing power of energy consumers. The policy shift from last resort to early use, first suggested by the National Petroleum Council in the wake of the second oil shock, was one sign. This was yet another example of the government’s efforts to protect energy consumers—individual, industrial, agricultural, and those in between. Such was the power of energy consumers that the government found it easier to get taxpayers to pay for the entire SPR through general revenues than to get consumers to pay for even a part of the program directly. Instruments such as industry inventory requirements, oil import fees and tariffs, and gasoline taxes (specifically for the SPR) were politically untenable, because they threatened to alter consumption patterns. The SPR’s history had also shown that once the government became an actor in the marketplace of oil, the program would inevitably become entangled in and affected by the prevailing political concerns of that arena. Some of these would be beneficial to the program; others would be deleterious. On the one hand, the Mexican petrotrauma enabled the SPR to benefit from large amounts of relatively cheap and secure oil, which allowed the program to meet its stockpiling goals. On the other hand, there was the example of the oil fill controversy of 1980, with its implications of foreign influence. As the 1980s progressed, the SPR’s budget was increasingly affected by the politics of deficit reduction. It was in this context that policymakers examined various alternative financing mechanisms. These included oil import tariffs (including various forms of the IPR) and debt equity instruments such as oil bonds and call options. Unable to reach consensus on any of these mechanisms, in 1981 the government took the SPR’s oil purchases off-budget so that they would not, on the surface at least, worsen the federal deficit. Ironically, the issue of fiscal responsibility, which had provided the impetus for reduced spending, forced the government to put the oil purchases back on-budget with the passage of the Gramm-Rudman-Hollings Act of 1985.

148

The Strategic Petroleum Reserve

The second half of the 1980s was a comparatively quiet time for the program, one that allowed it to “get its feet on the ground,” as former SPR official John Bartholomew described it. Storage capacity development caught up with the fill program, which began to slow down. “It gave us a chance to catch our breath,” said Bartholomew. “After putting out fires, and reacting to demands for the first ten years of the program, finally, it was like everybody left us alone to do our thing for a few years, which was very helpful in terms of laying a solid technical-operational foundation for the program. It gave us a chance to upgrade some of the facilities, and square off some of the corners we had rounded over the years.”64

DRAWDOWN FOR WAR, 1990 – 91

RENEWED DEPENDENCY

5

With the slack market that had existed throughout the first half of the 1980s, U.S. petroleum demand had been met with few problems. Thus the eight-year Iran-Iraq war, unlike earlier Middle East crises, had little effect upon the U.S. economy. But the slack market masked a growing problem. By the late 1980s, it had become more expensive to produce oil in the United States than it was to import cheaper foreign oil. Growing demand meant rising imports and by 1989, U.S. petroleum imports, at 2.94 billion barrels, outpaced domestic crude oil production, which totaled 2.78 billion barrels in that year (figure 5.1). The result was a widening energy supply gap that needed to be filled, and it was increasingly filled with imported oil. By 1990, the United States was meeting half its petroleum demand with imported oil (figure 5.2). With renewed dependence, the danger of a supply disruption also increased, as did American involvement in the politics of the Middle East.1

THE PERSIAN GULF CRISIS OF 1990 The Persian Gulf War had its roots in the glut of oil that had existed in the market since the mid-1980s. The OPEC quota system had fallen into disarray as member nations exceeded production quotas, and the ensuing glut had driven crude oil prices as low as $10 per barrel in 1986.

150

The Strategic Petroleum Reserve

Figure 5.1: U.S. Crude Oil Production, Petroleum Demand, and Petroleum Imports, 1985–90, in Millions of Barrels

SOURCES:

U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States: 1989, 109th ed. Washington, D.C.: GPO, 1989, 674, 680, 681; Statistical Abstract of the United States: 1995, 115th ed. Washington, D.C.: GPO, 1995, 716.

Figure 5.2: Crude Oil Imports Into the U.S., by Country of Origin, 1973–93, in Millions of Barrels

SOURCE:

U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States: 1995. Washington, D.C.: GPO, 1995, 598.

Drawdown for War

151

In July 1990, Iraqi President Saddam Hussein sent 100,000 troops to the Iraq-Kuwait border, a move designed to intimidate Kuwait and the UAE into abiding by the OPEC quota system. For awhile the gambit worked, as both Kuwait and the UAE reined in their production. But the Iraqi leader had larger plans, and they soon became clear: annexation of Kuwait—controlling its oil fields, and not incidentally, causing a major spike in the price of oil. On August 2, 1990, the Iraqi troops marched into Kuwait proper, and, meeting little resistance, soon took control of Kuwait City. On August 6 and 7, the United States dispatched planes and roughly 200,000 troops to Saudi Arabia on a defensive mission, soon known as “Desert Shield.” British forces soon joined in, as did troops from Saudi Arabia, Kuwait, Egypt, Morocco, Syria, Oman, the UAE, and Qatar. On November 8, President Bush increased the U.S. troop presence in Saudi Arabia to over 400,000. On November 29, the United Nations (U.N.) passed a resolution authorizing the use of force to expel Iraq from Kuwait and set a deadline of January 15, 1991, for Iraqi withdrawal. The Persian Gulf crisis brought on the third major oil price spike of the post–World War II era. While the cause was different from the 1973–74 and 1979 crises, there was much that was similar. Once again, the explosive politics of the Middle East exposed the economic vulnerability of the oil-consuming nations. Also similar was the way in which future supply uncertainty created a panic demand, which in turn spiked prices upwards. Still another repetition of the second oil shock was an embargo that exacerbated the loss of oil supply on the world market. This time, however, the embargo would be instituted by the consuming nations.2 On the same day that Iraq invaded Kuwait, President George Bush ordered an economic embargo against Iraq, which was followed by a similar call for an embargo by the U.N. Security Council on August 6. Owing to the disrupted Kuwaiti oil and the embargoed Iraqi oil, approximately 4.3 million barrels per day, 7 percent of world consumption, were removed from the world market. The 1990 disruption was larger than the 1973–74 disruption (2.6 million barrels per day), the 1979 disruption (3.5 million barrels per day), and the 1980 (Iran-Iraq war) disruption (3.3 million barrels per day).3 As in past crises, price increases followed the disruption. The psychological shock of the invasion initiated a wave of panic buying by refiners, retailers, wholesalers, and marketers who sought to assure supply for continuing operations. As before, anxiety, uncertainty, and fear led oil-purchasing companies to husband stocks and aggressively bid for additional supplies, beyond normal levels, as a hedge against

152

The Strategic Petroleum Reserve

future shortages and price increases. The purchases drove up demand, inflating prices in the process. Here was yet another similarity with past crises: the panic-driven price increases were caused by market expectations of a supply shortfall, not the actual physical appearance of a shortfall. In the days immediately following the invasion, there developed, in the words of one energy market analyst, a “panic demand,” meaning an increase in demand for precautionary stocks. The supply disruption had not reached the market as yet, but purchasers were willing to pay higher prices than before to ensure supply.4 As a result of this panic demand, crude oil prices increased significantly, especially on the futures markets. On the NYMEX, prices for delivery of crude in September rose from roughly $18 per barrel to $29 per barrel in the three days following the invasion. Following crude oil price increases, gasoline prices rose five, ten, fifteen, and in some cases up to twenty cents per gallon across the nation, depending upon local supply conditions. Prices of jet fuel skyrocketed, tripling from roughly $23 per barrel in early August to $70 per barrel in mid-October. “The market,” explained Phillip R. Chisholm, the executive vice-president of the Petroleum Marketers Association of America, had a “psychological reaction” to the Persian Gulf crisis, and had “been taken over by fear and panic.” “The entire system,” he observed, “has over-reacted to what has happened so far.”5 The initial panic was short-lived. Within days, near-term crude oil prices stabilized as purchasers, traders, wholesalers, and retailers realized that inventories were in fact high and that extra capacity could soon be brought to market. In fact, beginning in mid-August, at the exhortation of the Bush administration and the IEA, companies began to draw down their inventories. But while the panic buying soon ended, the uncertainty about future supply lingered on through the rest of the year, and that uncertainty continued to be reflected in crude oil and product prices. Crude oil prices for September delivery fell to $25 per barrel, yet that was still much higher than before the crisis. Jet fuel prices also remained high.6 One major difference from the crises of the 1970s was that there were no price or allocation controls to hinder market response. As a result, there were no shortages, just price increases. Gasoline and other petroleum products were available, albeit at much higher prices. But while Americans did not rush out into gasoline lines to fill up their tanks as they had in the 1970s, they nevertheless seized upon the opportunity to rail against the ostensible price-gouging of the oil companies. As in the 1970s, high energy prices fed public belief about profi-

Drawdown for War

153

teering by the major oil companies. With the increase in prices and rapid fallout in public opinion, President Bush set about the process of “jawboning” the oil industry to keep prices in check. In a national address on August 8, the president asked the oil companies to do their “fair share” and “show restraint.”7 Members of Congress, affected by the angry public mood, quickly moved to investigate the price increases and the industry’s ostensible gouging. As they had in the 1970s, members of Congress took up the defense of the U.S. energy consumer. On August 7, the Senate Consumer Subcommittee began hearings on the recent price increases and called on industry officials to testify. Senator Joseph Lieberman (D-Conn.) led the way, charging that American energy consumers were being “ripped off on a massive scale.” With all this public pressure, it was not surprising that a number of oil companies, seeking to head off federal intervention, agreed to lower or freeze gasoline prices. On August 9, several major oil companies cut or froze their wholesale gasoline prices.8 Still, to calm the market, additional supplies would have to be brought on, either from private inventories, increased production, or government stockpiles. The oil companies argued that they were doing all that they could, but to acquire additional supply might further unnerve an already panicky, tight market. For his part, President Bush was reluctant to draw down the SPR. The official reason for this was that, despite the disruption, a supply shortage had not yet occurred, and for that reason, a drawdown was not yet warranted. In addition, the president did not want to repeat what he viewed as the failed policy of the 1970s. Without a supply shortage, ordering a drawdown seemed tantamount to price control. A former oil man, Bush believed that market forces, not the government, should set prices.9 At the same time, the administration hoped that there would not be any major supply shortages and supported the position with several points. One was that inventories were high. U.S. inventories were in fact at record levels, the result of a gradual buildup that had occurred throughout the first half of 1990, when prices had been lower. An administration document of late August noted that according to the DOE, the United States had not experienced any supply disruption, and that private crude oil stocks, some 392 million barrels at the end of July, were at their highest levels in nine years. World commercial stocks were also up, about 300 million barrels higher over the year before. Further, at the time of the Iraqi invasion, several weeks worth of oil shipments from Iraq, Kuwait, Saudi Arabia, and Iran were already in transit to the United States and other markets. In addition, a number of

154

The Strategic Petroleum Reserve

factors were working to reduce demand, including higher prices, fuelswitching, and conservation efforts.10 Bush also emphasized the need for increased production. At the urging of the U.S., the Saudis stepped up production to fill in for the loss of Kuwaiti and Iraqi oil. By late August, Saudi Arabia had increased its production by 400,000 barrels per day. By December 1990, much of the lost production had been replaced by increased production from Saudi Arabia, the UAE, Mexico, Venezuela, and the Alaskan North Slope.11

THE 1990 DRAWDOWN DEBATE The sharp rise in crude oil and gasoline prices revived the debate over the proper use of the SPR. The reserve held 587 million barrels of oil, so the point was no longer moot. The Bush administration estimated that the SPR could offset U.S. imports from both Iraq and Kuwait (730,000 barrels per day) for more than eight hundred days. Its use could well have a significant impact on the market. But was it to be used only in the event of an actual physical shortage? What about the current situation, where there had been disruption and price increases, but no large-scale supply shortage? Should it be used early in a crisis, or saved as a last resort?12 It is notable that in their study of the SPR which came out in April 1990, Joseph Stanislaw and Daniel Yergin foresaw the political debate that would take place that fall. “[S]ome believe,” they wrote, “that in real life, there would be a fractious and angry policy debate involving the ‘early releasers’ in conflict with the ‘doubters,’ who question the reality of a crisis and suspect oil company manipulation, and the ‘hoarders,’ who, uncertain as to what is ahead, want to hold onto the oil in the reserve. The result might well be indecision, delay, and confusion, with the result that SPR would be used too late to be effective, if used at all. And one can certainly conceive of situations where market conditions result in price spiking, prompting calls for use of the SPR by some, while others say that the market will correct itself.”13 That analysis was only too prescient. In the fall of 1990, energy analysts in the public and private sector and members of congress on both sides of the aisle were distressed at the Bush administration’s reluctance to use the SPR. To many, the disruption of oil from Iraq and Kuwait seemed like a textbook opportunity for the use of strategic stocks. There were many in Congress who felt that the time had come for a drawdown. Notable among these were Representative Phil R. Sharp (D-Ind.), Representative Edward J. Markey (D-Mass.), Senator Bill Bradley (D-N.J.), and Senator Bennett Johnston (D-La.).14

Drawdown for War

155

On August 7, Sharp, as chairman of the House Subcommittee on Energy and Power, sought to find out what circumstances would trigger a drawdown. “We have spent $15 billion of the taxpayers’ money to buy an insurance policy called the Strategic Petroleum Reserve,” he noted. “Now is the time to use it.” But administration officials refused to be pinned down. At the hearing, John J. Easton, Assistant Energy Secretary for International Affairs, said that while the administration was considering using the SPR, it was only one of several options under consideration. Nor would the reserve be used as a price lever. “[W]e will draw down the SPR,” Easton told the subcommittee, “if the severity of the situation warrants it.” While he acknowledged that the current situation could arguably satisfy the legal requirements of the 1975 EPCA, Easton added that “presently, there is not a significant shortfall of crude oil on the market.” And in an August 8 address to the nation, all President Bush would say was that he would “explore whether we and our allies should draw down our strategic petroleum reserves.”15 Many energy policy analysts and DOE officials thought that the early use policy had been established in 1984. Since then, consecutive energy secretaries had reaffirmed the policy, as had an interagency report that had been completed just months before the August disruption. A number of studies, the report commented, had reinforced “the value of being able to place large volumes into the market in the shortest possible time at the outset of an interruption. By moving large oil supplies to the market in the initial stages of the interruption,” the report concluded, “the economy will have more time to adjust to the dislocation[,] and can do so in a more efficient manner.” That study had been completed, approved by President Bush, and sent to Congress in February 1990.16 When the disruption came in August, a debate on the proper use of the reserve took hold inside the administration. On one side there were those who argued for an immediate, large-scale drawdown, adhering to the early use policy. This group was led by Energy Secretary (and former Admiral) James D. Watkins, according to Vito Stagliano, who had been DOE Senior Policy Analyst at the time. Years later, he recalled that Watkins had “fought very hard” for an immediate drawdown. Yet there were those in the administration who argued against using the SPR, at least immediately, and their voices held sway. For five and a half months after the disruption, there was no large-scale drawdown.17 Why the delay? There were several theories. Perhaps first and foremost was the lack of shortages. Administration officials had repeatedly said that since no shortages had developed, there was no need for a drawdown. They pointed out that alternative supplies were making up

156

The Strategic Petroleum Reserve

the disrupted oil. Others pointed to a cabinet-level misunderstanding of what economists called “backwardation” in the futures market, in which prices paid for prompt supplies exceeded prices for far-forward supplies. The ostensible misunderstanding of this situation, which existed in the fall of 1990, may have encouraged the view that prices would fall in the near future, obviating the need for market intervention. Still others argued that disagreements between the IEA, the DOE, and the White House on the proper course of action stymied formulation of a collective response.18 A fourth possibility was that the president’s reluctance to order a drawdown stemmed from a conservative political philosophy that deplored government intervention in the marketplace. Under this philosophy, the rainy day policy made a comeback. Early use fell victim to the concern that the disruption could be deeper or longer, if the conduct of the eventual war went poorly. In other words, strategic oil reserves should be saved in case they were more urgently needed later on. For all these reasons, being slow to use the SPR was arguably a virtue, not a vice. The president was apparently won over by this line of thinking, whose advocates included Treasury Secretary Nicholas F. Brady, and possibly also OMB Director Richard G. Darman. If the reserve was to be used, Brady contended, it should be as a last resort, and not “in an attempt to influence oil prices.” The president also agreed with those who contended that there should be no drawdown until actual shortages appeared. In essence, Bush decided to wait for a rainy day. It was a reminder that the U.S. president was not bound by previous SPR policy, and that he enjoyed wide discretion over its use.19 The president did feel that a drawdown would be appropriate in certain circumstances. During a briefing with reporters in mid-September, Bush outlined his view on the proper use of the reserve. “When you have a real shortage of a product[,] or you see an external event that is going to guarantee that there be a shortage, then would be the time when you mostly certainly should use the SPR. It is my judgement there isn’t such as shortage at this time.” The president acknowledged that there was some merit to the thought that a small drawdown would calm a fluctuating market: We’d say, now, wait a minute, you speculators that are speculating on the price of oil out into October some time do so at your own risk. You could make a case—and I’m listening to those in the administration and on the Hill that make that case—that such a drawdown of a small amount, perhaps at the beginning, might argue against, or guarantee against

Drawdown for War

157

speculation in the futures market. That’s an intellectual and economic argument that has some appeal. But the reason we haven’t drawn down the SPR is, in my judgement, I have not felt that there was a shortage. Fortunately, if this had to occur, it occurred at a time when there was reasonable amounts of stock. So you’re seeing the fluctuation driven not by market forces, not by supply and demand today, but by speculation as to what it might be in the future, and I just don’t think that that would entirely be offset by an SPR drawdown.20

Still, the president conceded that there were circumstances “under which you would clearly have to draw down.” For example, “if we had left Saudi Arabia undefended, and if, when Saddam Hussein sent the tanks and the armor south from Kuwait City down to the border, they had gone across, cut off Dharan or something like that, then you would have had a situation where you might have short-range stocks overhanging the market that would last for a few days. But clearly, you would have had an emergency. You would have had something that any president would have, I think, instantly called for a drawdown of the SPR.”21 IEA officials also were reluctant to order a collective drawdown in the absence of shortages. The agency had the authority, upon declaring that a serious disruption had occurred, to order its member nations to activate emergency measures, including stockpile drawdowns, conservation measures, and the oil-sharing program. Yet, like the Bush administration, the IEA felt that it should respond to actual or anticipated loss of volumes on the market, not merely to undesirable price movements. Despite the disruption, IEA officials predicted that the worldwide shortage in September would be only 100,000 barrels per day. For the time being, inventory drawdowns by oil companies and stepped-up production by producer nations had mitigated the shortfall. While oil experts and economists criticized the agency’s reluctance to tap emergency reserves, IEA officials contended that the reserves should be drawn down only in a serious shortage. “The philosophy, particularly among the major holders of emergency stocks, is to look at the situation in terms of physical volume, rather than influencing the market,” said one IEA economist. And the price increases, noted senior IEA official Peter D. Huggins, “reflected fears about the imminent rather than actual loss of supplies [from] the Gulf.” However, the IEA also predicted that the shortage could rise to 200,000 barrels per day in October and more than 500,000 barrels per day in December.22

158

The Strategic Petroleum Reserve

Originally, IEA crisis programs were to be triggered if shortages in excess of 7 percent of available supply occurred. After the 1979 oil shock, the agency opted for a flexible approach, agreeing that stocks could be drawn down in smaller disruptions. But IEA emergency programs were still predicated on the appearance of physical shortages. And in 1990, agency officials, like the Bush administration, wanted private firms to draw down their stocks to help prevent those shortages. The IEA Board of Governors met in Paris on August 9 and 31, September 28, and October 31; each time they reaffirmed the position of waiting for shortages to develop before authorizing emergency measures. Even so, at its September 28 meeting, the Board noted the “increased risk” of a supply shortfall and urged member nations to begin preparations for emergency stockdraw and demand restraint measures.23 Yet many energy analysts, including some within the DOE, argued that those trigger conditions were based on an outdated analysis of the market. They contended that IEA officials were basing their premises on the oil market of the 1970s, when OPEC had a high degree of control over the market, and when there were price controls and allocation authorities in the United States, instead of how it operated in the 1990s, when the U.S. oil market had been decontrolled, and the world market was much more free from the control of any group of producers. The most important change in the oil market, they contended, had been the emergence of spot and futures pricing as an alternative to fixed prices. As more of the world’s oil trade fell under spot or spot-linked pricing, the ability of the market to reallocate supply to meet demand grew. (These developments had also made it virtually impossible for governments to allocate oil flows from above.) That no shortage had developed missed the point, critics argued. Even though alternative suppliers were making up for the disruption, there was enough market concern over the Persian Gulf crisis to keep oil prices high. There was no supply shortage, but economic damage was occurring as the effects of higher prices rippled throughout the economy. Many analysts even went so far as to say that, in this new market, there was no such thing as shortage, only high prices. Given even just a few weeks, the market would reallocate supply to eliminate imbalance. From this perspective, oil crises should be viewed through the lens of price, not volume. Thus the policy of waiting for shortages, Stagliano later observed, was fundamentally flawed. Both IEA and Bush administration officials, he later commented, “had not understood that unlike the scenarios that they were used to examining in the past, the world was not going to see an actual shortage of oil supplies within the structure of the market in 1991. We were trying to tell them that they were

Drawdown for War

159

looking at an oil world that was at least twenty years old . . . that in the new ‘free market’ of oil, what signals shortages of supplies is rising prices, not actual physical shortages.” Other economists and analysts sounded similar themes.24 Indeed, to many, the president’s contention that he did not want to use the SPR to influence prices was misplaced. “The Administration balks because selling oil from the reserve smacks of price control,” the New York Times editorialized on August 8. Such an argument “misses the point. The purpose of tapping the reserve is not to put a permanent lid on prices. It’s to mitigate a temporary supply crunch. The choice is not, as the Administration implies, between competitive markets and price controls. It is between economic damage and minor irritation. Prudent use of the oil reserve can calm jittery markets and minimize the impact of Saddam Hussein’s aggression. This is an emergency,” the editorial concluded, “that’s what lifeboats are for.”25 Even some Republicans questioned the president’s reluctance to use the reserve. Senator Dole was one of these. “We have invested millions of taxpayer dollars in the oil reserves to make certain America would be protected from tyrants like Saddam Hussein who would use the oil lifeline to threaten our security,” said Dole. The president, he said, “should strongly consider opening the taps.”26 Energy analysts outside the government contended that the real value of the reserve was its ability to prevent a panic-related price spike, not nurse a reeling economy through a protracted oil shortage. Given that much of the oil market was driven by psychology, by fears and expectation of shortage, only an early use of the SPR would prevent the worst evils of an oil-supply disruption—the heightened oil purchasing and accompanying price increases. Daniel Yergin, president of Cambridge Energy Research Associates, argued that an early use of the reserve would allow even a relatively smaller drawdown to have a greater impact than a larger drawdown which came later in a crisis. “The whole lesson [of previous oil shocks] is to do things early, not late,” he said. “Even a few hundred thousand barrels a day,” drawn down early in a crisis, Yergin added, “would be a great show of credibility.” Energy market analyst Philip K. Verleger concurred. “The great lesson from intervention in financial markets,” he said, “is to act quickly. The failure to use strategic stocks early in [this] crisis,” he added, “is the most serious failure of energy policy during the episode to date.” Verleger estimated that by October, the failure of the IEA nations to draw down their stocks had added $5 to $10 per barrel to the price of oil and cost the world’s consumers $40 billion.27

160

The Strategic Petroleum Reserve

But it was not true that everyone outside the Bush administration believed in early use. In an editorial appearing in its October 20, 1990 issue, the British journal The Economist argued that the U.S. government should have a slow hand on its SPR trigger. Of those who desired an immediate drawdown, the editorial remarked “Leave them to plead: drawing down the Strategic Petroleum Reserve now would risk even higher prices later.” The reserve, it was argued, should only be used when prices seemed to have topped out, and there was no guarantee that they had seen their upward limit. As long as a larger conflict in the Persian Gulf loomed, prices could rise again. “When shooting starts, those uncertainties will send the price [of oil] soaring. There would be no point in using stocks to drive the price down by $5,” the editorial concluded, “only to see it rebound by $10 a week or two later.” If the Bush administration thought that the outbreak of war would produce the highest oil prices of the crisis, then, and only then, should the SPR be drawn down. Interestingly, that would turn out to be the very approach the Bush administration adopted.28 But as energy prices remained high, the political pressure grew for the government to do something that would have a more immediate effect. By early September, the administration was increasingly less confident that it could avoid a drawdown. On September 13, Secretary Watkins informed the Senate Energy and Natural Resources Committee that while the administration viewed the current market as relatively stable, it was uncertain about future supply. He allowed that the administration was planning for a possible collective drawdown, in conjunction with the IEA. But he also explained that the administration wanted to see the effect that conservation measures, additional production, and industrial drawdown of stocks would have in relieving potential shortfalls before using the SPR. He added that he was reluctant to delve into the SPR as long as there were no major shortages and while other oil-exporting nations had made commitments to step up production. “[W]e do not want to mis-use it or use it too early,” Watkins explained, “because it is a finite reserve.” He also insisted that the administration would not draw down the SPR unilaterally, apart from a collective IEA drawdown. If the United States acted alone, other nations might benefit from the SPR drawdown, without having made use of their oil reserve stockpiles.29 And there may have been another reason the Bush administration was reluctant to tap the reserve: an SPR drawdown may have undercut U.S. arguments that the Saudis and other oil-exporting nations should increase production. Initially, in the wake of the Iraqi invasion of Kuwait, a number of the other OPEC nations announced that they would

Drawdown for War

161

not increase production to make up the supply shortfall. Subsequently, after exhortation by the administration, Saudi Arabia, the UAE, and others agreed to increase production. “If we had tapped the SPR,” said one government official, who spoke on condition of anonymity, “we would have lost a big bargaining chip with the Saudis.” Once more it seemed, as in 1980, U.S. foreign policy vis-à-vis Saudi Arabia had exerted a controlling influence on SPR policy.30

THE EPCA AMENDMENTS AND THE TEST SALE OF 1990 A frustrated Congress sought to force President Bush’s hand, or at least make sure that the SPR would be drawn down in a future crisis. The congressional energy committees, led by Sharp in the House and Johnston in the Senate, sought to do this by significantly expanding SPR drawdown authorities. On September 13, the same day that Watkins testified before the Senate Energy Committee, the entire Congress, in a rare display of consensus on energy policy, passed the Energy Policy and Conservation Act Amendments of 1990 [PL 101–383]. The House passed the bill by a vote of 391 to 0; the Senate, in a voice vote. The act was composed of eleven sections, or amendments, all dealing with the SPR.31 One amendment in particular widened SPR drawdown authorities—Section 3, which dealt with “severe domestic energy supply interruptions.” Section 161(d) of the original 1975 EPCA legislation had stated that SPR oil could only be released upon a finding by the president that such was required either to counter a “severe energy supply interruption,” or to meet U.S. obligations under the International Energy Program. Section 161(a), 3(8) had defined “national energy supply shortage” as one which the president determines: A. is, or is likely to be, of significant scope and duration, and of an emergency nature; B. may cause a major adverse impact on national safety or the national economy; and C. results, or is likely to result, from an interruption in the supply of imported petroleum products, or from sabotage or an act of God.32

Subpart C reflected the thinking of the times—the fear was “an interruption in the supply of imported petroleum products.” The Exxon Valdez oil spill of March 1989, however, had created an interruption in the supply of domestic oil. The disruption of ANS

162

The Strategic Petroleum Reserve

oil to the West Coast was not of the same intensity or duration of the previous disruptions—1 million barrels per day for thirteen days, compared to 2.6 million barrels per day for six months in 1973–74, and 3.5 million barrels per day for five months in 1978–79. Yet because “the impact on petroleum markets was psychological rather than physical,” as an EIA report noted, it did lead to a significant gasoline price spike on the West Coast. As a result, there had been political pressure to redefine the SPR’s drawdown authorities to take such events into account. Yet the 1989 oil supply disruption met none of the 1975 criteria—it was a disruption of domestic petroleum supplies, not imported; and it was the apparent result of human error, not sabotage or an act of God. Energy analysts, DOE officials, and members of Congress especially felt that the SPR should be used in less extreme cases, in disruptions that might be smaller than those of 1973–74 or 1979, but still might wreak economic hardship upon the nation, or parts of it. The administration also supported extending the drawdown authorities to include domestic as well imported oil supply disruptions.33 Thus section 3(b)(A) of the 1990 EPCA amendments stated that the SPR could be drawn down if the president found that “a circumstance other than those described in subsection [161](d), exists that constitutes, or is likely to become, a domestic (emphasis added) energy supply shortage of significant scope or duration.” This amendment thus widened the SPR’s drawdown authorities to include domestic as well as foreign oil supply disruptions. Moreover, the same amendment also provided that the SPR could be drawn down in advance of an expected crisis, if the president found that such an action “would assist directly and significantly in preventing or reducing the adverse impact of such shortage.” In such cases, the SPR could not be drawn down at a rate greater than 30 million barrels, or for more than 60 days, with respect to each such shortage; or if it held less than 500 million barrels of oil. Congressional desire for regional energy protection also resurfaced in the EPCA amendments of 1990. Prompting this was the fact that in December 1989 and January 1990, heating oil prices almost doubled in the New England region, in response to a record-breaking cold spell. In July 1990, a House report on the EPCA amendments also noted that the 1975 EPCA had emphasized the necessity of national impacts for SPR drawdowns, speaking of national energy supply shortages that might cause major adverse impact on national safety or the national economy. But the 1989 cutoff of ANS oil had largely been regional in impact, along the West Coast, and the December 1989–January 1990 heating oil price increases had largely impacted the New England region. Again it seemed that the existing legislation was insufficient. Ac-

Drawdown for War

163

cording to the July 1990 House report, the 1990 amendments were also designed to give the president the authority to order a drawdown even if the shortage was “only regional in its effect.” Although the 1990 Act did not contain this language, it was a large part of original congressional intent for the bill.34 What the Act did have for regional energy protection was its requirement that the DOE conduct a three-year pilot program for storing refined products. Between 1992 and 1994, the DOE was to stockpile refined products at a rate equivalent to 10 percent of the SPR’s oil acquisition in each year. The storage sites would be locations that were the “most dependent on imported petroleum products,” as determined by the Secretary of Energy. On paper, it seemed to give life once again to the RPR provision of the SPR / EPCA legislation. The DOE, however, was opposed to this refined product reserve and again cited the cost and efficiency advantages of a centralized Gulf Coast crude oil reserve. The administration also opposed the provision, deeming it too costly. In practice, this RPR was never implemented due to lack of funding.35 Still another amendment addressed the issue of ultimate size. As the bill had been developed throughout the summer of 1990, one of the major points of disagreement between Congress and the White House had been stockpiling goals. With the growing tide of imports, the SPR—even while growing—was increasingly affording less import protection. From a high of 118 days worth of import protection in 1985, when the reserve held just over 450 million barrels, the SPR’s import protection level had fallen to eighty-one days worth of import protection in 1989, when the reserve had grown to nearly 580 million barrels (figure 5.3). Ninety days of net oil import protection had been the original goal, the same amount that the United States was committed to under the original IEA agreement. It was in this context that some members of Congress renewed calls for a 1-billion barrel SPR. In 1989, Congress had authorized an interagency study on the reserve’s long-term stockpiling goal. That study, completed in February 1990—the same one that reaffirmed the early use policy—had tentatively recommended 750 million barrels as the ultimate stockpiling goal. That was the figure the Bush administration also wanted. In fact, both the DOE and the administration opposed the 1-billion barrel goal, arguing that a 750-million barrel reserve was sufficient, and that the additional 250 million barrels would not be worth the $12 billion it would cost. But with oil prices and fill costs rising, the president and the Congress agreed to compromise: the amendment on the reserve’s size postponed the authorization of the 1 billion barrels until after 1992; the interim goal would be 750 million barrels.36

164

The Strategic Petroleum Reserve

Figure 5.3: SPR, Days of Net Import Protection, 1977–97

SOURCE: Energy Information Administration, U.S. Department of Energy, Annual Energy Review, 1997.

There were other noteworthy amendments. Section 5 was notable not only in that it authorized pre-drawdown diversions of SPR oil, it also gave at least some drawdown discretion to the Energy Secretary. If the Secretary found that a severe energy supply interruption “may be imminent,” he could divert oil acquired and bound for, but not yet injected into the reserve, for sale into the marketplace. Section 8 gave the DOE the authority to conduct a 5-million barrel sale to test the SPR’s drawdown and distribution systems. This amendment would prove to be immediately relevant. Less than two weeks after the bill’s enactment, the administration would use it to test the reserve’s readiness in an increasingly panicky market. Section 10 was notable not for its immediate impact, but for actions it would enable in the future. It gave the president the authority, “[n]ot withstanding any other law,” to order the drawdown and delivery of SPR oil in exchange for a later delivery of oil to the U.S. government. In later years, this exchange authority would prove perhaps the most important amendment of the 1990 Act, for it allowed the White House to order a drawdown for situations not foreseen nor covered by the 1975 EPCA.37 The president had warned the Congress that he would veto any bill that contained requirements for a 1-billion barrel SPR and a mandated refined petroleum product reserve. Yet, in final form, the bill only required a plan to achieve 1 billion barrels, and only a three-year test refined product reserve program. In a September 14 memo to the president, OMB Director Darman recommended that Bush sign the bill. Darman noted that the DOE had concluded that while the 1-billion

Drawdown for War

165

barrel plan and the test RPR program were “unwise,” they were “not sufficiently objectionable to result in a veto recommendation.” The DOE had arrived at this conclusion “largely because in the current Middle East situation it is essential that there be no disruption in our authority to drawdown the SPR[,] or in the antitrust protection which the EPCA affords to U.S. oil companies that participate in activities of the International Energy Agency.” Commenting at length, Darman noted that “in response to the Persian Gulf situation,” there had been “intense congressional interest in mandating a drawdown of SPR oil. Such an action would have removed your discretion to decide the timing and size of a drawdown, as well as your ability to coordinate such a drawdown with our allies. The enrolled bill preserves your authority to drawdown the SPR. Further, it provides a degree of flexibility in implementing the SPR expansion, and limits the refined product reserve to a three year test program.” Thus, given the “overwhelming support for this bill in both Houses, and the need to prevent any lapse in our authority to participate in the IEP, and to manage and drawdown the SPR, we recommend the approval of S. 2088.” While there were aspects of the EPCA amendments that the president did not like, political pressure to do something mounted as prices continued to rise. As one of Congressman Phil Sharp’s aides commented, “[i]t’s pretty tough to vote against the Strategic Petroleum Reserve these days.”38 Accordingly, on September 15, 1990, just two days after Congress had passed the bill, Bush signed the EPCA Amendments Act into law. Their greatest importance was that they significantly expanded the SPR drawdown authorities. The reserve could now be legally drawn down in a much wider range of scenarios. It could be drawn down in the event of a domestic as well as foreign oil supply disruption. It could also be drawn down in advance of an anticipated disruption; the president no longer had to wait for one to occur. It could be drawn down, to a limited extent, in a crisis less severe than the shocks of the 1970s. It was quite possible, springing from congressional intent, if not from the bill’s actual language, that the SPR could be drawn down in a crisis whose impact was more regional than national. By widening the drawdown authorities, the 1990 EPCA amendments helped open the door to the nonemergency, revenue-oriented drawdowns that would take place in the latter 1990s.39 With the enactment of the legislation, Congress pressed the administration to implement the test sale provision, Stagliano later recalled, “as a poor alternative to a full-scale release.” In fact, there was strong bipartisan pressure in Congress for the president to release some SPR oil, to ease the market. The DOE supported the test sale as a way of

166

The Strategic Petroleum Reserve

making sure that the reserve would function properly should a larger drawdown become necessary.40 Events soon began to force the administration to change its thinking on using the SPR. Since the August invasion, the administration, even with the U.N. embargo on Iraqi and Kuwaiti oil, had contended that there would be sufficient supply to meet U.S. demand. But as the days went by, the near-term oil supply picture began to change. DOE officials began to anticipate a supply interruption sometime in late September to early October, after the pre-embargo Iraqi and Kuwaiti oil had arrived, and before the increased production from Saudi Arabia and the other oil-exporting nations hit the market. “We know a supply interruption is coming,” commented DOE Deputy Secretary Moore on September 17, “and that it is going to hit sometime between the middle of September and the beginning of October.” The administration also recognized that refinery utilization could not continue indefinitely at its 90-plus percentage levels. Moore added that using the reserve was “under consideration by the Administration every day,” and that its position “could change any day.”41 Meanwhile, panic continued to mount, and prices continued to rise. On September 21, Hussein threatened to attack the Saudi petroleum supply system, and urged his nation to prepare for war. An already nervous oil market went from bad to worse. Spot crude oil prices rose sharply to almost $34 per barrel, and crude oil futures for November delivery jumped to $42 per barrel. Financial markets plummeted. A study conducted by the World Bank concluded that prices could rise as high as $65 per barrel if actual shooting broke out. Pressure from Congress for a drawdown increased.42 On September 25, A letter was circulated by House Democrats, including Richard Gephardt (D-Mo.), William H. Gray (D-Penn.), John Dingell, and Leon Panetta (D-Calif.), which urged the president to use the reserve to blunt rising prices. “Clearly this is the kind of economic hardship the SPR was designed to reduce,” the letter read. “Economists are debating not when, but how serious the recession will be.” The letter, which was ultimately signed by more than three dozen House members, Democrat and Republican, also urged the administration to coordinate a drawdown with Japan and West Germany, to equitably distribute the stockdraw burden. After the American SPR, the Japanese and the Germans had the second and third largest reserve programs, respectively, at approximately 206 and 189 million barrels.43 Prices jumped again on September 26, buoyed by rumors that an Iraqi or a U.S. jet had been downed in combat and that possible ultimatums had been exchanged between U.S. and Iraqi leaders. At one point

Drawdown for War

167

crude oil prices for November delivery reached $39.05 per barrel on the NYMEX, before settling at $38.67 per barrel—more than double the July mark of $16.47 per barrel. Some administration officials began to openly concede that a drawdown might be appropriate. “From a political point of view, as well as an economic standpoint, we cannot let this go on,” a senior White House official said in late September.44 “It got to a point,” John Bartholomew later recalled, “where I think the Department of Energy, and in particular, Admiral Watkins, became concerned about the viability of the SPR program. Like, ‘if it ain’t needed now, it’ll never be needed.’ There had to be some kind of statement as to whether there was any value in the SPR program itself, period. Which, of course, a lot of people thought that there was, like Phil Sharp, on Capitol Hill, and others, who thought that it should be used, and I think there even became some concern as to the future of the SPR program. If it wasn’t drawndown, people would begin to say, ‘if we don’t need it under these circumstances, we might as well sell it, and be done with it.’”45 In fact, the September 26 price increase prompted the president to action. That same day, Bush directed Watkins to implement the 5-million barrel test sale authorized by the 1990 EPCA amendments. At a Republican fund-raising dinner in Chicago, the president set forth the reasons for his action. “[S]hould the supply situation deteriorate,” he said, the United States, along with its IEA partners, was “prepared to bring additional oil to market. We must make sure that we can act quickly, if necessary.” The 5-million barrel test sale was part of that process. Bush added that he was “prepared to take additional steps, if necessary, to ensure that America stays strong right here at home.” The president also inveighed against unwarranted oil futures speculation.46 The next day, September 27, the commodity markets seemed to shrug off the news of the test sale. Prices for November delivery did fall briefly to $37.67, but the decline was marginal and temporary. The market’s fear about an imminent outbreak of hostilities overwhelmed any reassurance the 5-million barrel test sale afforded. Prices quickly rebounded. Futures soon topped $40 per barrel, for the first time in ten years, and closed at a record $39.54 per barrel. The sale had had virtually no impact on the market. “This market is so scared,” said Arnold G. Stiffel of Cargill Investor Services, “that these prices are going to hold.” “It’s a fear market,” noted Michael Wilner of Hilltop Trading Company, “not a supply and demand market.” Members of Congress pressed for a larger drawdown. Noting the market’s apparent disdain for the test sale, Representative Wilbert Tauzin (D-La.) exhorted the president to make more SPR oil available, as did Representative Sharp.47

168

The Strategic Petroleum Reserve

That same day, September 27, both Watkins and Moore appeared before Sharp’s energy subcommittee. In testimony that lasted nearly four hours, both men repeatedly stressed that the purpose of the test sale was to assess the readiness of the drawdown, sale, and distribution systems, and to help the industry become familiar with those systems, in the event a larger drawdown became necessary. The administration was not trying to bring the price of oil down and had “no expectation” that the sale would “have [a] long-term market impact.” Watkins also reaffirmed that the administration would wait until there was a shortage, or emergency, before ordering a larger drawdown; and if such a case arrived, it would act in concert with the IEA.48 In fact, IEA officials met in Paris on September 28 to consider a U.S. proposal that member nations prepare for a collective drawdown. But still the IEA resisted. Reportedly, both West Germany and Japan opposed the move. Their representatives argued that reserves should be tapped only in an extreme case, such as the outbreak of war or actual shortage. The New York Times reported that at the Paris IEA headquarters, the U.S. decision to order the test sale was seen “as a strong signal that the U.S. wants similar actions from other nations.” But West Germany’s Economic Minister, Helmut Haussman, said before the meeting that his country was not in favor of such a move, arguing that there was no world shortage, and that “it is wrong to think that it is possible to keep prices artificially low through state measures.”49 For its part, the SPR-PMO had immediately begun preparing for a drawdown back in August, after Iraq’s invasion of Kuwait. They were ready for the test sale, which ultimately attracted offers from thirtythree companies. Of those, the DOE deemed bids from eleven companies for 3.9 million barrels to be acceptable, and carried out the sales, drawdown, and delivery without any significant difficulties. The first oil was delivered two days after awarding a purchase contract and twenty-one days after the test began. Ultimately, the DOE received an average of $31.35 per barrel sold with a total invoice of $122 million. When the time came for the much larger drawdown in January 1991, Watkins and other DOE officials looked back at the October– November 1990 test sale as an exercise which gave both the Department and industry the confidence that SPR oil could be moved into the market quickly and efficiently.50

DEVELOPING AN EMERGENCY RESPONSE STRATEGY In late September, DOE officials met with IEA officials for discussions aimed at developing a framework for some course of action. In

Drawdown for War

169

October, some IEA officials began to admit that drawdown of private stocks could not keep going at present rates. At a London conference, G. Quincey Lumden, IEA Director of Oil Market Developments, contended that the current massive drawdown of private stocks, coming as it did during a season when private stocks were usually built up, could not continue much longer. The market would be safe through 1990, but if the market situation did not improve, there could be a major shortage in early 1991, Lumden warned. This prospect increased the likelihood that IEA emergency measures, including collective drawdown of government stockpiles, would have to be implemented, especially if the market worsened. That market deterioration seemed increasingly likely if war broke out in the Middle East, a prospect that also seemed increasingly likely. At their October 31 meeting, the IEA Board of Governors announced that their member nations were prepared to implement plans for stock drawdown and demand restraint, if the need arose as a consequence of any further significant oil supply shortfall.51 Meanwhile, the Bush administration continued to emphasize increased production and demand restraint. The SPR would be drawn down only if some additional event seemed likely to cause shortages. Watkins made these points in an October 23 memo to John H. Sununu, the president’s Chief of Staff, and Brent Scowcroft, the Assistant to the President for National Security Affairs. “[W]e seem to have weathered the Iraqi-caused crude oil storm during the most critical transition months of September and October,” wrote Watkins. “It now appears that new production coming on line[,] combined with energy restraint measures within IEA nations [has] been sufficiently successful to place SPR drawdown on the ‘backburner’ once again—barring, of course, unforeseen events which would disrupt a very tight world-wide petroleum system.”52 By December, as the prospect for military conflict increased, the administration began to speak more openly of the circumstances under which the SPR would be drawn down. In a December 7 speech before the Council on Foreign Relations in New York City, Watkins contended that there was enough oil to meet current needs and urged the industry to stay calm if hostilities broke out. He then related the administration’s energy strategy in such an event. “Under these circumstances,” he said, “I will recommend to the President that we make available a substantial amount of oil out of the reserve.” Further, Watkins added that he “would expect that our allies in the IEA would engage rapidly in coordinated action to provide more supplies to the market.”53 As the U.N.-imposed deadline for Iraq’s withdrawal from Kuwait (January 15, 1991) grew closer, the IEA put the finishing touches on

170

The Strategic Petroleum Reserve

plans for a coordinated energy emergency response. On January 11, 1991, the IEA Board of Governors, representing twenty-one nations, met in Paris and announced their readiness to implement a coordinated emergency response plan in the event of a war in the Persian Gulf. In such an event, the IEA member nations (plus nonmembers France, Finland, and Iceland) would collectively make available 2.5 million barrels of oil per day over a thirty-day period: nearly 2 million barrels per day through stockpile drawdown; 429,000 through demand restraint measures; 64,000 through fuel-switching; and 16,000 through increased indigenous production (table 5.1). The IEA Board of Governors also agreed that member countries would have flexibility in their drawdown decisions as developing market conditions warranted. Energy market analysts agreed that if war broke out, and the IEA nations were to quickly place an extra 2.5 million barrels per day on the market, then that would more than make up for any loss and would exert a calming influence on the market. Notably, the U.S. contribution of 1.125 million barrels per day would be made solely through an SPR drawdown, without consumption restraints.54 Market analysts also contended that this represented a policy change for the IEA. As the possibility of war turned into a likely eventuality, IEA officials had apparently shifted their emergency response criteria from the appearance of physical shortages to the possibility of shortages. On January 11, 1991, Geoffrey Chipperfield, chairman of the IEA’s Governing Board, explained to reporters that its response plan did not require actual shortages in the market but only “the anticipation of a possible shortfall.” Once the plan was activated, the emergency supplies would enter the market within fifteen days.55 Meanwhile, the industry was also preparing for an emergency. Starting in October 1990, industry representatives and energy market analysts had been preparing for a war-induced supply disruption, under the auspices of the National Petroleum Council. In early January 1991, the Council’s “Short-Term Outlook” subcommittee met in the conference room of the Chevron headquarters in San Francisco to discuss plans for dealing with a war-induced energy crisis.56 The strongest recommendation coming out of the January 4 meeting, and its draft report, was that the SPR should be drawn down instantly, and very publicly, in the advent of a shooting war in the Middle East. Other possible government action included temporary demand restraint and encouraging conservation. Notably, these measures were not price and supply controls; they were to be “within the framework of market prices and unrestrained product movements.” But the government’s primary response was to be a large-scale SPR drawdown. “It’s

Drawdown for War

171

Table 5.1 OECD Emergency Response Program, Adopted January 11, 1991, in Thousands of Barrels per Day Total

Country

Stockdraw

Increased

Response

Demand

Fuel

Indigenous

Thousand b/d

Restraint

Switching

Production

Australia

0

33

0

13

46

Austria

6

5

5

0

16

Belgium

9

18

0

0

27

Canada

115

115

Denmark

11

2

0

0

13

Germany

169

18

0

0

187

9

9

0

0

18

Greece Ireland

5

1

0

0

6

Italy

74

24

32

0

130

Japan

350

0

0

0

350

Luxembourg

0

2

0

0

2

New Zealand

3

0

1

3

7

Norway

5

7

0

0

12

The Netherlands

25

7

0

0

32

Portugal

10

2

5

0

17

Spain

0

62

0

0

62

Sweden

0

21

0

0

21

Switzerland

6

12

1

0

19

Turkey

0

20

11

0

31

United Kingdom

120

0

0

0

120

United States

1125

0

0

0

1125

TOTAL IEA

1927

358

55

16

2356

Finland

0

12

11

0

12

France

59

58

9

0

126

Iceland

0

1

0

0

1

TOTAL OECD

1986

429

64

16

2495

Percent of Total

79.6

17.2

2.57

0.64

100

SOURCES:

IEA, The History of the International Energy Agency, Volume III: Principal Documents. Paris: OECD / IEA, 1995, 154–55; IEA, Oil Supply Security: The Emergency Response Potential of IEA Countries. Paris: OECD / IEA, 1995, 59.

172

The Strategic Petroleum Reserve

the critical cornerstone,” said Lawrence J. Goldstein, president of New York city-based firm Petroleum Industry Research Foundation (also known by the acronym PIRINC), and a member of the subcommittee. Other industry executives agreed. “With OPEC and other world producers already producing flat out,” added Tom Burns, director of international economics for Chevron Corp., “the only quick short-term incremental supply is SPR and other government-held global stocks.” The draft report also recommended that a drawdown include the largest possible volume. There would be little risk that SPR oil would glut the market, because companies would not bid for oil they did not want.57 By early January, a consensus on a plan of action had been developed not only by the Bush administration, but within the larger oil and energy industries in the United States and other IEA / OECD countries. With the advent of Operation Desert Storm, the United States, Germany, Japan, and fourteen other nations would announce plans to engage in a collective drawdown under the auspices of the IEA and the OECD. As the U.N.-imposed deadline for Iraq’s withdrawal from Kuwait approached, a blueprint for action had emerged. It was notable that by both the consent of government and industry leaders, SPR drawdowns had become the largest part of the recommended government course of action, in the arena of U.S. energy policy, during an emergency.58

THE FIRST CRISIS DRAWDOWN Thus when President Bush ordered air strikes against Iraq on the evening of January 16, 1991, the framework for an SPR drawdown was already in place. Within hours of ordering the air strikes (the first part of Operation Desert Storm), the president issued a finding that events in the Persian Gulf had resulted in a potential national energy supply shortage constituting a “severe energy supply interruption,” as defined in Section 3(8), and required under Section 161(d) of the EPCA of 1975. With the finding, the president authorized Watkins to draw down and distribute SPR oil at such a rate as he determined appropriate. Adhering to the IEA plan, Watkins directed the DOE to implement a 33.75million barrel drawdown, equal to a 1.125 million barrels per day drawdown over a thirty-day period. The Bush administration said it was the SPR’s “first draw down for [its] intended use.”59 Besides bringing additional supplies to the market, the administration also sought to prevent panic. In a prepared statement, Watkins said that the drawdown would “send a clear signal” that supplies would be adequate; and that, in turn, would help minimize price increases

Drawdown for War

173

and panic purchasing. Certain segments of the industry, especially the downstream elements, applauded the move. The Petroleum Marketers Association described the drawdown as a “strong, forceful action” that would help calm the market.60 As initially planned, of the 33.75-million barrel SPR drawdown, 11.25 million barrels (33 percent) would be light sweet crude; 22.5 million barrels (67 percent) would be light sour crude. This was proportional to the overall SPR inventory. Watkins noted that all of the oil would be “light crude, suitable for virtually any U.S. refinery.” This was because all SPR crude oils, even the ones the DOE called sour, were by some standards fairly sweet (figure 5.4). And by 1990, most of the major refining companies had upgraded their operations to facilitate sour crude processing.61 The next day, January 17, 1991, the DOE issued a notice of sale, inviting prospective buyers to bid upon it, and setting in motion the process of receiving bids, choosing successful purchasers, and making arrangements for delivery. As it turned out, industry demand for SPR oil was strong. By January 28, 1991, the DOE had received bids from twenty-six companies for 45 million barrels of SPR crude, despite the fact that just under 34 million barrels had been offered. But it turned out that the industry wanted more sweet oil than the DOE was offering. The bids requested 27.9 million barrels of sweet crude and 16.9 million barrels of sour—not exactly a match with what the DOE had offered: 11.25 million barrels of sweet and 22.5 million barrels of sour. But the DOE had the flexibility to change its offering to meet demand.62 By January 30, the DOE had accepted bids from thirteen companies that had offered the highest prices. They included British Petroleum, Amoco, Conoco, and Exxon, as well as a few smaller, independent refineries. Collectively, they agreed to purchase 17.3 million barrels of SPR oil, just over half the amount (33.75 million barrels) that had been Figure 5.4: SPR Crude Oil Types, 1990

SOURCE:

National Petroleum Council, Short-Term Petroleum Outlook . . . An Examination of Issues and Projections, January 1991. Washington, D.C.: NPC, 1991, 44.

174

The Strategic Petroleum Reserve

originally offered. With prices having fallen from $40 to roughly $20 per barrel, most of the nations involved in the IEA / OECD Emergency Response Program scaled back their offerings as well. Of the 2.5 million barrels per day IEA plan, only about 1.3 to 1.4 million barrels per day of additional supply ever made it to the market.63 As the initial bids suggested, industry displayed a strong preference for sweeter crudes. In fact, the number of bids for sweet crude nearly doubled those for sour crude. This was not surprising, given that the lighter Iraqi and Kuwaiti crude oils, which had been removed from the market, had been replaced to a large extent by heavier Saudi Arabian and Venezuelan sour crudes. Those heavier sour crude oils, having a higher sulfur content, were more difficult and expensive to refine into lighter products such as gasoline, jet fuel, and heating oil. Not coincidentally, the prices offered for the SPR’s sweet crude more closely approximated the DOE’s estimated benchmark prices. After reviewing the bids, the agency reduced the sales volume from 33.75 to 17.3 million barrels and adjusted the types of oils offered. The DOE accepted only those bids that were above the 97.5 percent of benchmark prices of comparable crude oils. The agency also changed the mix of crude to be sold, so that it would be more in line with the best offers. The interested firms agreed to purchase 14.35 million barrels of sweet oil and 2.95 million barrels of sour oil. In general, the firms agreed to pay about $25–$26 per barrel for the sour crudes and $27–$28 for the sweeter crudes.64 Ultimately, the average purchase price, after indexing, was $16.9 per barrel for the sour oil, and $18.6 per barrel for the sweet oil. This was the result of the DOE’s indexing system, which allowed prices to change with the market after the sale had been completed. The indexing system was designed to protect both bidders and the government on prices for SPR oil, so that neither the DOE nor bidders would unduly profit from or be victimized by severe price swings that might take place after the sale. Thus the 1991 drawdown harvested just under $320 million in total revenues for the government.65 By February 5, 1991, less than three weeks after the drawdown had been ordered, the first SPR oil, some 200,000 barrels of sweet crude from the West Hackberry site, was transported via DOE pipeline to the Sun Terminal at Nederland, Texas, and then by tanker to the Crown Central Petroleum Corporation facilities near Houston. Watkins declared the delivery to be “an historic event.” “Our delivery today,” he said, “marks the first time the Strategic Reserve has shipped crude oil under non-test conditions. We clearly can get oil to the market in less time than it takes for delivery from the Persian Gulf.” By March 31, the DOE had successfully sold and delivered the 17.3 million barrels

Drawdown for War

175

of SPR oil it had agreed to sell. The drawdown, the Secretary observed, had “sent an important message to the American people that their $20 billion investment . . . has produced a system that can respond rapidly and effectively to the threat of an energy disruption.”66

THE EFFECT OF THE DRAWDOWN With the advent of Operation Desert Storm, crude prices for February delivery jumped from $32 to $40 per barrel. A few transactions executed in the late hours of January 16, 1991, may have went as high as $50 per barrel. Also in those late hours, the DOE announced the SPR drawdown, as part of the larger IEA contingency plan. Then, through the late evening and early morning hours of January 16–17, prices dropped, and by the evening of the next day, Thursday, January 17, crude prices for February delivery had fallen to $21.44 per barrel, 10 cents lower than the price on August 1, 1990, the day before Iraq invaded Kuwait. What caused the price decrease? It had to be either the military action, the drawdown announcement, or some combination thereof. To answer that question, it is worth recounting the timing of the most important events of January 16–17, with regard to the international crude oil marketplace. The sequence of events—namely the drawdown announcement and oil price movements before and after—may provide a strong indication of the SPR’s effectiveness as a policy tool. At 6:36 p.m., Eastern Standard time, Wednesday, January 16, 1991, the cable television news network CNN reported that an attack was underway in Baghdad. Bush administration documents place the start of Operation Desert Storm later, at 7:00 p.m. Eastern time. At 9:01 p.m., the president began his televised address announcing Operation Desert Storm. The address, which ran some fourteen minutes long, made no reference to the SPR.67 At 9:30 p.m. Eastern time, the president directed Watkins to order the planned drawdown. Fifteen minutes later, the SPR program was placed on drawdown alert level III, with four sites activated for drawdown operations: Bryan Mound, West Hackberry, Bayou Choctaw, and Weeks Island. At 11:00 p.m. Eastern Standard time, Press Secretary Marlin Fitzwater announced that the president had authorized Watkins to draw down SPR oil in accord with the IEA emergency response plan. The announcement was deliberately made after the markets had closed, so that no firm or trader would gain any undue advantage from the news. At roughly that same time, the first reports that the Allied fighter planes had returned from their bombing runs, without losses, started to come in.68

176

The Strategic Petroleum Reserve

The air raid sent some oil companies into a flurry of private cash trading in Houston and New Orleans, after hours on the evening of the 16th. At the time, the NYMEX did not have off-hours electronic trading, so there is no public record of the transactions that occurred after 3:10 p.m. Eastern Standard time, on the night of January 16–17, 1991. Information about those transactions came from anecdotal sources—the person, firms, or traders involved in the deals, and the analysts who knew of them. According to these sources, oil prices peaked in off-hours trading to about $40 per barrel when the bombing of Iraq began, but soon began tumbling when it appeared that the war was going well for the United States and its allies. For months, experts had been predicting that when and if a shooting war began, prices would jump wildly. As it turned out, “[t]he prediction was right for about 15 minutes,” noted Philip L. Dodge, an oil analyst with Nomura Securities International Inc.69 The DOE issued the notice of sale at 6:00 a.m. Eastern time, the next day, January 17. Deliveries of SPR oil were scheduled to begin February 15, and be completed by March 31. The IEA Executive Director activated the larger IEA contingency plan early in the morning of January 17.70 When the NYMEX opened later that morning, traders tried to sell oil for $24.50 per barrel, a record $7.50 cheaper than Wednesday’s close of $32. But no one would immediately buy at that price. That triggered an emergency one-hour halt in trading under new rules intended to ensure orderly trading. The price of gasoline and home heating oil fell by their maximum limit of 20 cents per gallon before their trading was also halted. By that evening, crude prices for February delivery had plunged by $10.56, from $32 per barrel to $21.44 per barrel, the biggest one-day drop on record. By Friday, January 18th, February crude oil had fallen a further $2.19 to $19.25 per barrel. Oil prices in London fell below $20 per barrel, cheaper than before the Iraqi invasion of Kuwait. If nothing else, this activity was testament to the volatility that commodities and futures markets brought to oil pricing. Price changes were instantaneous, and highly affected by both market news and rumor.71 Prices had fallen dramatically, but why? The success of the air war? The drawdown announcement? A lively debate developed among industry representatives and energy market analysts. Even current and former DOE officials had different opinions. It was widely reported in the media that prices had tumbled in response to the success of the air campaign, as oil traders began to believe that Iraq would not be able to threaten Saudi oil facilities. Those same reports, however, also credited the announcement of the collective IEA drawdown as having a calming effect on the market.72

Drawdown for War

177

To some, it seemed obvious that the drawdown announcement had played a role. Secretary Watkins was one of these. At a press conference on January 17, he credited the IEA drawdown announcements, as well as the military campaign, with having a “positive impact” on the market. Furthering this view was a Wall Street Journal report that said some traders and industry officials blamed the drawdown announcement for causing the precipitous fall in prices. In fact, such was the intensity of this criticism that some IEA officials reportedly had second thoughts about implementing the emergency response plan.73 There were others who believed that the drawdown announcement played a critical role. Vito Stagliano, who had been the DOE Senior Policy Analyst under Secretary Watkins, contended that the drawdown had been “decisive” in bringing oil prices back down. Years later, he commented that “if the President had not finally allowed the release of the SPR, prices would not have tumbled as quickly, and to the degree that they did, on the day that they did.” Former SPR Project Manager C. Curtis Johnson also believed that the drawdown’s impact on crude prices in mid-January had been “monumental.” In October 1996, Johnson (at that point president of DynMcDermott Petroleum Operations Company, the SPR’s operations and management contractor) commented that “[i]f [the SPR] had not been here . . . during Desert Storm, the [oil] traders would have got oil up to $40 per barrel, and we would have lost billions of dollars [at that price]. Instead, the price went back down to $18 to $20 per barrel. The fact that the President was willing to commit the reserve sent the message that this reserve is going to be used, and that we’re not going to allow the oil traders to take the price of oil out of sight.”74 Still, others emphasized the early success of the air war. News of its success reassured oil traders, buyers, and sellers that the Saudi oil fields would remain safe, production would continue, and oil would continue to flow through the Persian Gulf. Energy market analyst Philip K. Verleger Jr., was one of these. He believed that the drawdown announcements had played no role in the price decrease. “[W]hen it became clear that we had won the air war,” he later noted, “and when all of the [air force fighter] planes came back [without having] been shot down, all of the fear, all of the panic demand just went out of the market . . . and the SPR sales hadn’t even been announced” at that point. Thus, the release of the SPR oil “had nothing to do” with the price decrease. After this, Verleger, who had been an ardent supporter of the program, began to question the need for the SPR.75 The API also doubted that the drawdown had caused prices to fall. Years later, API spokesman Joe Lastelic commented that the drawdown

178

The Strategic Petroleum Reserve

had been “more of a symbolic move than anything else.” He noted that the amount the United States was pledged to draw down, 1.125 million barrels per day, was “minuscule” compared to the then-current daily national petroleum consumption of 16.71 million barrels per day. Although the API supported the SPR program, it believed that it had been misused during the Persian Gulf crisis. Because there had been no actual shortage, use of the SPR had not been warranted.76 Other energy market analysts, while emphasizing news of the air war, believed that the drawdown announcement had played some role. Edward N. Krapels, president of the Washington, D.C.-based firm Energy Security Analysis Inc., noted that “it was the collapse of the Iraqi defense that overwhelmed everything else, and had the greatest impact upon the fall in prices.” But he allowed that the drawdown announcement “probably did have an impact” with regard to the differential in sweet and sour crude oil prices in mid January. As originally offered, the drawdown had been weighted in favor of sour crude. This, Krapels contended, “increased the liquidity of the sour crude market, and helped to push those prices down relative to sweet oil” at the very time when conflict was erupting in the Middle East.77 PIRINC’s John H. Lichtblau argued that while the drawdown announcement had been “a significant factor,” it had not been the principal factor. “Primarily,” he later said, “it was the Gulf War, and the expectation that the U.S. would prevail, that drove down prices. But the fact that the oil was available from the SPR also played a role.” The January 11 IEA announcement, Lichtblau contended, had helped condition traders to expect a drawdown in the advent of war. “Everybody knew when the military action started,” he explained, “that the SPR was going to be used.” When the announcement came at the outset of Operation Desert Storm, “it provided an instantaneous counterforce to the expected market panic. To that extent it played a role in the decline of prices. It was more of a psychological factor than an actual factor.”78 A number of DOE officials agreed that the drawdown announcement had played a psychological, unquantifiable role in the price decrease. Years later, Deputy Assistant Secretary for the SPR Richard Furiga commented that while the drawdown “had some effect,” it was “the success of the air war [that] drove the price down.” Other DOE officials also allowed that the SPR had played some role. William C. Gibson, who had been the drawdown manager in 1991, and later became SPR project manager in New Orleans, commented that “the SPR played some role” in bringing prices down. “I don’t know,” he conceded, “if you can ever measure it.”79

Drawdown for War

179

The National Petroleum Council emphasized news of the air war in driving prices down, but also attributed some role to the drawdown announcement. Years later, the NPC’s deputy executive director John H. Guy commented that “[t]he fact that it was going to happen, and was announced immediately, and would be drawn down in large quantities—all those things helped to calm the market somewhat.” And the overall response to the 1991 crisis, Guy contended, was a “watershed event. We as a nation had matured on how we handled energy emergencies . . . and the SPR played a part in that.”80 While the precise impact of the drawdown may be unknowable, it seems clear that the drawdown announcement played a significant role in bringing prices down. By 1990, the market had become increasingly driven by a kind of collective psychology, by what oil traders, buyers, and sellers thought would happen in the future. The commoditization of the crude oil futures market amplified and exacerbated this phenomenon. By the same token, it seems inescapable that news of the air war also played a significant role. It was true that by the time SPR oil reached the market—weeks after the announcement—military action in the Persian Gulf had largely resolved the crisis. Thus, determining the precise impact of an SPR drawdown is an inexact science. But because the market is highly affected by this collective psychology, it is evident that the drawdown announcement, even more than the oil actually reaching the market, played a role in lowering prices back to their precrisis levels. It sent a signal to the market that extra supply would be available, if needed. It is tempting to speculate that if the SPR had been drawn down in August or September 1990, it might have offered a better indication of its ability to mitigate disruption-related price increases. As it happened, coming on the heels of the Allied air strikes, the impact of the 1991 SPR drawdown will likely remain unclear and the subject of debate among energy analysts and policy experts.

THE PRIMARY ENERGY POLICY TOOL After the regulatory debacle of the 1970s, in the 1980s the White House adopted a market-oriented approach to emergency energy policy. The SPR figured prominently in this approach. With the accelerated fill rates of the 1980s, by 1990 the reserve was ready to play a large role in any future energy crisis. The government’s response to the 1991 Persian Gulf War provided a perfect example of this market-oriented approach: it used the SPR to offer a significant amount of oil, then let the market decide how much it wanted. And with the DOE’s price

180

The Strategic Petroleum Reserve

indexing system, the market affected the price of that oil as well. SPR drawdowns would thus mitigate panic-related price spikes, but they did not represent micromanagement. The government prescribed neither the price nor the flow of oil to (and through) the market. Sold at competitive auction, SPR drawdowns conformed with the market, and enabled both the government and the market to determine the nation’s response to energy crises. Despite the president’s reluctance to use the SPR in the fall of 1990, there was no question that the reserve had become the nation’s primary energy emergency response tool. If the administration’s reluctance to order a large drawdown that fall violated the early use policy—and many argued it did—it was a reminder that the president’s discretionary authority over SPR drawdowns was virtually absolute. It did, however, highlight one of the program’s other values: having a well-stocked reserve enhanced the president’s foreign policy prerogatives and afforded the luxury of adopting a wait-and-see approach. It is arguable that had the SPR not been credibly stocked in August 1990, the president may have been forced to act sooner, and with less circumspection and preparation than he ultimately did. Bush’s wait-and-see approach frustrated many in Congress, who had wanted to see a larger drawdown earlier. Their frustration led to the EPCA Amendments Act of 1990, which sought greater protections for energy consumers. That protection was ostensibly afforded by broadening the range of conditions under which the SPR could be drawn down. By increasing and widening the drawdown authorities, the EPCA Amendments Act may have been the most important energy policy development from the entire crisis. In later years, those broader authorities would help open the door to a growing willingness to use the reserve under nonemergency conditions, and for purposes unrelated to energy policy. This too would be a testament to the primacy of the SPR in U.S. energy policy, such as it was.

SMOOTHING PRICE CYCLES, 1996–2000

6

The SPR became an increasingly used policy tool from 1996 through 2000. Drawdowns became more frequent as politicians turned to the reserve for purposes that varied from revenue generation to price smoothing. Yet the program was also used to benefit the oil industry, as SPR oil was exchanged and leased to certain oil companies with serious short-term supply problems. As the program became a kind of catchall for issues related to petroleum supply and price, it was perhaps inevitable that the SPR would become one of the central issues in the presidential election of 2000. The drawdown of 30 million barrels that fall was both the largest and most controversial in the program’s history to date, for it portended a wider use of the reserve than had been intended by the 1975 EPCA.

THE POLITICS OF DEFICIT REDUCTION The SPR’s history had shown that once the government created an energy security program, it was inevitably affected by the prevailing political concerns of the moment. This was never more true than in the latter 1990s, as the seemingly insoluble problem of budget deficits grew worse. As the U.S. government operated under a mounting load of public debt, the politics of deficit reduction rose to the top of the national agenda. At the same time, public concern over energy security had faded. This was generally true despite the fact that by the mid-1990s,

182

The Strategic Petroleum Reserve

the United States depended on imports to meet more than half of its petroleum demand, equaling the dependency levels of the late 1970s. The reasons for the lack of concern over energy security were several, but all boiled down to the fact that the American energy consumer was satisfied. Throughout most of the 1990s, prices were low and supply was available. Coming out of the Persian Gulf War of 1991, the U.S. military had adopted a policing role in the region, to ensure that oil continued to flow out of it. OPEC was having difficulty enforcing its production quotas. With a surplus on the market, real crude oil prices and gasoline prices (adjusted for inflation) were as low as they had been in twenty years. For all these reasons, by the mid-1990s the American electorate, and therefore its elected representatives, felt little sense of energy insecurity. Talk of energy policy had taken on a quaint ring. It was in this context that the national executive and legislative branches began to look at the SPR as a mechanism for revenue generation. The advent of a Republican-controlled Congress in 1995 brought a renewed focus on reducing government spending. While committed to reducing the deficit, the Republicans were, however, adamantly against raising taxes. In large part, this led to the policy of selling government assets to generate revenue. This policy was facilitated by a reversal on the ban on the sale of federal assets, promulgated by Congress and accepted by President Clinton. Both Republicans and Democrats began to look at federal assets as potential revenue generators and a means of balancing the budget. These assets included not only the SPR but also the Elk Hills Naval Petroleum Reserve, a government uranium enrichment plant, an electrical power generating facility, helium refineries and stockpiles, and a handful of other federal assets. In order to cut federal spending and reduce excessive regulation, members of Congress pledged to sell off all the Naval Petroleum Reserves, draw down and sell some of the SPR’s oil, and liquidate, or at least commercialize, parts of the program’s underutilized infrastructure. There were a few dissenting voices in Congress and some within the DOE.1 The dissenting voices, however, were drowned out by those who wanted to show gains in deficit reduction. As 1995 wore on, the Clinton administration warmed to the idea of selling SPR oil to generate revenue. The president had in fact been the first to propose the sale of the California, Wyoming, and Colorado Naval Petroleum and Shale Oil Reserves, only to be rebuffed by the Republicans, who although in control of Congress, did not enjoy a consensus even amongst themselves on national energy policy. By early 1996, Clinton had also begun to appreciate the SPR’s potential as a money maker.2 Ironically, the move to sell SPR assets for revenue generation origi-

Smoothing Price Cycles

183

nated from within the DOE. On December 15, 1994, Energy Secretary Hazel O’Leary announced that as a result of geotechnical problems, the DOE would remove the oil from and abandon the Weeks Island site. The site, which had been created through conventional salt-mining and not for the purpose of petroleum storage, was beginning to show its age—it had been an SPR storage site for almost twenty years. The “old mine,” which had been developed by Morton Salt since 1901, was itself underneath a lake. Crevasses and faults had developed in the salt dome above the mine, allowing water from the lake to seep into the oil storage area. Under the plan, decommissioning would begin in 1995 and be completed by mid-1999. The oil would be relocated to unused storage capacity at the Big Hill and Bayou Choctaw sites. Roughly 72 million barrels would have to be pumped out of the huge single cavern at the Weeks Island site, and that oil would then have to be transported to the other sites (Big Hill for the most part).3 That effort would cost money, and O’Leary proposed to sell some oil from the Weeks Island site, as it was removed, to raise the needed revenues. On January 26, 1996, the Energy Secretary received the needed legislative sanction when Congress passed the Balanced Budget Downpayment Act, which authorized the sale of up to 7 million barrels of Weeks Island oil to obtain $100 million to fund the decommissioning of the site. Ultimately, by March 1996, 5.1 million barrels of Weeks Island oil were sold, bringing in $96.4 million. But the success of this effort created a snowball effect. Congress and the White House took notice. Scrambling for every possible revenue source, the SPR began to look like a pile of money waiting to be spent. Just a few days later, O’Leary said that she regretted the Weeks Island oil sale. She recognized that it was the “camel’s nose under the tent.”4

THE 1996 DRAWDOWNS In short order, in the spring of 1996, both Congress and the White House authorized two drawdowns to raise revenue. One proposal, put together by Senator Arlen Spectre (R-Pa.) and Senator Tom Harkin (D-Iowa) called for the sale of 12 to 15 million barrels of SPR oil to raise $227 million. This money would not go to the program, but would help fund federal education commitments. The drawdown request was attached to a DOE appropriations bill. In the last week of April, Congress passed and the president signed the authorizing legislation, and thus the second nonemergency SPR drawdown of the year began in late May and was completed in August. Ultimately, 12.8 million barrels of SPR oil would bring in the target goal of $227 million. In early February

184

The Strategic Petroleum Reserve

1996, in a federal budget proposal to Congress, the president proposed another sale, to take place in the year 2002, to raise $1.5 billion for the general purpose of deficit reduction. The DOE found that having opened the idea of the SPR as a revenue generator, it was hard to dampen the enthusiasm for additional sales. The department found itself obliged to accept still a third proposal to sell SPR oil in the fall of 1996, this time to raise $220 million to help pay for the ongoing costs of the SPR program. By October 1996, sales of SPR oil for this third nonemergency drawdown had already begun. By January 1997, 10.2 million barrels of West Hackberry sour oil had been sold, and the $220 million had been raised. Combined, the three 1996 drawdowns (beginning in February, May, and October 1996), would reduce the reserve by 28.1 million barrels, from 591.6 to 563.5 million barrels, and bring in $545.8 million in revenue.5 Top-level DOE officials forthrightly expressed their opposition to the use of the SPR as a revenue generator. In early April, Secretary O’Leary, who had spearheaded the effort to win approval of Weeks Island oil sales, made clear her opposition to the proposal to use the SPR to cover fiscal deficits: it was a “shortsighted” act by “a bunch of minions,” and it was over her “regrets” that the administration would use the SPR for budget-balancing purposes. She pointed out that these latest proposals for selling SPR oil were for purposes neither related to energy disruptions, nor the program itself—a distinction from the initial Weeks Island sale.6 The DOE’s critics in Congress accused it of hypocrisy. “They [the DOE] pointed everybody over to the piggy bank,” said a congressional source, “and then said ‘Let’s not have any more sales.’“ But even had the Weeks Island sale not provided “the camel’s nose under the tent,” as O’Leary termed it, the move to use national assets as revenue generators, including the sale of SPR oil, might likely have occurred anyway. Both parties in Congress were becoming desperate to show gains in deficit reduction, and both parties had already begun to view the SPR as a source of funding.7 But before the $227 million sale could take place, the politics of oil once again rose to the top of the national agenda, triggered by rising gasoline prices. In April 1996, the national average of retail gasoline prices increased to $1.30 per gallon, a rise of 12 percent over year-earlier levels. The situation was particularly acute in California, where gasoline prices increased to $1.75 per gallon and were as high as $2 per gallon in some areas. There were many reasons for the price increases. They included environmental mandates for costlier reformulated gasoline; the fact that

Smoothing Price Cycles

185

refiners had produced more heating oil instead of gasoline following the unusually cold winter of 1995–96; and industry’s increasingly prevalent just-in-time policy, which kept operating inventories to a minimum. All this translated into lower inventories and a limited supply of crude to refine into gasoline. By May 1996, U.S. refiners’ crude oil inventories fell to 297.6 million barrels, the lowest since 1977. Moreover, demand was up, heightened by relatively low oil prices, the growth of sport utility vehicles, the removal of national speed limits, and the onset of the summer driving season. When demand began to outstrip supply, prices inevitably rose.8 But as the American political economy had shown so many times since 1973, angry energy consumers discounted these reasons, and turned instead against “Big Oil.” For American energy consumers, it did not matter that even with the increases, crude oil and gasoline prices in the United States were still among the lowest in the world. The companies were once again suspect. The DOE began an investigation as to the cause of the price increases. Not satisfied with that, Congress debated whether to open its own investigation. Republicans took the opportunity to call for a repeal of the federal gasoline tax increase passed in 1993. Democrats called for a reimposition of the Windfall Profits tax, which had expired in 1986. Political pressure for government action mounted. On April 29, the president authorized the DOE to immediately begin the sale of the 12 to 15 million barrels of SPR oil that had already been authorized by law. That night, while speaking at a Democratic function in Coral Gables, Florida, Clinton announced that he would expedite the drawdowns, saying that he was “very concerned about this dramatic, although apparently temporary, rise in the price of gasoline at the pumps.” In his comments, the president revealed an understanding of the ways in which sustained energy consumption was essential to a modern economy. The gasoline price increase, he said, “affects the take-home pay of working people who have to commute to work,” and “offers a great problem for tourism centers like Florida. We’re about to get into the high-driving season, and if gasoline is 20 percent higher, there are not going to be as many people driving as far to do whatever it is they’re going to do this summer.” For these reasons, he had instructed the Secretary of Energy to “immediately begin the orderly sale of about 12 million barrels of our nation’s strategic petroleum reserve to try to moderate the price of fuel.” It was a rather frank admission of a price control policy—and amazing, given past controversies. Republican lawmakers charged that the president was trying to take sole credit for the SPR oil sales, which both Congress and the White House had already mandated

186

The Strategic Petroleum Reserve

to help balance the budget; and that the drawdown announcement was driven by election-year politics.9 The question remained as to what impact the drawdown would have. One administration official predicted that the initial sale of 400,000 to 600,000 barrels of oil per day would “likely have a softening effect” on petroleum prices. Many private-sector energy analysts, however, doubted that those levels would have much impact on gasoline prices. The effect of placing a total of 12 to 15 million barrels on an American market that consumed close to 18 million barrels per day, noted one, was “like trying to fight a forest fire with a few cupfuls of water.”10 In fact, the market did react to the drawdown announcement. On April 30, the day after the president’s announcement, crude oil futures for June delivery fell $1.23 to settle at $21.20 per barrel. By early May, some crude oil futures also dipped down further, as June light sweet crude settled down to $20.81 per barrel. Some analysts argued that a deflationary trend had already been underway; others allowed that the drawdown announcement played some role in bringing prices down. Houston-based energy analyst John Saucer commented that while the drawdown announcement did not have a “fundamental impact” on the market, it did have a “psychological impact.”11 It was notable that despite the fact that all the oil sold in this drawdown was sour, it was in high demand by refiners. The 1996 drawdown thus undermined the pervasive notion that the SPR had been filled with undesirable high-sulfur or “sludge” oil. And with crude oil and gasoline prices coming down, the president was able to paint the second drawdown of 1996, intended by law to help fund education commitments, as an energy-related measure. But if the idea of using the SPR to balance the budget was a departure, the decision to sell SPR oil to combat price spikes, without a disruption in either domestic or imported oil supply, represented the kind of policy Reagan and Bush administration officials had deemed anathema. In point of fact, the SPR provisions of the Energy Policy Act of 1992 may have facilitated such a move. Even more than the 1990 EPCA amendments, the 1992 act further widened the drawdown authorities by explicitly including price increases in the language of the legislation. With the 1992 law, a “severe energy supply interruption” would be deemed to exist if the president determined that, in addition to a “significant reduction in supply,” a “severe increase in the price of petroleum products has resulted from such emergency situation,” and “such price increase is likely to cause a major adverse impact on the national economy.” This further broadening of the drawdown authorities to a price-based criterion had been the result of a push by congressional

Smoothing Price Cycles

187

Democrats, who had been frustrated by the Bush administration’s refusal to draw down the SPR in the fall of 1990. Thus the most immediate and primary impact of an oil-supply disruption—the sticky issue of energy price spikes—had for the first time been made explicit in law and established as a criterion for an SPR drawdown. In so doing, the 1992 law likely helped open the door for revenue-oriented drawdowns, dressed in the clothing of energy policy.12 The drawdowns seemed to represent a serious change in SPR policy, away from supply protection to price control. As such, they brought serious criticism from industry spokesmen, energy analysts, DOE officials, and a few members of Congress, on both sides of the aisle. Industry groups, particularly producer groups, were perhaps the most critical. To them, the sale of SPR oil into a nondisrupted market represented another form of price control. These concerns were voiced at a May 8, 1996, hearing on the future of the SPR, held by the House subcommittee on Energy and Power. At the hearing, API president Charles J. DiBona commented that the SPR “was never intended to be used to control prices or dampen normal price fluctuations.” Such a move, he contended, “sets a dangerous precedent for both oil markets and the government.” He went on: It can be expected to lead to political pressure on the government to respond wherever and whenever petroleum product prices rise, no matter what the reason. If the government uses the SPR to limit price increases but not decreases, it obviously would reduce future incentives for firms to hold inventories.

Private stockpiles, he argued, would be increasingly unable to mitigate future supply disruptions. “In the long run, the government action would be self-defeating.”13 There were a few members of Congress who opposed the SPR sales, mostly in the Senate. One of these was Senator J. Bennett Johnston (D-La.), a key architect of U.S. energy policy for two decades. He believed that selling SPR oil to meet budget targets was a “a great mistake,” because the instability in the world oil market meant that the U.S. needed the SPR “now as much as ever.” Senator Dale Bumpers (D-Ark.) worried that federal assets might be sold for pennies on the dollar. SPR oil, he noted, was being sold at prices of $18 to $19 per barrel that had been acquired at an average price of $27 per barrel. By one estimate, the federal government would take a $90-million loss on the May 1996 drawdown.14

188

The Strategic Petroleum Reserve

But ultimately there were too many in Congress who either supported or did not oppose the policy. When asked about using SPR oil to fund education, Senator Harkin commented that he did not mind “shifting one asset for another.” There were others who deemed the drawdowns good energy policy. Representative Frank Pallone (D-N.J.) was one of these, stating that Clinton’s decision to use the SPR to combat gasoline price increases “showed its usefulness.”15 Most of the officials affiliated with the SPR program were ambivalent about, if not always adamantly against, the 1996 drawdowns. That September, Deputy Assistant Secretary for the SPR Richard Furiga admitted to having “mixed emotions” about selling SPR oil as a budget device. He conceded, however, that program personnel were “getting experience and training” from the drawdowns, and that there were “operational benefits . . . to show that the system works.”16 But frequent use of the SPR, as the 1996 drawdowns seemed to portend, conflicted with the program’s basic design structure, both from a physical and legal viewpoint. Physically, the caverns the DOE had created were designed for a twenty-year life cycle and could be drawn down and refilled five times without bringing their structural stability into question. But because the program used freshwater for drawdown, caverns would be further leached and would thus grow with each drawdown. More frequent drawdowns might shorten the life span of the caverns. In addition, most of the environmental waivers the SPR program had received from Texas and Louisiana state agencies for its operations during drawdowns had been worded around, or based upon, national emergency scenarios. More frequent drawdowns for the purpose of revenue generation might not be covered by those waivers, as written. While it seemed that the momentum for revenue-oriented drawdowns might be undeniable, there was, under the 1990 EPCA amendments, a 500-million barrel floor under which the SPR could not be drawn down under the new provisions. Drawdowns taking the reserve under 500 million barrels would have to pass the standards of 1975 EPCA, a presidential finding of a “severe energy supply interruption.”17 The entrance of Energy Secretary Frederico Peña in January 1997 seemed to indicate a policy shift away from selling SPR oil for budgetary purposes. In a May 16, 1997, speech before the IPAA, Peña announced that the proposed sale of 67 to 75 million barrels of SPR oil to raise $1.5 billion in 2002 was no longer needed to balance the budget. The Clinton administration, he averred, was now “serious about putting the nation on the right course toward energy security.” And, seemingly in accord with this view, President Clinton’s proposed fiscal 1998 federal budget contained no further drawdowns.18

Smoothing Price Cycles

189

In July 1997, however, the House of Representatives once again took up a measure that included the sale of more SPR oil—a proposal to raise approximately $209 million by selling roughly 10 million barrels from the reserve, to help pay for the program’s ongoing operations and maintenance. The taps were still open for revenue generation, it seemed. As important as an Energy Secretary’s sentiments were, it was still the White House and the Congress that held the reins of power over the SPR, and it would be within their walls that the future of the program would be determined. As a testament to that truth, in early 1998, a House Interior Appropriations bill [H.R. 2107], containing a proposal to raise $207.5 million through the sale of SPR oil, was sent to the president. But on May 1, 1998, Clinton issued a finding that the proposed sale was “imprudent in light of current market conditions.” That same day, he signed the Emergency Supplemental Appropriations bill into law, which included a provision halting the proposed sale. On May 11, Peña announced that the sale had been officially canceled. Still, the question remained. Had the idea of using the SPR to generate revenue been permanently quenched?19

WORKING WITH THE INDUSTRY In the spring of 1996, the DOE found a new use for the SPR, one that benefited the industry while also helping to prevent a supply disruption. In late April, just as increasing gasoline prices were attracting political attention, ARCO discovered that its 20-inch crude oil line that connected its Seaway terminal and tanker complex at Freeport, Texas, with Cushing, Oklahoma, had become clogged. This interrupted oil deliveries to thirty-two refineries throughout the Midcontinent and Midwestern regions and threatened to bring a significant supply disruption. This would have exacerbated the tight supply conditions that had led to the gasoline price increases. The loss of the line also potentially impaired the DOE’s ability to use the SPR in an emergency situation. ARCO had been relying on the 20-inch line to deliver crude to the Midcontinent while its 30-inch Seaway line was out of commission. The Seaway line, which had originally been a major cog in the SPR’s distribution network, had been converted to natural gas transmission in 1985. In the spring of 1996, it was in the process of being converted back to crude oil transportation. In fact, the company had been filling the Seaway line with crude when the 20-inch line became clogged. With the disruption coming in the midst of a tight market, ARCO sought to accelerate the process of bringing the Seaway line back into service.

190

The Strategic Petroleum Reserve

But before the first drop of oil could arrive in Cushing, ARCO had to fill (or “pack”) the line with approximately 2.5 million barrels of crude oil. Yet due to the tight market, there was not enough crude immediately available to fill the Seaway line. The SPR’s Bryan Mound site, right in the midst of the Seaway complex, with 217 million barrels of oil, seemed to present a solution to the problem. On May 1, ARCO officials approached the DOE. Was it possible to borrow up to 1 million barrels of crude from the Bryan Mound site? After a few days’ consideration, the DOE responded favorably to the idea. The agency concluded that maintaining an adequate supply of crude oil to these refineries was crucial to meeting the higher summer demand for gasoline and avoiding additional pressure on gasoline prices. It also believed that it could help without sacrificing any of the SPR’s operational readiness. On May 4, the DOE announced that it had agreed to lease ARCO up to 1 million barrels of oil, at 20 cents per barrel per month, to be returned within six months. Within that time frame, ARCO would replace the oil with an equivalent grade of crude, plus pay any price differential if oil prices were to fall during the lease term. This lease and exchange agreement was entered into under the Secretary’s authority contained in Sec. 10 of the 1990 EPCA amendments. Both DOE and ARCO officials were happy with the arrangement. “Access to this additional source of crude oil . . . reinforces a vital link in the supply system and demonstrates the government’s ability to respond to the nation’s needs in disruptive situations,” said Karen K. Caldwell, president of ARCO Seaway, Inc. Members of the Clinton administration portrayed the deal as another effort by the president to combat rising gasoline prices, and another way in which the SPR could be used to help the industry.20 The episode was unprecedented and unique in many ways. It offered yet another form of domestic supply disruption for the government to consider. It also showed that the industry policy of maintaining stocks to bare operating levels tended to tighten supply even in a slack market, making conditions even more propitious for a disruption. Perhaps most notably, ARCO’s overture to the DOE was a measure of how things had changed. It may have been the first example in U.S. history of the federal government leasing oil to the industry. This in itself was a milestone, and yet another reminder of how growing U.S. demand and depletion of domestic reserves had shifted the paradigm in the political economy of oil. In the summer of 2000, the DOE again used the SPR in response to industry request. In June, some 1.5 million barrels of SPR oil were

Smoothing Price Cycles

191

drawn down to prevent a disruption in the flow of gasoline and diesel fuel from the Louisiana Gulf Coast to the New England and MidAtlantic regions. The decision came amidst a tight summertime market, in which gasoline prices had risen to more than $2 per gallon in some areas. The precipitating event was the collapse of a dry dock barge in the Calcasieu ship channel, just north of the Intracoastal waterway. Both CITGO’s Lake Charles refinery and Conoco’s West Lake refinery, two of the largest in the state, were cut off from tanker deliveries. The blockage threatened to disrupt crude oil shipments to the refineries, which meant that they faced production curtailments in a matter of days. The companies approached the DOE with an exchange offer, and in less than thirty hours, the DOE had made arrangements to exchange SPR oil to relieve the refineries’ supply problems. On June 15, Energy Secretary Bill Richardson, using the SPR’s exchange authority, ordered a 500,000 barrel drawdown to be delivered to CITGO. The next day, the DOE agreed to release an additional 500,000 barrels to Conoco under a similar exchange agreement. The companies would resupply the reserve with an equal amount of crude after the shipping lanes were reopened. Expediting these deals was the fact that both refineries were in close proximity to the West Hackberry site. The oil would be drawn down from there and transported to the refineries through the 22-inch Equilon pipeline. Within a week, the shipping channel was reopened. By early August, both companies had returned an equivalent quantity to the reserve, completing the exchange.21 A number of Congressmen, led by Senator Charles Schumer (DN.Y.), sought but did not get a larger release. Schumer, who had become an ardent advocate of using the reserve to prevent regional supply shortages, described the administration’s decision as evidence that it was “willing to allow the government to influence the market.” There was truth to the charge. Once again, an SPR drawdown announcement helped lower prices. After the initial announcement on the 15th, crude oil futures prices on the NYMEX fell 62 cents (and by $1.45 at one point) to settle at $32.33 per barrel the next day, June 16. Gasoline prices fell slightly, by 2.25 cents to $1.066 per gallon. This again evinced the reserve’s signaling power, albeit in a limited way.22 Also, the initiatives by CITGO and Conoco—like ARCO’s request for an oil exchange in May 1996—eroded arguments that the industry opposed SPR oil releases in nonnational emergency situations. Indeed, these episodes showed their occasional need for the program. But perhaps the most notable development was the government’s increasing tendency to use the SPR exchange authority to address problems not

192

The Strategic Petroleum Reserve

foreseen nor covered by the 1975 EPCA drawdown authority. By design, the exchange provision of the 1990 Act allowed a more frequent use of the reserve than the 1975 legislation intended.

REFILLING THE SPR In early 1999, with prices at historic lows and the market awash in oil, members of Congress began looking for ways to restore the 28 million barrels sold in 1996. In early February, Congressman Mac Thornberry (R-Tex.) introduced a bill to replenish the SPR by allowing companies who operated on federal lands to pay their royalties with oil rather than cash. The bill would require the Mineral Management Service (MMS) of the Department of Interior (DOI) to collect 100,000 barrels per day from offshore production for the reserve, until it was filled to its total capacity of 680 million barrels. Another bill, this one introduced by Congressman Lamar Smith (R-Tex.), would have provided $300 million for oil purchases. At then-current prices, it was estimated that the measure would have brought in some 24 million barrels.23 The Clinton administration preferred the approach favored by Congressman Thornberry. On February 11, Secretary Richardson announced plans to restore the 28 million barrels to the SPR with royalty oil from Gulf of Mexico production. The plan had the virtue of increasing the amount of oil in the reserve without appropriating funds for the purpose. As a secondary benefit, it was also hoped that the measure would afford some relief to beleaguered producers, by taking oil out of the market. It also avoided the vexing problem of determining the value of a barrel of oil, often an issue when companies paid their royalties in cash. It was estimated that the DOE and the DOI (through the MMS, which managed the offshore leasing program) would deliver up to 100,000 barrels per day beginning in April. The oil would either be piped directly from offshore operations in the Gulf, or transferred to the reserve through exchange arrangements. At a press conference held that day, Richardson commented that it was time to rebuild the reserve: “In a world where our economies are interconnected and interdependent, where fossil fuels provide the source of most of our power, a reliable, secure supply of oil is not a luxury, but a necessity.”24 To put the plan into effect, Richardson transmitted letters to Congress notifying oversight committees of necessary changes in the administration’s Strategic Petroleum Reserve Plan. The use of the royalty oil was authorized under EPCA, and could be implemented administratively, but the DOE had to formally notify Congress at least sixty days in advance.

Smoothing Price Cycles

193

On March 31, the first contracts for royalty oil transfer were signed with Texaco, Shell, BP Amoco, and Exxon, who collectively agreed to transfer approximately 38,600 barrels per day of royalty crude to the SPR. During the three-month terms of the contracts, the companies were scheduled to deliver nearly 3.9 million barrels of oil to the Bayou Choctaw site. By April, the DOE had taken delivery of 500,000 barrels of crude. On June 16, 1999, the DOE signed another round of contracts with Equiva Trading Co., Vastar Resources Inc., Vitol S.A. Inc., and Mobil Supply, Trading and Transportation for an additional 9.3 million barrels. A third round of royalty oil contracts, aimed at bringing in the remaining fourteen million barrels, was scheduled for the fall. Some DOE officials indicated that in the longer term, they wanted to add up to 90 million barrels of royalty oil to the SPR. Such were the merits of the royalty-in-kind initiative that it outlasted the Clinton administration. By avoiding outlays for crude purchases—historically the program’s largest cost—the use of royalty oil has enabled the SPR to attain its highest stockpiling levels yet.25

THE RPR REVISITED By the late 1990s, the DOE had examined proposals for building a regional, refined product reserve (RPR) on a number of occasions. Usually, these studies had focused on the feasibility of building a regional heating oil reserve and had been undertaken at the insistence of congressional representatives of the Northeast states. Each time, the DOE had concluded that the large-scale crude oil storage in Gulf Coast salt caverns was the best, most cost-effective means of protecting energy consumers. It was deemed too expensive and too problematic to store large amounts of refined product in aboveground steel tanks. Yet the issue of regional energy supply would not go away. One of the 1990 EPCA amendments required the DOE to conduct a three-year pilot program for storing refined products in locations most dependent on imported petroleum products. Tellingly, it was not implemented due to a lack of funds. A DOE review of the RPR issue in 1991 reaffirmed that decision. Still, the issue persisted. It re-emerged in the fall of 1996, prompted by three near-term events: reports that home heating oil stocks were at record lows; the consequent question of the availability and affordability of home heating oil for winter; and a heightened level of political dialogue that stemmed from the coming November elections. Memories of the harsh winter of 1995–96 further stoked concerns about supply and price. For many families in the Northeast and Midwest, in winter,

194

The Strategic Petroleum Reserve

home heating oil supplies became a virtual lifeline. The U.S. Northeast was in fact described as the world’s largest heating oil market. Three out of four families in the region depended on home heating oil in the winter—about 12 percent of American families, somewhere between 10 to 14 million homes. It also adversely affected renters, landlords, businesses, even the city and state governments, by driving their costs up significantly. In such a context, home heating oil supply and price inevitably became politicized. The renewed concern with regional energy protection first took the form of a proposal to trade SPR crude oil for home heating oil, so that the government could help supply that market, as needed. It soon again took the traditional form of a proposed regional refined product reserve. In a September 18, 1996, letter, twenty-one members of Congress from the Northeast and Midwest wrote Secretary O’Leary to express their concern over home heating oil supplies, which were running 25 percent below previous-year levels. The congressional group was split fairly evenly between Republicans and Democrats, but was led by a number of Democratic notables, including Senators Joseph Lieberman (D-Conn.), Christopher Dodd (D-Conn.), Patrick Leahy (D-Vt.), Edward M. Kennedy (D-Mass.), and his nephew, Representative Joseph P. Kennedy (D-Mass.). They called on O’Leary to find a way of boosting heating oil supplies. They pointed to industry estimates that low inventories could push home heating prices up 20 cents per gallon or more in the upcoming winter, increasing the costs for a family using 1,000 gallons a year by $200. A report in the August 19 Wall Street Journal noted that middle distillate stocks for the previous week had numbered 104 million barrels, 21 million barrels below the previous year, and portended that “a winter of normal temperatures will probably ensure very firm prices, and an icy winter could send them skyward.” The DOE’s own estimates had found similar conditions. Inventories of overall distillate oil stocks, including home heating oil, were running 15 percent below the previous year, and 17 percent below the average seasonal level of the previous month. Further, there had been an unexpected 400,000-barrel decline in distillate stocks in early August. By mid-November, some estimates had heating oil stocks running as much as 28 percent below previous-year levels.26 A tight market, in turn, tended to inflate prices. Wholesale spot prices for heating oil in New York increased from 55.72 cents per gallon on August 2 to 66.13 cents per gallon on September 6, an increase of nearly 17 percent. By mid-October, home heating oil prices had increased an additional 9 cents per gallon. Some projected that a colder-

Smoothing Price Cycles

195

than-usual winter could add another 5 cents per gallon. And at least in some cases, by mid-November, some New Englanders were paying 25 cents more per gallon than they had the year before.27 Many of the same factors that kept industry inventories low also left some regions vulnerable to supply shortages and price increases. First and foremost was the continuing industry penchant for restricting inventories to basic operating levels, in line with the popular “just-intime” philosophy. Another factor was the continuing prospect that the United Nations would permit additional Iraqi oil to be sold as part of an oil-for-food and medicine package. And the reports that Iraqi oil was being sold on the black market, in contravention to the U.N. mandate, also played a part in convincing companies to keep inventories low. The congressional letter brought the theme of protecting energy consumers to the fore. “It is apparent to us,” it concluded, “that the stage may be set for a significant increase in retail prices for home heating oil and diesel fuel over the next several months. Coming on the heels of this spring’s substantial spike in gasoline prices, we are extremely concerned about the potential for this kind of run-up and the impact it would have on the Northeast and Midwest regions of our country. We have doubts as to whether the nation’s refiners have the time or capability to build a level of inventories high enough to protect consumers in the upcoming heating season.”28 The letter asked O’Leary about the possibility of a swap between the government and industry, SPR crude for heating oil. The DOE had in fact made a somewhat similar exchange, a crude-for-crude swap with ARCO Pipeline Co. earlier that year, in April. The purpose of that deal had been to loan SPR crude to ARCO when its Seaway pipeline became clogged, amidst rising gasoline prices nationwide. If SPR crude oil was available to help supply industry in a pinch, some argued, why not do the same thing, except with heating oil, to help heating oil consumers in their time of need? Trading SPR oil for home heating oil, and then placing it on the market as needed, they argued, would simply be using the reserve for the use it was intended to help shield energy consumers from the economic effects of high energy prices. DOE officials argued that there were a number of roadblocks to using the reserve in this fashion. For one, they were not sure that the agency had the legal authority to swap SPR crude for heating oil. DOE officials also pointed out that the enacting legislation for the SPR had expired in June, and Congress had yet to reinstate that authority. But as before, there were those who felt the DOE was conveniently finding roadblocks to mask its reluctance to implement the EPCA’s RPR provi-

196

The Strategic Petroleum Reserve

sion. Citizen Action argued that the DOE had been only too willing to respond when the industry needed help, but was strangely reluctant to help energy consumers directly.29 With public pressure mounting, on October 18 O’Leary met with twenty-one senior oil company executives and industry analysts to discuss the home heating oil market. The meeting was more of a factfinding effort than an arm-twisting session, the Energy Secretary later said. She merely wanted to ascertain the causes of the tight heating oil market. In fact, according to DOE reports, there was not much more room for increased distillate production. U.S. refineries were running at 95 percent capacity, and the distillate production rate of 3.4 million barrels a day in September 1996 was the highest in three years.30 Many refiners thought it was too soon to start gearing up for home heating oil production. That process entailed shifting production away from diesel fuel, which was enjoying strong prices at the time. Nevertheless, a few companies said they would work to meet demand. CITGO Petroleum announced that it would delay shutting down a cracking unit at one of its refineries to keep its distillate production up. Tosco Corp. announced that it would keep its Linden, New Jersey, refinery running at full speed to keep up with heating oil demand.31 Perhaps because of these pledges, O’Leary announced that the government would not intervene in the heating oil market. Despite unusually low inventories, she believed that there was no immediate need for such action. “I don’t see any impending crisis. I see a tight market,” O’Leary said at the press conference that followed the meeting.32 Still, the advocates of regional energy protection would not be denied. Congressman Kennedy continued to press the White House to be more responsive to the needs of Northeast energy consumers. Kennedy had long championed the cause of regional energy protection. In 1979, he had founded Citizen Energy, a nonprofit enterprise founded to help lower-income Bostonians purchase heating fuel. By the mid-1990s, he believed that industry trends had made that cause even more important. “There may be benefits to the industry’s dependence on a ‘just-intime’ system of inventory management,” Kennedy observed in October 1996, “but there are questions about whether these benefits are being passed on to the consumer.”33 With the rise in heating oil prices, throughout October and November 1996, Joseph Kennedy revived the idea of a Northeast home heating oil reserve. It was the same basic concept that his kinsman Senator Edward Kennedy had championed since the SPR’s inception, but with a new twist. The congressman suggested that the DOE could create the

Smoothing Price Cycles

197

Northeast reserve by taking crude from the SPR, and exchanging it for heating oil.34 Coming out of her October 18 meeting with the industry officials, O’Leary had indicated that the DOE had no plans for acting on Kennedy’s proposal, but did say that the agency would take a closer look at the Northeast product reserve concept. In a letter written to Kennedy just days after her meeting with industry executives, O’Leary acknowledged that the “significant changes that have occurred in domestic and international markets for supply, storage, and distribution of crude oil and petroleum products warrant re-examination of the issue.” As part of that re-examination, O’Leary pledged that the DOE would undertake a study of the regional reserve issue, to be completed by the spring of 1997.35 Members of the New England congressional delegation pressed for more immediate action. On October 28, O’Leary met with Congressman Kennedy and Senators Dodd and Lieberman to address the home heating oil issue. But when there were no pledges of immediate action coming from the DOE, the contingent came away unsatisfied.36 The report that O’Leary promised came out in July 1998. Its findings were not new. As it had in the past, the DOE decided against creating a government-controlled regional petroleum product reserve. The report concluded that such a reserve would make economic sense only under a very narrow set of conditions. The benefits would exceed the costs only if the reserve was relatively small, approximately 2 million barrels, located in leased terminals, and filled by trading SPR crude for distillate product. Storing distillate product in Gulf Coast salt caverns would improve the cost-benefit characteristics, the report found, but in an emergency, it would take seven to ten days to move the products to northeastern consumers. A larger product reserve of 6.7 million barrels, designed to meet extreme weather contingencies, would not be attractive based on cost-benefit analysis, unless it was constructed entirely within the existing SPR sites. Inevitably, it seemed, RPR proposals always foundered on cost. The cost of above-ground tanks was ten times that of man-made salt caverns, and hard rock mines were twenty times as costly as the Gulf Coast salt mines, which, it was noted, were already connected by pipeline to nearly half of U.S. refineries. Then there was the cost, most of which stemmed from the frequent cycling of petroleum products. Product reserves could have operating costs up to ten times higher than crude reserves, because the inventory had to be regularly turned over.37 Further, the DOE’s review also deemed the 1975 EPCA’s authorization for regional reserves, based upon import dependence, to be anach-

198

The Strategic Petroleum Reserve

ronistic. It was most unlikely, the DOE found, that situations causing the Northeast to experience heating oil price spikes would be related to product import disruptions. Instead, they would probably be the result of low preseason inventories, such as occurred in the fall of 1996, and unduly severe weather. Further, it was unlikely that there would be a disruption of product imports but not crude imports. And in a situation where prices of all products rise dramatically, the underlying market would most likely be short crude oil, not specific products. In those instances, where prices rise so much as to pose a threat to the overall U.S. economy, the report concluded, the proper policy response would be to draw down crude oil from the SPR.38

THE RPR CREATED Yet support for a Northeast heating oil reserve did not wane. In fact, by the late 1990s, the concept was gaining momentum, because the conditions that created such support continued to exist. The DOE’s report to Congress in June 1998 had concluded that a federally created regional heating oil reserve made economic sense only when private stocks were unusually low and consumer prices unusually high. Such a confluence of factors had occurred in the winter of 1996, but most experts deemed a recurrence in the near future highly unlikely. But extremely low temperatures returned to the Northeast in the winter of 1999–2000. In January 2000, temperatures in New England plunged to nearly 24 percent below normal. Heating oil prices increased dramatically, and many consumers were faced with unexpectedly high bills. Between January 17 and February 17, the average price of home heating oil for residential customers in New England rose from $1.18 to $1.96 per gallon, a 66 percent increase. A typical household with a 275-gallon tank, filled at the peak price, paid an additional $140 for an average fill-up. In some areas, home heating oil prices more than doubled, going from 80 cents to $2 per gallon. In other areas, consumers faced the prospect of no supply at all.39 That February, Citizens Energy Corp. was forced to stop accepting applications for an emergency fuel aid program for the poor and elderly, largely because it was paying almost $2 a gallon for oil that it turned around and offered at 40 cents to people in the program. The price jump immediately impacted customers of J. L. Oliver in Berlin, New Hampshire, which had promised to deliver oil for as little as 55 cents a gallon even if the wholesale price increased. The company stopped making deliveries altogether, forcing the state Office of Energy and Community Services to find new suppliers for about 2,500 households.40

Smoothing Price Cycles

199

Energy analysts described the recurring problems in the Northeast heating oil market as a “classic case of market failure,” in which just about everything that could go wrong had. Reasons included recent OPEC crude oil production cutbacks; refiners’ reluctance to overproduce heating oil stocks, due to its limited market; and unpredictable weather patterns. Supply was further reduced when power generators and industrial companies began switching from high-cost natural gas to fuel oil, and inclement weather temporarily prevented waterborne oil deliveries. There were those who recognized that heating oil consumers were part of the problem. Many had become overly accustomed to a cheap and ready supply of heating oil, a historically unstable commodity. The heating oil market was small in the national context, and had been declining since the late 1970s. Only about 8 to 10 percent of American homes used it, and for many oil companies, gearing production toward it meant targeting away from other, larger markets. Ultimately, Larry Chretien, director of the Boston Oil Consumers Alliance, agreed that there was plenty of blame to go around, from OPEC to consumers who had grown to expect low oil prices indefinitely. Though he wanted more accountability for the major businesses in the oil supply chain, he noted that “We have met the enemy and he is us.”41 Nevertheless, such socioeconomic trauma quickly sparked political activity. Attorneys general across the region looked for evidence that heating oil dealers had engaged in price gouging. And, use of the SPR once again became a key political issue. The New York Heating Oil Association publicly called on President Clinton to release oil from the reserve to temper rising prices and contacted Senator Schumer to aid their cause. Both Schumer and Senator Susan Collins (R-Maine) indicated that they would push for legislation that would give the president the authority to sell SPR crude to ease the heating oil crisis. They were soon joined by Congressman Sherwood Boehlert (R-N.Y.), Congresswoman Sue Kelly (R-N.Y.), and several other lawmakers from the Northeast.42 It quickly became evident that getting new legislation would take too long. Seeking to spur action, Schumer advanced a proposal that would immediately inject crude into the market. Using the SPR’s exchange authority, the government could “swap” crude from the reserve with interested oil companies, in return for a promise to replenish the stockpile at a later date when prices were lower. It was essentially the same idea put forth in the September 1996 congressional letter to Secretary O’Leary, and the same idea Congressman Joseph Kennedy had again advanced that November, along with Senators Dodd and Lieberman.

200

The Strategic Petroleum Reserve

Richardson and other administration officials downplayed the Schumer proposal. It was a bad idea, they argued, to use the reserve to influence prices (even though the administration had done just that in April 1996). Richardson pointedly commented that the SPR should be used only in case of a supply disruption. Yet the idea had its defenders in the White House. And by late January 2000, the administration was feeling pressure to do something. On January 26, a DOE spokeswoman said that while the Secretary had “ruled out” using SPR, the administration remained “concerned” about high crude and home heating oil prices. To that end, the DOE would delay delivery of some 5 million barrels of royalty-in-kind oil, scheduled for delivery at SPR sites, in an attempt to place more oil on the market. Meanwhile, the administration debated the merits of additional options, including Schumer’s swap proposal.43 While engaged in that debate, the administration soon found itself in the middle of a political crossfire. Northeastern officials pressed increasingly hard for a drawdown. Pressure was coming from federal, state, and local levels; from Democrats, Republicans, and Independents. On February 12, Rudolph Giuliani, the conservative mayor of New York City, sent a letter to President Clinton urging him to draw down the SPR immediately, “before things get much worse.” The Mayor placed the blame squarely on OPEC production policies and seemed to discount long-term industry inventory practices or worldwide production trends. On February 17, when the president still had not acted, Giuliani publicly took him to task. (“He could stand up to OPEC and he’s refusing to do that,” said the Mayor). It was perhaps notable to see a conservative politician demand that the government intervene in the marketplace, but the heating oil crisis brought northeastern politicians of all stripes together. It was also worth noting that the mayor was, at that point, campaigning against First Lady Hillary Rodham Clinton for New York’s open U.S. Senate seat.44 On the other side were industry groups, which criticized the administration for even contemplating using the reserve without a supply disruption. The SPR “was intended to be used only in the event of a critical disruption of imported supplies,” said API president Red Cavaney in early February. That had indeed been the original purpose. But the 1990 and 1992 laws had expanded the drawdown authorities significantly beyond that to include domestic disruptions and price increases related to supply shortages. Yet the idea that the reserve should only be used in the event of foreign oil supply disruptions was shared by many. A number of newspaper editorials and syndicated columnists also spoke out against the proposal, on the basis that it would use the reserve “in a way that was never intended.”45

Smoothing Price Cycles

201

In early February, the president began sending signals that he might order a drawdown. Using an interesting reversal on Richardson’s phrase, Clinton said that he would not “rule out” using the reserve, and that he had “not taken the petroleum reserve issue off the table.” To the frustration of those who wanted a drawdown, he continued to send out vague, promising, but ultimately noncommittal signals. In mid-February, the president told reporters that he had not “closed off any options,” and that he was “monitoring this on a daily basis.” In the meantime, the administration made available some $200 million to help low-income families purchase heating oil.46 Meanwhile, spurred by rising prices, the Northeast congressional delegation intensified their efforts. By mid-February, West Texas Intermediate crude on the NYMEX had pushed beyond $30 per barrel for the first time since the Persian Gulf War, nine years earlier. Congressman Bernard Sanders (Ind.-Vt.) led a bipartisan congressional group that collectively demanded an immediate SPR release. On February 15, they held a press conference to express their concerns. Many were openly critical of the president’s handling of the heating oil crisis. Congressman Michael Forbes (R-N.Y.) took a less critical stance, saying that he understood the administration’s reluctance to use the SPR in a nonsupply emergency. But he placed his finger squarely on the policy issue of the moment when he commented that “it ought not require a war to help Americans from freezing in their own homes.”47 There were those, in and out of the administration, who argued that a drawdown would be ineffectual; that by the time the SPR oil hit the market, the crisis would have passed. It was an argument Sanders rebuffed. He recognized the SPR’s signaling power. “The argument that it is too late to release oil from the reserve to impact home heating oil prices doesn’t stand up,” he said. “I believe that an announcement of a release would have an [immediate] impact on prices.”48 Momentum was also building for some sort of publicly owned home heating oil reserve. In early February, Sanders sponsored legislation that called for creation of a 6.7-million barrel heating oil reserve in the Northeast—a figure derived, at least in part, from the 1998 DOE report. Sanders believed that such a reserve would be a “cost-effective way of making sure that the government has a mechanism to lower heating oil prices when global situations cause them to rise.” By midmonth, he claimed that fifty-one members of Congress had signed onto his bill, mostly from the Northeast, but also from Michigan, Ohio, and California.49 Despite his earlier signals, the president remained reluctant to tap the SPR. But the renewed heating oil crisis and growing political pres-

202

The Strategic Petroleum Reserve

sure necessitated some action. On March 18, 2000, in a radio address, Clinton proposed legislation that called for the creation of “an environmentally sound home heating oil reserve in the Northeast,” and directed the DOE to undertake environmental reviews for the purpose. Environmental concerns had always plagued RPR proposals, because they always called for large-scale steel tank storage. The proposed legislation also called for reauthorizing the SPR and a number of other energy-related measures.50 But winter became spring, then summer, and still the Congress had not acted. As the winter of 2000–2001 approached, heating oil consumers feared they would face a repeat of the past. Heating oil stocks had been low since early 2000, and they remained particularly low in the Northeast, their primary market. As before, it seemed there would be little cushion for a supply shortage or relief for heating oil consumers. Although the market was small, the nation’s heating oil users were geographically concentrated and were developing a strong, unified political voice. While their representatives in Congress were unable to advance legislation to create a Northeast reserve, they continued to make it a priority. And as the election cycle of fall 2000 neared, their political concerns gained weight. The concerns of heating oil users had finally found a receptive audience in the Clinton White House, and the fact that the Northeast was a Democratic stronghold no doubt played a role. The administration had taken considerable political heat for failing to act during the previous winter. Since then, the president had been pushing the Republican-led Congress to create a heating oil reserve and had included it in a number of energy initiatives. These initiatives had gone nowhere. Faced with the continuing congressional intransigence, on July 10, 2000, President Clinton directed Richardson to establish an interim heating oil component of the SPR in the Northeast, to help protect regional consumers from fuel shortages in the upcoming winter. The Northeast Home Heating Oil Reserve would consist of 2 million barrels of heating oil, an amount the DOE determined would provide relief from weather-related shortages for approximately ten days. That was the same amount of time it took ships to bring heating oil from Gulf Coast refineries to New York Harbor. The new reserve was distinctly regional with the states of New York, Connecticut, Maine, New Hampshire, Rhode Island, Vermont, Massachusetts, Pennsylvania, and New Jersey falling under its jurisdiction.51 The 1975 EPCA gave the president the authority to create a permanent regional petroleum reserve (in sections 157 (a) and (b)), but the most recent renewing legislation had expired in March 2000. Thus the

Smoothing Price Cycles

203

Northeast reserve had to be established on an interim basis until it could be made permanent with congressional renewal of EPCA. While he called on Congress to act, Clinton also said that any such renewing legislation should include trigger language that was “more appropriate to possible regional shortages than current laws permit.” The statement evinced the administration’s growing desire to make greater use of government-owned oil stocks.52 Because there was no appropriated funding available to create the heating oil reserve, the government once again turned to the SPR’s exchange authority. The DOE would offer enough crude to acquire the 2 million barrels of heating oil and storage facilities. Contracts would be awarded to companies that offered the best exchange value. On July 19, the Defense Energy Support Center issued a solicitation to companies willing to provide the storage tanks, heating oil stocks, or some combination thereof. In the fall of 2000, some 2.8 million barrels of SPR crude were exchanged to create the Northeast Home Heating Oil Reserve. But, although held by the government, this oil was a net loss to the SPR.53 On August 29, the DOE announced that all contracts were in place, two weeks ahead of schedule. Three companies would provide the storage space: Equiva Trading Co., a 500,000-barrel tank capacity at the Motiva terminal in New Haven, Connecticut; Morgan Stanley Capital Group, a 500,000-barrel tank capacity at the Williams terminal in New Haven, Connecticut; and Amerada Hess Corp., a 1-million barrel tank capacity at the Hess terminal in Woodbridge, New Jersey, in the New York Harbor area. Two of those companies, Equiva Trading and Morgan Stanley, agreed to supply the heating oil, 1 million barrels each. By October 13, the 2 million barrels of heating oil were in place.54 The administration sought to assure the industry that the new reserve would not be abused. “Under no circumstances would it be used for political reasons or price manipulation,” Richardson averred. The Northeast reserve would be drawn down, he said, only in response to a supply disruption, not to control heating oil prices.55 Nevertheless, as before, there was significant opposition to a Northeast heating oil reserve. Some groups criticized it as misguided energy policy. Others seemed to accept the reserve, but questioned the desirability of trigger mechanisms. The API expressed concern that the reserve would divert stocks needed to build private inventories. Both the Petroleum Industry Research Foundation (PIRINC) and the Competitive Enterprise Institute (CEI) argued that a government reserve, especially if perceived as easily triggered, could potentially lead to no net gain in inventories, perhaps even a reduction, making heating oil supplies even tighter in the Northeast market.56

204

The Strategic Petroleum Reserve

But there was much more support for the reserve. The Consumers Federation of America applauded the move, as did groups such as the Massachusetts Oilheat Council. “We really believe that homeowners should know come winter that there is a stable supply of heating oil,” said its president, Michael Ferrante, in August 2000. “I think the industry can live with government being in their business somewhat.”57 The concept was also gaining momentum in Congress. Although representatives from the Northeast had led the charge, there came to be wide bipartisan support for the heating oil reserve. This bipartisanship could be seen in the Northeast delegation, where Republicans actually outnumbered Democrats in support of the new reserve. In November 2000, Congress amended the Energy Policy and Conservation Act to allow the DOE to establish the Northeast reserve on a permanent basis.58 Interestingly, White House support for the Northeast reserve survived the transition from Democrat Bill Clinton to Republican George W. Bush. In a reversal of past Republican presidential policy, Bush supported creation of the reserve and proposed $8 million in his budget to fund it. In fact, during the 2000 campaign, then-candidate Bush had voiced support for a $100-million publicly funded but privately operated Northeast heating oil reserve. In essence, that was the model that was adopted. With funding available to defray their costs, the three involved companies—Amerada Hess, Morgan Stanley, and Equiva Trading—agreed to store the oil at their terminals, rotate it, and manage its delivery in the event of drawdown.59 On March 6, 2001, Energy Secretary Spencer Abraham signed letters of notification to Congress which formally established the Northeast Home Heating Oil Reserve. The move made the 2-million barrel interim reserve permanent and a separate legal entity from the SPR. In this case, a Republican administration readily accepted the increased role of government. Through the Northeast reserve, the government would assist families and small business owners in severe heating oil supply and distribution crises. “Last winter’s weather,” Abraham acknowledged, “showed that the government does have a role in providing an important backup for heating oil supplies in the event severe circumstances affect supply and delivery in the Northeast.”60 The Bush administration did, however, reject the idea of trigger mechanisms. This was manifest in the SPR Plan amendment Abraham submitted with the letters of notification. As with the SPR, presidential discretion rather than preset triggers would decide when the Northeast reserve would be drawn down, ostensibly in accordance with EPCA criteria.61

Smoothing Price Cycles

205

THE SPR AND THE ELECTION OF 2000 In the fall of 2000, the SPR became embroiled in its biggest controversy yet. It coincided with rising oil prices, tight crude and heating oil stocks, and the impending presidential election. That race pitted Vice President and Democrat Al Gore against George W. Bush, the Republican Governor of Texas and son of the 41st president. Also coming into the political mix was the fact that First Lady Hillary Rodham Clinton was campaigning for the open U.S. Senate seat from New York, a state that depended heavily on heating oil in the winter. During the summer, gasoline prices had been running $1.50 to $2 per gallon throughout the nation and had surpassed $2 per gallon in the Midwest. Public outcry led to an inquiry by the FTC, which found that gasoline prices in Milwaukee and Chicago were as much as 65 cents a gallon higher than in other parts of the country. The industry denied charges of price gouging and attributed the increases to seasonal demand, low regional gasoline inventories, limited regional pipeline infrastructure, and new environmental requirements for cleaner fuel in cities like Chicago and Milwaukee. The controversy abated, but did not go away. The Midwest would figure prominently in the political debate that followed, especially since Wisconsin and Illinois were considered swing states.62 In September, crude futures, which had been running in the lower $30-per barrel range, increased by $4 per barrel, buoyed by fears of winter shortages. With the approach of winter, political debate increasingly focused on the Northeast. Concerns focused especially on heating oil stocks, which, for the region, were running 24 percent below previousyear levels. In New England, they were running 65 percent below normal levels. An API announcement that crude stocks had fallen by more than 2 million barrels made the market even more nervous, as did an OPEC announcement that it would wait until October to increase production. Analysts said that while crude oil supplies were adequate, heating oil stocks might be insufficient to meet demand in the event of severely cold weather. The DOE predicted that heating oil prices might rise 30 percent over previous-year levels, or go even higher with a harsh winter. Another wave of “panic buying,” heightened by newspaper headlines and political fervor, inflated prices. On September 20, crude futures for October delivery closed at $37.20 per barrel, a ten-year high.63 Rising prices were caused not by a disruption but by a confluence of long-term factors. Perhaps most important was a worldwide production lag. In the wake of the low oil prices of 1998–99, many oil compa-

206

The Strategic Petroleum Reserve

nies had cut their exploration and production budgets. Rising prices in late 1999 and 2000 led them to step up their E&P efforts, but production still lagged behind demand. Further, when oil prices were low, OPEC and other producing countries had curtailed production, in an attempt to revive prices. By one estimate, OPEC, Mexico, and Norway had removed more than 1 billion barrels from the market since March 1999, an amount that was more than double the 420 million barrels lost during the entire Persian Gulf crisis of 1990–91. The swift recovery of many Asian economies boosted demand unexpectedly, placing even more pressure on supply. Lastly, the industry’s ongoing policy of maintaining lean inventories—a trend heightened by a number of mergers within the industry—further tended to inflate prices by creating expectations of a tight market.64 In June 2000, Robert A. Manning of the Council on Foreign Relations, and Amy Myers Jaffe of the James A. Baker III Institute wrote that “the world has entered an oil-supply situation more precarious than at any time since the 1973 oil shock.” In an insightful analysis, they noted that what was once a rigid, long-term contract market had become a free-wheeling, global, spot-oil arena. As a result, rising prices affected all buyers, since available supplies went to the highest bidder. Because of these changes, they wrote, there would be “no canceled fixed-price contracts [to] signal when a crisis has begun. It will be a question of political judgement.” And because of this, they commented, “it may be more difficult for policy makers to respond to an ‘emergency’ that involves no act of war.” That would be an all-too accurate description of the crisis that emerged in the fall.65 By September, many members of Congress, especially those from the Northeast, had been urging the Clinton administration to tap the SPR for months. The Consumer Federation of America, the nation’s largest advocacy group, also asked the president to release oil from the reserve. The group urged Clinton to order the sale of 2 million barrels a day for thirty days to help lower prices, and “send a very strong signal to the market.” The administration had taken some severe political heat failing to intervene when heating oil prices doubled the previous winter. That criticism—coming as it did from a region vital to Democratic political fortunes, and in many cases voiced by members of the president’s party—meant that Clinton would keep his options open during the upcoming election season.66 As prices increased and the election drew nearer, a furious debate broke out within the administration on using the reserve. In midSeptember, Richardson wrote the president, arguing for the release of 60 million barrels of oil. He acknowledged that the reserve had been

Smoothing Price Cycles

207

created for major supply disruptions, not to manipulate prices. But those who were paying exorbitant amounts for heating oil, he argued, just wanted the problem solved—they weren’t interested in the policies of the past. Treasury Secretary Lawrence H. Summers held an opposing view. Summers was a veteran of many currency market interventions, some more successful than others. In a strongly worded two-page memo dated September 13, Summers advised Clinton against using the reserve. Richardson’s proposal, he said, would “set a dangerous precedent.” Echoing the position Gore had taken in February, he noted that OPEC could easily neutralize the release of stockpiled oil; and that oil traders, seeing the approach of an election, might dismiss it as a political ploy. The memo, which had been solicited by White House officials to make the case against a drawdown, argued that opening the reserve to drive down prices would have only a modest effect, and “would be a major and substantial policy mistake.” But in Washington, D.C., noted New York Times reporter David Sanger, losing an election was also considered a “major mistake.”67 On September 21, citing the need for “aggressive action right now,” Gore publicly urged President Clinton to tap the SPR to help bring down prices before the onset of winter. For setting, he used the Burch Oil Co., a family-owned heating oil distributor in St. Mary’s County, Maryland, an area where most residents used oil to heat their homes. Speaking in front of four large heating oil storage tanks, Gore said he would recommend that the president order a series of SPR crude oil “swaps.” Under his proposal, the government would make available to the market “several releases of 5 million barrels each,” up to 35 million barrels over the next month. If these releases produced lower prices and eased tight supplies (that is, was shown to “work”), the DOE should then make additional releases to further stabilize prices. The 2-million barrel interim heating oil reserve was still being developed, and some feared it might not be ready in time for the coming winter. But the SPR, which had been replenished somewhat from the 1996–97 drawdowns, now held 571 million barrels.68 Gore’s announcement, then, came in the midst of an ongoing debate within the administration over using the SPR. The president had been mulling a possible release for about a week. Now, the vice president was openly imploring him to draw down the reserve, placing Clinton in a position where he had to act, lest his party’s candidate lose face. It also represented something of a reversal for the vice president. In February, during the presidential primaries, Gore had been pressed by Senator Bill Bradley, his rival for the Democratic presidential nomination, to say “yes” to tapping the reserve. But Gore had dismissed the

208

The Strategic Petroleum Reserve

idea at the time. It would be ineffective to do so, he had argued, because OPEC could easily negate the move with production cuts. Placing diplomatic pressure on oil-exporting countries to boost supply, Gore had said, would be a much more effective way to help ease prices. But in mid-September, with the election seven weeks away, and winter heating oil prices upsetting voters in Democratic strongholds and “battleground” states, Gore changed his position.69 In explaining his new position, Gore turned again to the defense of energy consumers: “For millions of working families and middle class families, just paying for the gasoline to drive back and forth to work[,] or just go to the supermarket or pick up your kids after school becomes much more of a burden on the families’ budget. And we have to change that.” But he went even further. It wasn’t just working or middle class families’ transportation needs Gore sought to protect, it was the traditional American entitlement of affordable, available energy: “You ought to have the choice to get in your car, turn on your engine and go where you want, all at a reasonable price.” The vice president also argued that the situation had changed since February, because OPEC had failed to deliver on its promise to increase production, and thereby lower prices.70 It was perhaps notable that just hours after the vice president made his announcement, Summers said that Gore’s proposal would be a “prudent use” of the reserve, and “could be appropriate in some circumstances.” The reason for the change? It had always been recognized, Summers explained, “that this would be . . . a rapidly evolving situation.” Critics charged that Summers’s reversal stemmed from his desire to land a spot in a possible Gore administration. Chris Lehane, spokesman for the vice president, countered that Summers’s September 13 memo had concerned a DOE proposal to draw down as much as 60 million barrels from the reserve, much more than Gore was proposing.71 Later that same day, Richardson said that the president was considering tapping the reserve. Appearing before the House Committee on Government Reform, he commented that “all options remain on the table,” and that a decision was “imminent.” The president, he said, would not leave consumers “hostage” to high heating oil costs.72 Meanwhile, the vice president continued to speak out on the heating oil issue. The next day, September 22, he traveled to Pennsylvania, another key battleground state. Pennsylvania had 1.2 million heating oil consumers, and twenty-three electoral votes. Gore met and spoke publicly with union families who were having difficulty paying their heating oil bills. He noted that heating oil prices had risen to $1.30

Smoothing Price Cycles

209

a gallon in western Pennsylvania, and were as much as $2 a gallon in the eastern part of the state. Both figures were above the national average of $1.04 per gallon, which itself had increased 38 percent over previous-year levels. He also used the occasion to flesh out his drawdown proposal. As with recent business agreements between the DOE and certain oil companies, the drawdowns would be made using the SPR’s exchange authority. Companies that received SPR oil would return an equivalent quantity and quality back to the reserve at a later time when oil prices had eased.73 Bush denounced Gore’s proposed stock swap as a “bad idea” that could leave the United States vulnerable to foreign suppliers. “Strategic reserves,” he said, “should not be used [in] an attempt to drive down oil prices right before an election. [They] should not be used for short-term political gain at the cost of long-term security.” Echoing the original EPCA legislation, Bush said that the SPR should only be used “in case of war or a major disruption.” He recognized the need to protect energy consumers, but argued for a different method. Interestingly, he favored the tactic Gore had advocated in February—diplomatic pressure. He believed that the nation should use its “strong hand in diplomatic circles to make it clear to our friends overseas that we don’t want them holding our nation and our consumers hostage.” Noting how Gore had changed his opinion on using the reserve, Bush accused the vice president of performing “a political somersault.”74 Gore responded the next day and accused Bush of being an “apologist” for the oil industry. The vice president had been openly critical of the oil industry for months. In June, he had accused the industry of “price gouging” and making “enormous and unreasonable profits” at the expense of consumers. One of the central choices Americans faced in the upcoming election, Gore said, was “whether we will have a president who’s willing to stand up to the big oil interests and fight for our families.”75 Both candidates recognized the need for action. As had been made clear by past crises, when crude prices hit the upper $30-per barrel range, pressure would grow for some form of government action. Anecdotal evidence—opinions taken from consumers at the gasoline pump on the 22nd—suggested that some Americans supported the vice president’s call to use the SPR, if it would help get prices down; others viewed it as pandering. For their part, the major oil companies denied any profiteering and contended that it was all part of the normal price cycle.76 Despite the debate, Gore’s pronouncement once again displayed the SPR’s signaling power. Prices fell immediately in the wake of his

210

The Strategic Petroleum Reserve

comments. The vice president had given his prepared statement on the morning of the 21st. Before noon, crude futures on the NYMEX fell by $1.24 to $34 per barrel. By Friday the 22nd, NYMEX crude prices were $32.68 per barrel, down more than $4 from the ten-year high reached three days previous. As before, traders argued that prices had been due for a downward trend.77 A number of industry organizations opposed the Gore plan, objecting to what seemed to be a policy of price control. In a written statement, the API essentially restated its objection to the 1996 drawdowns. The strategic petroleum reserves, it said, “were not intended to and should never be used to manipulate prices. History has shown time and time again that government interference in the marketplace will lead to the negative consequences such as the long gas lines of the 1970s.” Other industry officials doubted its usefulness, arguing that while adding extra crude onto the market might drive down crude prices, it would not boost heating oil stocks. Pipelines were full, and American refineries were operating at nearly 97 percent capacity. In many cases, feedstock was not the problem.78 Many economists and analysts offered caution on the idea of using the reserve to mitigate prices. Past government efforts to control oil prices had led to “tremendous distortions,” noted George David Smith, an economic historian at New York University. The oil market, he observed, was subject to “all kinds of strategic pressures,” which were “beyond the federal government’s ability to predict or control.” That doomed any use of the SPR, if not necessarily to failure, to having a minimal impact on gasoline and heating oil prices. Robert Burns of the Ohio State University’s National Regulatory Research Center had a similar opinion. He commented that if the SPR’s purpose was “to have petroleum set aside in case of emergencies . . . that might make sense. But if it’s to actually try and influence the market, it won’t have much of an effect.”79 Yet not all shared this outlook. Adam Sieminski, an oil analyst with Deutsche Banc Alex. Brown, argued that since the administration was facing “a panic situation,” a drawdown would be “good public policy,” and “not an empty gesture.” Geoff Heal, a professor of economics and finance at Columbia University, argued that it was costly to keep such stockpiles and, given the fact that the United States had not faced a “true” energy crisis for years, this was a chance to put it to good use. Heal contended that that the SPR, if used “in a determined manner,” could cut oil prices by about 15 cents a gallon in the short term. These sentiments were shared by the vice president. Gore spokesman Lehane rejected the argument that the oil reserve should only be tapped at time

Smoothing Price Cycles

211

of true national emergency, such as war. “One of the reasons you have a reserve is to tap into it when you have a crisis. We are on the cusp of a crisis,” he said.80

THE 2000 DRAWDOWN The decision came on the afternoon of September 22, when Richardson announced that the president had authorized a “limited drawdown,” using the SPR’s exchange authority. Thirty million barrels would be made available over a thirty-day period, starting in late September. In effect, for that one-month period, the government would place an extra 1 million barrels a day on the market. Administration officials expected that the additional oil would help boost home heating oil stocks by 3 to 5 million barrels, closer to but still short of normal inventory levels. Even so, some economists predicted that the drawdown could save a typical oil-heated household up to $100 over the winter.81 Despite the “limited” characterization, it was in fact a large-scale drawdown, second only to the 33.75-million barrel drawdown ordered by President Bush in January 1991. And when compared to the roughly 17 million actually sold in that case, the 2000 drawdown would in fact be the largest in the program’s history. In both cases, the government said it was acting to prevent possible supply shortages. Richardson was familiar with the historical arguments about using the SPR, and that many policymakers believed in waiting until a rainy day. “We think this is a rainy day,” he said. “We think that between now and winter, because of the low stocks of home heating oil, we’re in danger of potential disruption.”82 Unlike the 1991 drawdown, this would be an exchange rather than a sale. Companies offering to return crude of a comparable or higher grade in 2001 would be awarded contracts. Because prices were expected to be lower then, those companies would return the amount they obtained, plus additional quantities as a bonus percentage that would be specified in the offers. This would ultimately increase the amount of oil in the SPR, enhancing its energy security capabilities. Further action would be taken if necessary, Richardson added. He denied that the move was political. The president simply wanted to ensure adequate heating oil supply, so that “the American people . . . have enough heat in their homes.” A few days later, Richardson appeared before the Senate Energy Committee. There he told the lawmakers that the administration was not trying to manipulate prices, but that assertion was undermined by his subsequent statement: “We don’t want the American people, the people on the East Coast, to cut back on food

212

The Strategic Petroleum Reserve

and medicine to pay for oil.” Economics were part of the political equation.83 Nevertheless, many did accuse the administration of playing politics with the reserve. Joining the Bush camp in opposition were a number of congressional oil-state Republicans, who strongly opposed the stock swap. They were led by U.S. Representative Joe Barton of Texas, head of the House Energy and Power Subcommittee. The drawdown, he said, “risks setting the dangerous precedent of using the SPR as a tool to manipulate the market.” Barton and his allies believed that because the United States had not experienced a supply disruption, releasing SPR oil was not justified. On September 27, he vowed to block the release, either through legislation or court injunction. But by the next day, Barton had abandoned that idea. He recognized that he and his allies were powerless to stop the swap. Instead, he said he would ask President Clinton and Secretary Richardson to submit in writing the “legal and policy justification” for releasing the oil.84 But it wasn’t just Republicans; many leading pundits and commentators also were critical. Syndicated columnist Paul Greenburg commented that tapping the reserve “hide[s] the essential problem—the lack of a real energy policy—until Election Day.” One media report noted a compelling time line: on Wednesday, September 20—the day that crude futures hit a ten-year high—Gore had called Clinton to broach the idea of tapping the reserve. Then, on the morning of September 21, Gore publicly announced his proposal. In the afternoon of the next day, September 22, Clinton directed Richardson to draw down the SPR. This illustrated, wrote an AP reporter, “how Gore—Democratic presidential candidate first, vice president second—reaps the political benefit of inside information and influence.” It was not a coincidence, some noted, that the thirty days of government-led oil infusions would end just two weeks before the election.85 It was notable that just days after President Clinton ordered the drawdown, members of the European Union (EU) also considered drawing down their emergency oil stockpiles. On September 26, both Spanish Prime Minister Jose Maria Aznar and French President Jacques Chirac said that they hoped the EU governments would agree to release some of their stockpiles by mid-October, to deflate rising prices. But other EU leaders opposed the idea. Luxembourg’s Prime Minister JeanClaude Juncker stated flatly that he would not give the recommendation to proceed, because the emergency oil reserves were meant for a “real crisis.” For its part, the IEA said that it had not been approached by the EU about the possible use of emergency oil reserves.86 Nevertheless, OPEC viewed the possibility with alarm. That same

Smoothing Price Cycles

213

day, its president, Venezuelan oil minister Ali Rodriguez, said that such a move could trigger such severe price deflation that OPEC would have to take counteraction by cutting production. Speaking to reporters at the OPEC summit in Caracas, Rodriguez said: “It was always said that the [EU] reserves were intended for emergency situations, and we are not in anything like that. There is no energy crisis.” A general European stockpile release, he added, “might provoke a downward movement so big that it would oblige OPEC to take some decision.” Algerian oil minister Chakib Khelil, when asked whether he supported European nations tapping into their emergency reserves, said that “it would not be in their interest to do it.” Libyan oil minister Abdullah el-Badri supported that sentiment, but targeted his concern on the impending SPR release. El-Badri said that any oil price slide sparked by a U.S. release of emergency supplies would force OPEC to cut its own output to shore up the market.87 Interestingly, this was after Secretary Richardson had telephoned Rodriguez on September 22, the same day of the SPR drawdown announcement, to assure him the decision was not political or aimed at “damaging institutions like OPEC.” It was based purely on solving a domestic problem, said Richardson. The next day Rodriguez had struck a note of cooperation and conciliation saying that the SPR release, when combined with a planned OPEC production increase in October, would “provoke a decline in speculation,” a result he deemed “very positive.” It may have been that a possible EU stockpile drawdown, coming on the heels of a massive SPR release, was just too much for OPEC to openly countenance.88 There were three important and related points to be drawn from this exchange. One was that certain EU members, like the United States, were evincing a desire to draw down emergency oil stocks to combat rising (and hence politically problematic) oil prices, even without a supply disruption. A second and equally important point was that, despite conciliatory language on both sides, OPEC leadership still viewed the IEA oil stockpiling programs as a threat to their economic and political interests, just as they had in the 1970s. That outlook affirmed the view of some U.S. policymakers, past and present, who believed that emergency oil stockpiling programs had in fact removed the oil weapon from international diplomacy. A third and related point was that OPEC clearly believed that emergency stockpile drawdowns were an (only too) effective means of bringing down oil prices—a perspective fundamentally at odds with many U.S. energy analysts, who doubted their utility. In the United States, despite the political debate, demand for SPR

214

The Strategic Petroleum Reserve

oil was strong, as it had been with the 1996 drawdowns. By October 4, all 30 million barrels had been snapped up by eleven refining and trading companies. As conceived, it would be a “win-win” scenario. Collectively, the winning bidders agreed to return the oil, plus an extra 1.565 million barrels, a premium of about 5 percent, between August and November 2001. In essence, companies were betting that they could take oil in November at relatively high prices, sell it, replace it later with even more crude purchased at cheaper prices, and make money in the process. By using the futures market, the bidders would be able to pay back the oil at prices lower than current levels, and lower than future levels if market prices rose in the interim. One official with Valero, an independent refiner based in San Antonio, Texas, described the deal as a “good transaction for value.” From the government’s perspective, the exchange would ultimately increase the amount of oil in the SPR.89 By October 14, the DOE had completed deals with nine companies for the release of 23 of the 30 million barrels, and SPR crude had begun flowing to distributors. By early December, the entire 30 million barrels had entered the market. And, although it had gone largely unnoticed, the DOE had been placing some 2.8 million barrels of additional SPR crude onto the market throughout September and early October. This was part of yet another exchange agreement, undertaken to provide the petroleum stock for the Northeast Home Heating Oil Reserve. In midOctober, the DOE announced that the final 67,000 barrels of heating oil had arrived at Woodbridge, New Jersey, completing the 2-million barrel Northeast reserve.90 Not everyone viewed the drawdown as a market-impacting event. All the deal would do, said Kyle Cooper of Salomon Smith Barney in Houston, was “move around crude.” Kenneth Miller, senior principal at Houston-based energy consulting firm Purvin & Gertz, predicted that the drawdown would be a “blip on the screen,” and would only have a “limited impact on prices.” Yet these sentiments, if not uncommon, tended to diminish the fact that the drawdown would place oil on the market that had not been there previously, and did not take into account the psychological impact of a drawdown announcement.91 In fact, crude oil prices did fall significantly in the wake of Richardson’s September 22 announcement. With the announcement, those who held contracts for future (winter) delivery sold some of those contracts, on the expectation that more oil would be available in the winter from the drawdown. As they sold those contracts, prices fell. By September 26, light, sweet crude for November delivery had dropped to $31.57 per barrel (“So far, so good,” Gore observed on September 25). If one took September 20 as a starting point—when drawdown hints first

Smoothing Price Cycles

215

began to emerge—the benchmark crude oil price had fallen by $5.63 to $31.57 per barrel, a decline of 15 percent. Wholesale heating oil prices dropped 1.4 cents per gallon, to 94 cents per gallon.92 As before, a number of analysts argued that a deflationary trend had been in place prior to the drawdown announcement, and that the drawdown announcement thus played a small role, at best, in the ensuing price deflation. Yet some economists conceded that the announcement had dampened price speculation. Warren Tashnek, a vice president with Fimat Futures USA, seemed to agree with this latter group. He commented that most of the price decline had been “the result of the tremendous amount of political rhetoric” that had been taking place. Other analysts acknowledged that the market had peaked, but believed that prices were headed downward, at least in part, due to the “psychological effect” of the drawdown. An October 6 report in the Oil Daily went further, stating that the SPR awards had been “the main story” in the price decline. Perhaps most presciently, one analyst chalked up the losses to “a jittery market’s tendency to overreact to headlines.”93 It was probably inevitable that the nation’s oil reserve would become a key point of debate in a presidential election. The SPR had arguably become the nation’s primary energy policy tool, and the United States had become a society in which the price of petroleum products had great political significance. As a result, those prices—especially for gasoline and heating oil—were closely monitored by the media. From a political perspective, it seems clear that Gore had taken advantage of his official relationship with the president to obtain the drawdown. Ironically, it did not save him from losing the closest presidential election in U.S. history. The First Lady, however, did win the open U.S. Senate seat from New York. But perhaps the most important point of the 2000 drawdown was that it was an unabashed attempt to influence the price of petroleum products. Bush had accused the administration of attempting to redefine the reserve’s purpose, and many agreed. There had been no supply disruption, at least in the traditional sense. But heating oil stocks were down significantly; to a lesser extent, so were crude stocks. So supplies had been tight. Gore had argued that the current drawdown authorities allowed for release of oil in times of short supply, and rejected Bush’s contention that the reserve was not meant to be used to stabilize prices. The purposes of the reserve, Gore observed, had been “modified some years ago . . . to explicitly take this kind of situation into account.”94 In point of fact, the Clinton administration was not redefining the reserve’s purpose. Legislation passed by Congress in the early 1990s had done that. But it was making use of that legislation, which had broad-

216

The Strategic Petroleum Reserve

ened the drawdown authorities. Now, a limited drawdown could take place in the event of a “significant reduction in supply” and a “severe increase in the price of petroleum products.” The president did not need a “severe energy supply interruption”—foreign or otherwise—the key drawdown terminology in the 1975 EPCA. Gore was correct in that the drawdown was allowed under the 1990 EPCA amendments and the Energy Policy Act of 1992. The 1990 law had widened drawdown authorities and provided the exchange authority. It had said that the president could order a drawdown in advance of an expected crisis and expanded that definition to include a domestic energy supply shortage. The 1992 law had gone even further and included price increases in the drawdown authorities, albeit still tied to supply reductions. The 1990 act did place a number of limits on drawdowns under its expanded authorities, one of which was the size of the drawdown. Interestingly, that limit, 30 million barrels, was the amount President Clinton ordered released in September 2000. The move was also made possible by the May 1996 drawdown, which opened the door to using the reserve to influence prices. For his part, the president may have recognized that in the new world oil market, this was the kind of energy crisis leaders would face—a problem of price rather than supply. The 1970s model—supply shortages, high prices, rationing, gasoline lines—was outdated. Producers (mostly outside the United States) could increase supply to prevent a shortfall, but they could not prevent prices from rising significantly. From this perspective, it was incorrect to predicate energy policy, including use of the SPR, on the basis of an economic model that was twenty-five years old. Clinton may have indeed abetted Gore’s political gambit, but he may also have been the first U.S. president to recognize the new economic reality and formulate energy policy accordingly. Perhaps most of all, the entire episode was yet another testament to the growing political power of energy consumers.

THE SPR, 1996–2000: AN INCREASINGLY USED POLICY TOOL The history of the SPR program from 1996 through 2000 continued to be a portrait of the government’s policy of protecting energy consumers. There was a political imperative to protect the role energy consumers played in the economy, and respond to—even anticipate and diffuse— popular outcry over energy price increases. The crises of the 1970s had seared that imperative into the institutional psyche of the executive and legislative branches, the ones most beholden to popular will. By

Smoothing Price Cycles

217

the late 1990s, even marginal and seasonal price increases seemed to represent a threat to consumers, and the SPR was the government’s primary means of protecting them. The policy decisions made by the White House and the Congress in these years were testament to that political imperative. The government’s reliance on the SPR during energy crises large and small showed that the reserve had become its primary energy policy tool. The program’s ascension to that position stemmed from the fact that it conformed with the existing energy economy. It enabled the government to put out various fires as they arose and avoid the larger and much more contentious problem of crafting a comprehensive, long-term energy policy. The May 1996 drawdown was a case in point. Even though it had already been scheduled for revenue generation, that drawdown conveniently became the government’s answer to the political problem of rising gasoline prices. The September 2000 drawdown, which took place amidst rising crude and heating oil prices, and an impending presidential election, was an even better example. These two uses of the reserve demonstrated two things: a shift in drawdown policy from volume replacement to price smoothing; and, relatedly, how this shift contributed to the increasingly political nature of drawdown policy. For years, the government’s resistance to using the SPR on behalf of Northeast heating oil consumers provided an exception to the general trend. Historically, concerns over cost had trumped concerns over regional energy protection. The decision not to implement the refined product reserve pilot program called for in the 1990 EPCA amendments, and the decision not to swap SPR crude for home heating oil in the fall of 1996, were seen as failures to protect energy consumers, especially by lawmakers from the Northeast. But in the end, these consumers also made themselves heard and forced government action. With the recurring heating oil crises of the late 1990s providing the context, political outcry from the Northeast compelled establishment of the Northeast Home Heating Oil Reserve in July 2000. It was more than just notable that the government used SPR crude as barter to supply the new reserve’s heating oil inventory. If the SPR was used increasingly to protect energy consumers between 1996 and 2000, it was also increasingly used to aid the oil industry. Often that aid was justified as a means toward the end of protecting energy consumers. But the fact that oil companies such as ARCO, CITGO, and Conoco, when faced with supply challenges, approached the DOE about the possibility of using SPR oil, showed not only industry support but also industry need for the program. These episodes

218

The Strategic Petroleum Reserve

also eroded industry arguments against using the SPR in nonnational emergency scenarios. In each case, the DOE obliged these companies using the SPR’s lease and exchange authorities. Thus the most notable development for the SPR in the latter 1990s was the government’s increasing tendency to use the reserve for various reasons, all in the name of protecting energy consumers. The SPR’s lease and exchange authorities were increasingly used as the means to that end. Provided by the EPCA amendments of 1990, these authorities became the mechanism for drawing down the reserve to address problems and situations not foreseen nor covered by the 1975 EPCA. The reason for this was that by the latter 1990s, the politics of oil demanded a greater use of the reserve than the original legislation had intended. These trends stood large when reviewing the overall history of the program.

CONCLUSIONS: THE SPR AND U.S. PETROLEUM RESERVES POLICY

NATIONAL SECURITY ECONOMIC, OIL-RELATED

7

From a historical perspective, a study of the Strategic Petroleum Reserve program reveals the ways in which energy security has become crucial to national security. Previously in U.S. history, even world history, national security had been largely a matter of military capability. By World War II, national security for industrialized nations had come to depend as much on economic autonomy, energy security, and oilproducing capacity as it had on military matters. In the post–World War II era, maintaining energy consumption became vital to sustained economic growth. Transportation, shipping, manufacturing, and other commercial businesses required petroleum energy to keep running. Shipping and transportation became especially crucial to the U.S. economy. Cars, trucks, buses, railroads, airplanes, and ships were fueled by refined oil products—gasoline, diesel, jet, and bunker fuel. Railroads and agricultural equipment required diesel fuel. The nation’s northeast region depended on fuel oil for heating. In addition, a whole host of other non-fuel products were derived from petroleum. Most notable was an innumerable litany of plastic products, some more indispensable than others. Oil supply disruptions, and their associated price increases, reverberated throughout the economy. Their effects were manifest in the general price inflation, reduced consumer spending, higher interest rates, and lower company profits that collectively took the steam out of economic growth and created conditions conducive to recession.

220

The Strategic Petroleum Reserve

Policymakers found that protecting energy consumption patterns—in essence, protecting energy consumers—had become a vital part of national security. For nations that depended on foreign oil supplies, disruptions in the flow of that oil represented a serious threat to economic and military national security. For the United States especially, oil supply disruptions were a threat to national economic security. One SPR project manager phrased it succinctly: “This country has got to have oil. It’s just got to have it. It’s our lifeblood.”1 For much of the twentieth century, the United States had surplus oil-producing capacity. The U.S. petroleum industry controlled the bulk of those natural reserves, and the government deferred to industry, trusting it to provide extra supplies whenever they were needed. In the two world wars, the industry delivered the petroleum products the U.S. military needed. By 1970, however, depletion of U.S. petroleum reserves deprived the United States of its surplus oil-producing capacity. That development, along with rising energy demand, meant growing dependence on foreign oil. This made the United States vulnerable to blackmail via the “oil weapon.” No longer able to consistently deliver affordable petroleum products—to fully protect American energy security—the industry’s political power declined. Subsequent shortages, price increases, and environmental accidents further eroded its political clout. These developments, and an outcry from frustrated energy consumers, emboldened the federal government to take a more active role in energy policy. In the wake of the shortages, the government stepped into the marketplace with a wide array of energy policy tools to help protect national economic security. These included the SPR, which provided man-made, publicly owned, surplus capacity. After 1973, most oilconsuming nations developed a strategic emergency oil reserve system. By the 1980s, the U.S. government had determined that the SPR was the best, least intrusive means of protecting energy consumption. In an energy supply shortfall, the reserve could combat the two things that threatened energy consumption—shortages and price increases. Besides economic protection, the SPR also enhanced U.S. foreign policy. It serves as a deterrent to the use of the oil weapon and affords flexibility in energy supply / foreign policy crises. For oil-exporting nations, a well-stocked strategic reserve made use of the oil weapon prohibitive, both in terms of lost revenue and possible reprisal. To be sure, both the international oil market and political arena have changed dramatically since the 1970s, and these changes have helped disarm the oil weapon. Although OPEC can still have a major impact, pricing is

Conclusions

221

largely determined in the international futures markets. And as the leading oil-exporting nations have recognized the importance of market stability, confrontation has been largely replaced by cooperation. But the Arab oil-producing nations opposed and feared the IEA oil stockpiling programs, at least in their early years, and there is some evidence to suggest that they still do. Those programs, along with efforts to foster conservation and alternative energies, threatened their foreign policy prerogatives, which were wholly based on their oil-producing capacity. These facts suggest that credibly stocked strategic reserves have helped remove the oil weapon as a diplomatic tool. Indeed, since 1973, there has not been an overt use of the oil weapon, although there have been oil-supply disruptions, as in 1979, 1980, and 1990. These types of disruptions can certainly happen again in the future, and herein the SPR will continue to have an important role to play. Besides its deterrent value, the reserve also strengthens U.S. foreign policy by affording diplomatic flexibility. A well-stocked SPR affords the United States the luxury of adopting a wait-and-see approach in most disruption scenarios, at least in the near term. In a major disruption, the president will not be forced into an immediate choice between military intervention, foreign policy concessions, harsh demand restraint measures, or severe damage to the U.S. economy. As one SPR project manager said, the reserve gave the president “a card to play” before sending in the Marines.

THE WISDOM OF PASSIVE ENERGY POLICY TOOLS The SPR’s history also points to the virtue of passive, supply-side energy policy tools. As the U.S. and IEA response to energy emergencies matured and evolved after the first oil shock, both government and industry officials concluded that passive, supply-side measures were preferable to the intrusive, micromanaging regulatory approach taken in the 1970s. In the energy arena, strategic oil reserves were the best examples of such tools: they dictated neither price nor distribution. Policymakers determined that in a supply crisis, it was better to make extra oil available, and let the market determine the distribution, allocation, and to a large extent, the price of oil as well. Coercive measures, such as mandatory price and allocation controls, demand restraint and rationing, more often than not, brought perverse and undesirable results. Price controls kept a lid on domestic prices, but also reduced incentives for domestic production and stoked demand for imported oil, thereby placing upward pressure on world oil prices. Nor were they politically popular. Demand restraint proved infeasible to implement.

222

The Strategic Petroleum Reserve

In a crisis, especially, demand restraint runs directly counter to the consumer’s primal urge for energy security. Not surprisingly, IEA governments have abandoned a major reliance on it as a tool of emergency energy policy. In the wake of the first oil shock, a number of European governments had contended that they would respond to a future crisis with a heavy dose of demand restraint. The disruption of 1979 undermined those claims. As they did in the United States, European consumers hoarded in response to the crisis. The result was predictable: oil and gasoline tanks were filled, worsening the panic. After the second oil shock, IEA officials accepted that an agency cannot force a country to exercise demand restraint. They recognized that, in a supply crisis, consumer desire for energy security will render calls for demand restraint ineffectual. Perhaps the most damaging argument against a strong reliance on demand restraint—even more than the extreme difficulty in effecting it—is that such measures do not alleviate or reduce the economic damage of a disruption. After 1979, U.S. and IEA officials recognized that supply-side measures, in the form of stock drawdown, should form the bulwark of any collective disruption response. They recognized that in disruption scenarios, supply-side measures will be more effective than demand-side measures in mitigating shortages and price increases. Unlike policies that sought to manage shortage through coercive measures, oil supplied from strategic reserves would actually alleviate shortage, lessening pressure on prices, while allowing private market mechanisms to work and keeping government intervention to a minimum. In short, unlike the other energy emergency measures, strategic stockpile drawdowns helped reduce prices and calm markets without the unpleasant side effects. In the wake of the second oil shock, the United States abandoned reliance on coercive, micromanaging tools and embraced the SPR as its emergency energy policy tool of choice. From the regulatory debacle of the 1970s, the government had learned not only the futility but also the danger of trying to micromanage the world’s largest energy economy. Finding a market-oriented strategy became the sine qua non of emergency energy policy, arguably energy policy in general. Reagan administration officials, in particular, found that the SPR fit that bill. In a supply crisis, the reserve would help alleviate shortages, thereby reducing panic, and related political pressures for more controlling regulatory measures. Thus, the government’s adoption of the SPR as its primary energy emergency response was part of a larger move toward a market-oriented regulatory approach.

Conclusions

223

By 1990, U.S. and IEA officials recognized the necessity of accommodating the first panic surge of demand in a crisis with extra supply. When energy consumers are nervous about supply, a heavy reliance on demand restraint is not only futile but also counterproductive. Indeed, when one looks at the makeup of the IEA’s emergency response program adopted on January 11, 1991, one sees that it relied predominantly on stockdraw (79.6 percent), and had a much lesser reliance on demand restraint (17.2 percent) (see figure 7.4). And apparently, it will continue to be U.S. policy to use SPR drawdowns as a substitute for demand restraint measures in any future IEA emergency response program.2 Successive U.S. presidential administrations have supported the SPR because it allows the market to work. The January–March 1991 drawdowns provided a good example of this passive, supply-side approach: it was a move to make extra oil available to the market, to mitigate potential shortfalls and avert panic, but not control the price or flow of oil. The government placed a significant amount of oil up for sale, then let the market decide how much it wanted. With the program’s price indexing system, the market affected the price of that oil as well. SPR drawdowns thus blunted panic-related oil price spikes without micromanagement of the price or distribution of oil. SPR drawdowns, if sold at competitive auction, conformed with the market. To be sure, the government still retains no small amount of power: in its decision on whether to draw down the reserve; in its decision of how much oil to offer; and in its right to refuse to sell SPR oil for any offer deemed too low. And even when not being drawn down, the SPR played even more of a passive, but still valuable, role. The potential for a drawdown presents an ever-present possibility that extra oil might be placed on the market.

DRAWDOWN POLICY The Energy Policy and Conservation Act (EPCA), which governs SPR drawdown policy, allows for a large-scale drawdown, over 30 million barrels; a limited drawdown, up to 30 million barrels; and test sales up to 5 million barrels. A drawdown can take the form of a sale or an exchange. In the latter case, the company receiving the crude must return, some months later, a volume that is roughly equivalent to the dollar value of the volume received. Under EPCA, the president determines whether an emergency situation exists. If he determines that a supply shortage or high prices could adversely affect national safety or the national economy, he can implement a drawdown. A large-scale

224

The Strategic Petroleum Reserve

drawdown requires a presidential finding of a “severe energy supply interruption,” as defined under the original EPCA of 1975, and broadened with the Energy Policy Act of 1992. The EPCA amendments of 1990 defined the situations in which a limited drawdown could take place and provided the test sale authority. Originally, SPR drawdowns were to be insurance against disruptions in the supply of foreign oil. The effects of the 1973–74 Arab oil embargo had been seared into the collective memory. Thus the 1975 EPCA viewed a severe energy supply interruption as one resulting “from an interruption in the supply of imported petroleum products,” or from sabotage, or an act of God. Commitment to the IEA sharing program, ostensibly triggered under a similar scenario, was also a condition for an SPR drawdown. In the mid-1980s, the DOE instituted the policy of early and massive release of SPR oil in the event of a severe oil-supply disruption. That position was reaffirmed in a February 1990 interagency study on the SPR’s size, and again in a May 1998 DOE policy statement on the reserve.3 Yet when a major foreign oil-supply disruption occurred in the August 1990, the Bush administration refused to order a drawdown. The condition of 1975 EPCA—an interruption in the supply of imported petroleum products—had been met. Yet while oil prices doubled throughout the fall, the United States suffered no major shortages. The administration maintained that it would not order a drawdown without supply shortages, a position the IEA supported. Energy analysts argued that position was fundamentally flawed. In a deregulated market, they argued, a disruption will cause price increases, but not necessarily shortages, because producers with surplus capacity could fill the supply gap before the disruption reached the market. But, with the rapid reaction of the spot and futures markets, they could not deliver that additional oil before consumers were hit with higher prices. The political controversy that ensued was testament to the difficulties associated with government intervention into the energy arena, even after the shortages of the 1970s had altered the political landscape. Successive administrations discovered that designing any official drawdown policy was an inherently problematic and contentious affair. Much of the difficulty stems from the fact that, until 1992, much of the debate, and the EPCA’s wording, focused on the supply aspect of disruptions, rather than the associated price increases. Yet as the 1990 disruption and ensuing recession made clear, disruption-related price increases are hardly less damaging than disruption-related supply shortages. To add to the difficulty, the SPR exists in an extremely

Conclusions

225

complicated market, in which there are numerous players with diverse and conflicting interests. Some groups clamor for early release of SPR oil; others believe in waiting for a rainy day. Some contend that the government should allocate SPR oil to refineries whose supply has been disrupted. Others argue against such intervention, and say that the market should rule—SPR oil should be sold to any and all qualified buyers who offer the best deals. And any government action that hints of price controls comes under instant and widespread criticism. In reaction to the Bush administration’s stance in the fall of 1990, Congress passed legislation designed to facilitate drawdowns. The 1990 EPCA amendments expanded the SPR drawdown authorities to include a domestic energy supply shortage and enabled the president to order a drawdown in advance of an expected crisis. The 1992 Energy Policy Act further widened drawdown authorities to include increases in the price of petroleum products, albeit still tied to a “significant reduction in supply.” What followed was a growing use of the SPR for what some analysts called “price smoothing” and a shift away from volume replacement.4 The legislation passed in 1990 and 1992 facilitated President Clinton’s decision to order a drawdown in April 1996. The drawdowns that followed were offered by the administration as measures to combat gasoline price increases. Those increases, the result of tight supply, environmental mandates, and the approach of summer, had occurred without an oil supply disruption. As such, they seemed to portend a new drawdown policy. The episode also suggested that the government might be moving back toward a price-affecting policy and a more activist, micromanaging approach. If prices were the target, and the crisis could be relatively small, then policymakers theoretically had many more potential situations in which to use strategic reserves. Opponents of this type of policy feared that politicians would always be able to find a justification for using the SPR. But did the 1996 drawdowns in fact signal a new policy? If they were viewed as a response to gasoline price increases, perhaps the answer is yes. But when viewed for what they originally were—revenue generation for the purpose of deficit reduction—one realized that they had purposes unrelated to energy policy. In fact, these drawdowns were a manifestation of the fact that in the mid-1990s, the American people and their government were more concerned with deficit reduction than energy security. From this perspective, it was less clear that there had been a change in drawdown policy. That was until the fall 2000 drawdown, which seemed to affirm a price-smoothing policy. That drawdown was an unabashed attempt by

226

The Strategic Petroleum Reserve

the Clinton administration to influence the price of petroleum products (notably heating oil) without even the covering rationale of a supply disruption. But the 30-million barrel drawdown was allowed under the new authorities to prevent a shortage and help stabilize prices. Thus, given the growing political power of energy consumers, future use of the SPR to combat seasonal price increases cannot be ruled out. Still, drawdowns ordered without a presidential finding of a severe energy supply interruption are limited to 30 million barrels and cannot take the reserve below 500 million barrels. Moreover, the history of the SPR program indicates that drawdown policy will vary by administration (and even within administrations) and their political philosophy. Democrats want to use the tools of government; Republicans, more often than not, want to hold them in reserve. Yet even if the SPR is used in the future to counter seasonal price increases, it will still be a passive approach. The reserve is a blunt instrument for lowering prices, as others have noted. It would be difficult to correlate any particular amount of drawndown oil into a specific price target. Drawdowns have the general effect of moderating energy prices, but cannot be used to achieve a specific price level. Price controls would be a more precise, albeit insidious, tool for that purpose. It seems unlikely, however, that price controls and allocation authorities will return, at least as long as those who experienced them wield political influence.5 It also seems unlikely that trigger mechanisms will be adopted. These mechanisms usually entail a specific, targeted level of supply disruption or price increase whose occurrence automatically triggers a drawdown. The topic is usually raised any time the program or drawdown policy seem to have been unduly or adversely affected by political considerations. But consecutive administrations have consistently decided against trigger mechanisms, opting instead for the flexibility the 1975 EPCA legislation affords. Even though subsequent EPCA amendments have expanded SPR drawdown authorities, they do not force the president’s hand. Better for the president to have discretionary power in meeting future crises, officials have argued, than to circumscribe that power with specific triggers. The IEA also learned the value of a flexible drawdown policy. Originally, the IEP, the IEA’s emergency response program, was based on trigger mechanisms. Drawdowns were to be triggered (as a last resort) if shortages of at least 7 percent of available supply occurred. In the wake of the second oil shock, the IEA concluded that emergency response measures should be implemented on a flexible basis, whether the supply shortfall was less or greater than 7 percent. By the mid-1980s, the international agency had developed the coordinated emergency re-

Conclusions

227

sponse measures (CERM), intended as a quick and flexible response to a supply disruption that was not large enough to activate the IEP. Notably, policymakers opted for the CERM over the antiquated IEP in January 1991, following the largest oil supply disruption yet. Still, as others have noted, the CERM represents a consultation process rather than a set of guidelines and leaves open the question of just how and when to use strategic oil reserves. The IEA nations have developed a significant emergency petroleum reserve system, but, some argue, the lack of a collective, detailed response plan—one that takes the modern international oil market into account—fails to maximize their utility. If the United States and the IEA continue to predicate their emergency response measures on the appearance of actual physical shortages, their ability to implement timely stockpile drawdowns may well be moot.6

THE SPR’S SIGNALING ROLE While providing a passive form of protection, the SPR has a signaling power that enables the government to have an important but limited role in the energy economy. In a process not unlike the U.S. Federal Reserve’s hintings and official announcements of changes in its discount rate, hints and announcements of SPR drawdowns can influence oil and energy prices. In both cases, when the government acts, industry has to adjust its prices accordingly lest its customers—borrowers of capital or buyers of oil—choose to take their business elsewhere. SPR signals have many target audiences. One is the oil-exporting nations and their political organizations, such as OPEC and OAPEC. The message is that the United States is taking steps to reduce its energy vulnerability, if not its dependence, and enhance related foreign policy prerogatives, whether with the Middle East or other parts of the world. Another target audience is the oil market, the entire mix of buyers, sellers, and traders in the American petroleum industry. Here the message is that extra oil can or will be placed on the market, and that panic purchasing, inventory hoarding, and excessive price speculation is discouraged and should be avoided. A third target audience is the American energy consumer, and the message is that the government is active in defense of their interests.

DOES IT WORK? But does it work? Have SPR drawdowns—or announcements of same— reduced or stabilized oil price spikes? Until the mid-1980s, the reserve

228

The Strategic Petroleum Reserve

did not contain enough oil to offer a credible response. The May 1984 price normalization that followed the early use policy announcement showed that the threat of a drawdown could affect oil prices. That announcement had come in the midst of price panic, induced by tanker wars in the Persian Gulf. The 1991 drawdown has been perhaps the best test of whether the SPR works. It was a large-scale drawdown that took place in the midst of a serious foreign policy crisis, following the largest oil supply disruption in world history. The announcement of the 33.75-million barrel drawdown sent the signal to markets that extra oil would be made available to mitigate possible shortfalls and dampen related price spikes. This drawdown, along with the success of the Allied air campaign, helped bring oil prices back to pre-disruption levels. Both crude oil spot and near-term futures prices, after nearly doubling in the fall of 1990, fell back to precrisis levels within twenty-four hours of the drawdown announcement. There are those who credit the Allied air campaign, not the drawdown announcement, in bringing prices back down. Others contend that the SPR played a direct or complementary role. Given the psychological nature of the market, dissecting these factors and apportioning them causal weight is likely a futile exercise. While the effect of the 1991 drawdown was obscured by the air war, there have been other drawdown announcements whose effects have been clear: in September 1990 (the 5-million barrel test sale); in May 1996 (some 28 million barrels ultimately sold); and in September 2000 (the 30-million barrel exchange). In each case, crude oil prices fell on news of the announcement (usually future prices; sometimes spot prices as well). On some occasions, gasoline and heating oil prices have also declined. Events have thus shown that a credibly stocked SPR can have a calming effect on the market, stabilizing prices by signaling the availability of extra oil supplies. To a large extent, it is the psychological nature of the market that gives a drawdown announcement its impact, even before SPR oil is made available. When an announcement is made early in a crisis, it tends to drive inflationary price speculation from the market and makes hoarders think twice about buying oil at inflated prices. Through this psychology, drawdown announcements can have an impact apart from and possibly even greater than the impact of SPR oil actually reaching the market. Such was the case in 1991, when crude prices fell to precrisis levels just after the announcement, but weeks before SPR oil actually reached the market. Of course, an administration must follow through with oil delivery after a drawdown announcement, or its psy-

Conclusions

229

chological impact, not to mention the credibility of the program and the administration, will be lost. And, of course, in any future scenario, the market may still need the oil at that point.

CRITICISMS OF THE SPR In recent years, a number of critics have questioned the need for government oil stockpiles. Usually these critics are economists or financial analysts, or are members of Washington, D.C.-based think tanks. Two prime examples of the latter have been the Heritage Foundation and the Cato Institute, which have both called for dismantling the SPR and selling the oil. Other critics have included civil servants and even members of Congress. Essentially, they make six points that, in their view, tend to diminish or remove the need for strategic oil reserves. They point out that today’s world oil market is quite different than that of the 1970s, when the SPR was created. From this, three points flow that ostensibly undermine the need for government-held oil stockpiles; two relate to the futures market.7 First, they note that the world oil market has changed significantly since the 1970s, when the SPR was created. As exploration and production technology has improved, and with deregulation of price and supply, the market has found and produced more oil and gas than previously thought possible, much of it from non-OPEC sources. As production outside OPEC and the Persian Gulf nations has grown, these SPR critics contend, the need for strategic stockpiles has lessened. Second, they contend that with the growth of financial instruments like futures contracts, oil has become a truly fungible commodity, easily and quickly exchanged for money or other (future) oil. This, in turn, makes it possible for consumers and producers to hedge, to assure themselves of future supply, and protect themselves against market disturbance. Third, with the interrelation of the futures and spot markets, prices move and react too quickly for government drawdowns to impact the market. In any crisis scenario, the market will react too quickly and prices rise too sharply, or, conversely, fall too quickly, for the SPR to have its intended effect. By the time that a drawdown decision is made and the oil delivered to the market—a two- to three-week process—it would be too little, too late. The market will have already adjusted. Further, by ensuring long-term supply and allowing for rapid price movement, the futures market has divested oil of much of its strategic-political importance. It has become, in their words, just another commodity. And if oil has become just another commodity, they

230

The Strategic Petroleum Reserve

conclude, there is no justification for government-owned strategic oil stockpiles. Fourth, there are those critics who contend that the SPR does not have the “horsepower” to affect world markets. They point out that its drawdown capacity of 4.3 million barrels per day (for a ninety-day period) pales in the context of U.S. and world petroleum consumption, which, in 2000, was approximately 19.5 and 75 million barrels per day, respectively. The amount of oil stored in the SPR also pales when compared to all the “wet” (real, or spot) and “paper” (futures) oil traded in the United States and world markets. In the mid-1990s, worldwide oil trades ranged from 300 to 400 million barrels per day. While a 500million barrel (plus) reserve might seem considerable, from an absolute numbers perspective, it is in fact too small, they argue, to affect the market. Finally, they argue that government oil stockpiles are not needed, because embargoes are ineffective policy instruments. With more oil coming from diverse sources, future embargoes would be even less effective, and thus unlikely. Since the SPR had been built in response to an embargo, there was no longer a security rationale for the reserve.

WILL THE SPR SURVIVE? Given these criticisms, one has to ask: Will the SPR survive? Should it? This study suggests several reasons why the SPR will, or should, continue to be the federal government’s primary energy emergency policy tool. Each criticism mentioned above has a response that validates this point.

World Oil Market Has Changed To be sure, the world oil market has changed significantly since the 1970s. Production levels are higher, the relevant technology has improved, oil-consuming nations have lifted price and supply controls, and new areas have opened up. More oil is being produced around the world. Non-OPEC production has grown. The United States has diversified its sources of foreign crude and reduced its dependence on Persian Gulf oil. In recent years, imports from Venezuela and Mexico have outpaced those from Saudi Arabia; imports from Canada did so in 2000.8 But in the United States, there are still many similarities to the market of the 1970s, and in those similarities lie the dangers. In the early 1980s, rising prices and greater fuel efficiencies caused demand

Conclusions

231

to subside. Since then, low to moderate prices, economic expansion, growing use of less fuel-efficient vehicles, and the relaxation of speed limits have caused demand to rise. American transportation needs, in particular, have driven U.S. petroleum demand to new heights. In a large, modern, continental nation with geographically diverse markets, long-distance transportation is paramount for economic health. Some economists contend that changes in the U.S. economy have made it less vulnerable to oil price increases. They note that the American economy has become less manufacturing-dependent and more service- and information-oriented. Transportation, however, is a large part of the service economy; and not only is it the largest petroleum end-use sector, transportation-related consumption is up significantly since the 1970s. Besides growing service-related transportation, more Americans are driving their own cars, further heightening demand. Between 1969 and 1997, according to one estimate, the American automobile population increased six times faster than the human population. When private automobile use and service-oriented transportation are combined, one finds that transportation-related petroleum consumption has increased significantly, up 45 percent between 1973 and 2000 (figure 7.1).9 In 2000, transportation accounted for two-thirds (67 percent) of U.S. petroleum demand (see figure 7.2). And for all practical purposes, Figure 7.1: Overall U.S. Petroleum Consumption by End-use Sector, 1973– 2000 in Quadrillion BTU

SOURCES: EIA, DOE, Annual Energy Review 1997. Washington, D.C.: EIA / DOE, 1998, 37; EIA, DOE, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, 2001, 43.

232

The Strategic Petroleum Reserve

Figure 7.2: Overall U.S. Petroleum Consumption by End-use Sector, 2000

SOURCE: EIA, DOE, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, 2001, 39–43.

transportation is wholly dependent on petroleum, meeting 92 percent of U.S. transportation energy demand, and cannot be substituted in the near term. Vehicular use of motor gasoline and diesel fuel account for more than 80 percent of the transportation total, while jet fuel and aviation gasoline use for commercial, military, and civilian aircraft account for 14 percent. These heavily used forms of transportation have been based on petroleum-based energy for decades—at least a century, in the case of the automobile. The history of twentieth-century transportation fuels suggests that they may not be, or at least have not been, substitutable in the long term, either.10 And while residential, commercial, and electric utility petroleum consumption are low, industrial consumption has held steady since the 1970s (see figure 7.1). When combined with the huge, growing, and mostly inelastic transportation demand, one sees that the U.S. petroleum demand is greater than ever before (see figure 7.3). Petroleum products are the largest single energy source for the American economy, in 2000 accounting for nearly 40 percent of total U.S. energy consumption (see figure 7.4). Several factors strongly suggest the possibility of a tight future U.S. energy market—yet another disturbing similarity to the 1970s. Loopholes in the national automobile fuel efficiency laws (the CAFE standards) have enabled automobile manufacturers to answer growing demand for less fuel-efficient sport utility vehicles. The raising of national highway speed limits has also heightened demand. There is no national appetite for conservation, either from the American public or its elected leaders. And as the events of the 1980s have shown, alterna-

Conclusions

233

Figure 7.3: U.S. Energy Consumption, by Source, 1973–2000, in Quadrillion British Thermal Units

SOURCE: Energy Information Administration, U.S. Department of Energy, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, August 2001, 9.

Figure 7.4: Overall U.S. Energy Consumption, by Source, 2000, in Quadrillion British Thermal Units

SOURCE: EIA, DOE, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, 2001, 9.

tive energy programs will not enjoy political support until oil prices become excessively high.11 While U.S. petroleum demand has continued to grow, domestic oil production—while still considerable—has continued to decline. Since its peak of 9.64 million barrels per day in 1970, U.S. crude oil production has consistently decreased and stood at 5.8 million barrels per

234

The Strategic Petroleum Reserve

day in 2000. While that level made the United States the third leading crude oil producer in the world (behind Saudi Arabia and Russia), and while new discovery and recovery technologies helped revive domestic production in the 1990s, America’s onshore reserves are definitely mature. To a lesser extent, so are the offshore reserves. Other promising domestic reserves are off-limits due to environmental restrictions.12 Other factors will work to keep the U.S. market tight. One is the industry’s “just-in-time” inventory philosophy of maintaining stocks strictly at operating levels. Throughout much of the 1990s, commercial inventory stocks were at their lowest levels in decades. The continuation of these trends strongly suggest the possibility of a tight future U.S. energy market, which heightens American vulnerability to an oilsupply disruption. Further, the United States is more dependent than ever on foreign oil, and its reliance on Persian Gulf oil is once again increasing. With hindsight, it is difficult to view President Nixon’s Project Independence, whose audacious goal was energy self-sufficiency by 1980, as anything but an abject failure. Although oil imports into the United States decreased during the first half of the 1980s, they began to grow again during the second half of the decade. By the late 1990s, the United States depended on foreign oil to meet half its petroleum demand, eclipsing the dependency levels of the late 1970s. By 2000, American dependence on imported oil reached a record high, accounting for 51.6 percent of domestic consumption (see figure 7.5). Some 22.3 percent of U.S. petroleum imports (crude and products) came from the Persian Gulf (see figure 7.6). While below the historic level of 27.8 percent in 1977, U.S. dependence on crude oil and petroleum products from that region is Figure 7.5: U.S Total Net Petroleum Imports as a Share (Percentage) of Total U.S. Petroleum Demand, 1973–2000

SOURCE: Energy Information Administration, U.S. Department of Energy, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, 2001, 135.

Conclusions

235

Figure 7.6: U.S. Petroleum Imports from the Persian Gulf as a Share of Total U.S. Imports, 1973–2000

SOURCE: Energy Information Administration, U.S. Department of Energy, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, 2001, 129.

still significant. Its loss, or disruption, even for a short period of time, would bring serious injury to the U.S. and world economy. The stability of world oil supply is further eroded by the fact that large volumes of crude flow through what analysts have called strategic “choke points.” These include politically unstable areas such as the Suez Canal and the Strait of Hormuz, and pipeline transit regions in Chechnya and Azerbaijan. Other plausible scenarios—a terrorist attack on a supertanker or a general strike in Venezuela—could result in a serious disruption. Indeed, the number and type of such scenarios seems to increase each year. And because of the interconnectedness of both “wet” (real) and “paper” (futures) oil markets throughout the world, any disruption in the flow of wet oil—whether in the Persian Gulf, the Caspian Sea, or the Strait of Malacca—reduces world supplies. International futures markets would be impacted, raising the price of oil throughout the world. In short, a supply disruption anywhere is a price increase everywhere; and the handful of politically unstable choke points enhance opportunities for disruption.13 There is an important distinction to be made between dependence and vulnerability. The United States has reduced its dependence (slightly) on Persian Gulf oil. But because of its growing dependence on foreign oil, it remains vulnerable. Energy vulnerability is not dictated by the source of petroleum imports. It stems from the price increases associated with disruption, the contribution of oil to the overall energy mix, and the role of energy in a modern economy. While imports remain high, so will vulnerability, and that will continue to be the primary fact of U.S. energy policy well into the twenty-first century.

236

The Strategic Petroleum Reserve

Figure 7.7: U.S. Economic Growth Versus Energy Prices – Crude Oil Prices from Persian Gulf Nations, in Nominal Dollars per Barrel, and Gross Domestic Product Percent Change Based on Chained 1996 Dollars, 1973–2000

SOURCES: Energy Information Administration, U.S. Department of Energy, Annual Energy Review 2000. Washington, D.C.: EIA / DOE, August 2001, 159; “Gross Domestic Product Percent change from preceding period,” Bureau of Economic Analysis, U.S. Department of Commerce (http: // www.bea.doc.gov / bea / dn / gdpchg.xls).

The economic evils associated with oil supply disruptions cannot be doubted. With the three major import disruptions of the twentieth century—1973–74, 1979, and 1990—oil prices rose steeply, and recessions followed. The higher inflation and interest rates that occurred reduced buying power, slowed consumer spending, and raised the cost of doing business. Later analysis will likely show that the 46 percent increase in oil prices in 2000—the third largest since 1973—played no small role in the economic downturn of the early new millennium (see figure 7.7).14

Futures Provide Needed Hedges It is also true that oil has become a fungible commodity, and that futures prices react almost instantaneously to news affecting the world oil market. However, these facts do not obviate the need for strategic oil reserves. Three basic points apply here. First, the Persian Gulf crisis of 1990–91 revealed that futures markets are just as subject as spot markets to uncertainty and panic-induced price inflation. Prices for future oil delivery nearly doubled throughout the fall of 1990. Of course,

Conclusions

237

futures contracts are often tied to spot market prices. But that same quick reaction is what makes futures markets problematic: they react quickly to bad news as well as good. And increases in futures prices drive up energy prices for the American consumer just as spot price increases do. Second, in and of themselves, futures markets produce no oil. Futures contracts may on paper guarantee future supply, but they are useless if the source of that supply is cut off. Whatever their merit, futures contracts and options represent rights to buy, not actual physical reserves. They do not afford the additional energy security provided by actual, physical strategic stocks. Third, while oil has become a fungible commodity, it is not just another commodity. It is the lifeblood of modern society. Nations do not go to war over soybeans or pork bellies, but a number have gone to war over oil. Throughout the twentieth century, oil has had a crucial strategic-political importance, fueling transportation, economic growth, and (unfortunately) military conflict. As long as it continues to be the largest single energy source for industrialized nations, their governments will, and should, have an interest in maintaining emergency oil reserves.15

SPR Not Big Enough Quantitatively, the argument that the SPR is too small to replace the nation’s daily petroleum consumption is correct. That is, mathematically, the reserve’s 4.3-million barrels per day drawdown capacity comes up short against a national consumption of 19.5 million barrels per day. However, policymakers have always assumed that in any given disruption scenario, the United States would not lose all its crude oil supply, whether foreign or domestic. But even more than that, it is evident that the energy market is not wholly—perhaps not even mostly—driven by absolute numbers. It is often driven by expectations, fears, hopes, and beliefs about the future availability of oil. In other words, the market is often driven by a collective psychology. The advent of the futures market, and the speculative aspect it brings, has made this even more true. Fears and uncertainties about future supply are reflected almost immediately in futures prices. It is in this context that energy market analysts and policymakers contend that the SPR can have its biggest impact through a drawdown announcement. An announcement of a massive drawdown, they contend, can have an even bigger impact on the market than the actual delivery of oil. Such an announcement sends the message, or signal, that a large

238

The Strategic Petroleum Reserve

amount of oil will be made available. That message immediately impacts the market psychology with a calming and stabilizing influence, one that countervails inflationary pressures. In past energy crises, rising prices and uncertainty over future supply have led various industry players to hold onto stocks, even add to them, taking more oil off the market and inflating prices further. Here the value of government-held stockpiles, in their capacity to bring extra supply to a tight and nervous market, is best seen. The SPR did not hold enough oil for a credible drawdown in 1979, and a policy decision not to draw down in the fall of 1990 hindered its price-blunting capability. Yet in any future supply crisis, as in the past, consumers will fear loss of fuel products; downstream segments of the industry will fear loss of feedstock. Those fears cannot help but be allayed by the knowledge that the government will make extra supply available. And as fears are eased, the market forces that inflate energy prices are mitigated. Of course, the reserve has to be credibly stocked to have this psychological effect, and at 500 million barrels plus, it is not too small to affect the nation’s oil market. The SPR’s ability to replace some 22 percent of U.S. daily petroleum consumption is far from negligible.

Embargoes No Longer a Threat Changes in the world oil market do make the recurrence of a 1973like oil embargo unlikely. Its evident renewed unity notwithstanding, OPEC’s economic-political power has eroded since the 1970s, when its crude oil production represented more than 50 percent of world supply. Even then, when its economic power was at its height, its political unity was fragile. In each embargo or disruption, one or more of the OPEC members could not resist the temptation of selling to the world’s largest oil market. Further, the 1973–74 crisis was unusual in that it occurred at a time of surging demand and inadequate production capacity. Lastly, the fact that many Arab states have become dependent on oil production revenue further militates against a recurrence. One or more of these states would almost certainly abstain from any future politically inspired oil embargo. For many reasons, the recurrence of a politically motivated disruption is highly unlikely.16 Yet while future 1973-like embargoes are unlikely, the history of the post–World War II era has shown that oil supply disruptions can take many forms, are not always politically motivated, and have occurred with alarming frequency (see table 7.1). If American dependence on and demand for foreign oil is growing, disruptions, and the threat they pose to national security, are still possible. And since the private

Nationalized

Suez War

Syrian Transit Fee Dispute

Six Day War

Nigerian Civil War

Libyan Price-Production Controversy / Saudi TAP-line breakdown

Algerian-French Nationalization Struggle

Lebanese Political Conflict

Arab-Israeli “Yom Kippur” war / Embargo

Civil War in Lebanon

Damage at Saudi Oilfield

Iranian Revolution

Outbreak of Iran-Iraq War

UK Piper Alpha Offshore Platform Explosion

UK Fulmer Floating Storage Vessel Accident

UK Cormorant Offshore Platform

Exxon Valdez Oil Spill

Iraqi Invasion of Kuwait

October 1954

November 1956–March 1957

December 1966–March 1967

June 1967–August 1967

July 1967–October 1968

May 1970–January 1971

April 1971–August 1971

March 1973–May 1973

October 1973–March 1974

April 1976–May 1976

May 1977

November 1978–April 1979

October 1980–December 1980

July 1988–November 1989

December 1988–March 1989

April 1989–June 1989

March 1989–April 1989

August 1990–October 1990

4.6

1.0

0.97

0.2

0.3

3.3

3.5

0.7

0.3

2.6

0.5

0.6

1.3

0.5

2.0

0.7

2.0

5.30

65.99

51.6

0.5

51.6

49.8

63.07

65.1

62.1

60.2

58.2

58.2

50.2

48.0

40.1

40.0

34.3

17.5

0.7

mmb / d

Consumption

Supply Disruption mmb / d

World Oil

Magnitude of Oil

6.98

1.94

51.6

0.39

0.60

5.23

5.38

1.13

0.50

4.47

0.86

1.20

2.71

1.25

5.00

2.04

11.43

13.22

Consumption

Percent World

SOURCES: EIA, DOE, World Oil Supply Disruptions, EIA website (www.eia.doe.gov/emeu/security/distable.html); John S. Cook and Charles P. Shirkey, “A Review of Valdez Oil Spill Market Impacts,” EIA/Petroleum Marketing Monthly, March 1989, Washington, D.C.: EIA/DOE, June 1989, 5, 8.

Iranian Fields

Supply Disruption

March 1951–

Dates

Table 7.1 World Oil Supply Disruptions, Percent of World Oil Consumption, 1951–91

240

The Strategic Petroleum Reserve

sector is unwilling to undertake this, it is the role of the government to continue to hold and maintain strategic oil stockpiles. For all these reasons, the United States has made a determination that it must have an energy security program; through time, the SPR has become that program.

The Value of Strategic Reserves As it enters the twenty-first century, the United States is more dependent on foreign oil than ever before; more dependent than it was during the worst of the 1970s energy crises. From a public policy perspective, the best and most realistic future scenario that the United States can hope for is to have energy emergency programs in place as insurance against oil supply disruptions. Historical events do not guarantee future outcomes, but the frequency and variety of disruptions in the past half century suggests that future disruptions are a distinct possibility. Hence SPR drawdowns will still have a role in protecting national security. Strategic stockpile drawdowns can mitigate the economic damage of a disruption in four basic ways. First, by discouraging excessive speculation, panic buying, and hoarding, drawdowns help stabilize and lower crude oil and petroleum product prices. Secondly, by mitigating price increases, drawdowns tend to reduce the inflation, transfer of wealth, loss of industrial output, and consequent economic damage that comes with a disruption. Third, by helping replace lost supply, drawdowns allow the U.S. economy time to adjust, recover, and operate more nearly to predisruption levels, until such time as oil flow can be restored. In the meantime, drawdowns can also help assure the continuance of critical national safety and health activities. Lastly, by alleviating oil shocks, strategic reserves can play a key role in mitigating and reducing—and perhaps preventing—the kind of socioeconomic damage that was manifest in the 1970s. Despite the glut of oil that existed in world markets in the late 1990s, worldwide spare producing capacity seems to be diminishing. By and large, the oil-exporting nations today have very little spare production capacity, with Saudi Arabia perhaps the only notable exception. These trends, among others, undermine the argument that the futures markets reduce the need for strategic stocks. Only additional physical supplies can mitigate market panic, and those supplies can only come from nations with surplus oil-producing capacity or strategic stockpiles. Given reports of declining surplus capacity among producing and exporting nations, the importance of strategic reserves in future crises can only increase.17

Conclusions

241

It also is clear that any emergency oil stockpiling the industry may undertake of its own accord will fall short of national needs. This is true for several reasons. First and foremost is the high cost associated with surplus stocks, especially those stored in steel tankage. Secondly, there is the risk that in an emergency, the government might control the price and allocation of such stocks, as it did in the 1970s. However unlikely the return of such a policy might seem, it was an experience the industry will not soon forget. Lastly, there is the argument that since the economic benefits of stockpiling accrue to all energy consumers, the private sector alone does not have an incentive to (and perhaps cannot) achieve a stockpile level that is optimal from a national point of view. In light of disruption history, declining production capacity, and industry storage trends, it seems reasonable to conclude that the United States will continue to need what DOE officials have characterized as a “reasonably-priced insurance policy.”

FUNCTIONALITY The SPR has become the most functional energy security policy tool that the federal government has. Whatever energy policy tool the government hoped to wield over the long run had to please, or at least not anger, energy consumers, in the first place, and the petroleum industry, in the second place. To endure, emergency energy policy tools had to conform with the structure of a petroleum-based energy economy. With the internal-combustion engine the primary example, the economic, physical, and transportational infrastructure of U.S. society, for industry and consumers, has been committed to a petroleum-based economy for nearly a century. In fact, the SPR, by affirming the petroleum-based economy, helps to define “energy crisis” as a potentially recurring but ultimately short-term phenomenon in which the status quo will soon prevail once more. Such a definition is a blow to those who see in an energy crisis a rationale for the development of alternative energies. A policy commitment to a pro-energy consumer, petroleumbased economy ruled out many of the most powerful conservation approaches, especially that of demand restraint. Efforts by the Nixon, Ford, and Carter administrations to tax gas guzzler automobiles or to implement an energy consumption tax (usually in the form of a gasoline tax, or a tariff excise tax) all ran afoul of consumers. These tools restrained energy demand by driving up energy costs, by either reducing supply or taxing consumption. They therefore had little White House support, or met stiff resistance in Congress, and were either defeated outright or rendered innocuous in law. Oil import tariffs, in particular,

242

The Strategic Petroleum Reserve

were opposed by consumers, refiners, importers, and much of the rest of the petroleum industry. Consumers opposed tariffs and fees because they restricted the availability and affordability of petroleum products. Industry segments who opposed them took up the defense of the consumer. For these reasons, oil import tariffs and fees became politically untenable. They were opposed, seemingly, by all except domestic producers, who were in the 1990s drowning in a flood of cheap oil, as they had been in the 1950s and 1970s. No longer able to wholly satisfy the ravenous appetite of the U.S. energy consumer, they had fallen considerably in the pecking order of the American political economy of oil. After 1973, their cries for protection went unheeded. Decontrol of oil prices had only a brief demand restraint effect, because world oil prices began a prolonged decline starting in 1982. Indeed, the generally low-to-moderate oil prices of the 1980s and 1990s have heightened and stoked demand. Even the restraining effects of the CAFE standards have waned, as Americans have increasingly opted to drive less fuel-efficient sport utility vehicles. And for markets dependent on petroleum—transportation, shipping, manufacturing, and heating in the Northeast—renewable and synthetic energies have made at best marginal gains. Other measures to reduce demand for petroleumbased energy have probably realized their maximum effectiveness. Given the parameters of the American political economy, there was, and is, little that can stand in the way of rising consumer demand. Fuelefficient technologies can slow demand, but have to be attractive to the end-user market. They have not always been. As a result, American energy demand continues to reach new heights. If the government’s answers to the energy crisis were to endure and be effective, they had to conform to the petroleum-based energy economy and not attempt to curtail demand nor shift or alter existing energy consumption patterns. After the first oil shock, energy consumers gained ascendancy in the American political economy. To a large extent, this was because after 1973, policymakers recognized the vital role that energy consumption plays in the national economy. Simply put, the U.S. economy depends upon energy consumption. Energy shortages and price increases drive up the cost of transportation, shipping, and manufacturing, key elements of the national economy. By undermining the national economy, oil supply disruptions became a threat to national security. The disruptions of the 1970s drove this lesson painfully home, and before long, consumer groups made their voices heard. Thus, since 1973, government policy has been to protect patterns of energy consumption. The SPR survives because it conforms with and affirms those patterns by

Conclusions

243

providing long-term energy security in the form of extra oil supply. As long as protecting energy consumption is a policy goal and oil remains a vital energy source, the SPR is the government’s most functionable energy policy tool. The SPR also serves the purpose of the U.S. petroleum industry, and the industry’s political support has been crucial to its endurance. Despite having lost political power after the embargo, the American petroleum industry was not powerless. Industry groups might have placed serious obstacles in the SPR’s path with concerted opposition, as they did with price controls, allocation authorities, alternative fuels programs, and industry inventory requirements. They did not do so. Instead, the industry groups by and large embraced the concept of government strategic oil stockpiling as a preferable alternative to those other programs. A key reason for this support was the fact that unlike the other measures, a government strategic oil reserve, funded from general revenues, posed no competitive threat. Here the role of the National Petroleum Council, in formulating the basic form of the reserve, supporting the program, and advising the government on its use thereafter, was crucial. The SPR represented a limited governmental role in the marketplace. It did not raise the spectre of “favored” government competition, which is what the industry had found so alarming about Daniels’s plans for the Naval Petroleum Reserves, and Ickes’s Petroleum Reserves Corporation. The SPR’s activities essentially consist of buying and storing oil. In a drawdown, it is also a seller. But it is not an oil-producing, refining, or marketing entity. It does have a limited role in transportation, but the SPR pipelines are relatively short and serve only to connect its sites with commercial pipelines or terminals. Thus the four major components of the American oil industry were not threatened by this form of government-owned strategic reserve. Simply put, as a government entity, the SPR has a very limited function and does not play the same role in the marketplace as Pemex and the other international, state-run oil companies. The industry also supports the SPR because it affirms the petroleum-based energy economy. Unlike alternative fuels programs, the SPR conforms with the shape of the market. In so doing, it supports the status quo. Indeed, it has been criticized by some environmental groups on these very grounds. There is some truth in the charge. Through the SPR, the government has officially accepted, or recognized, U.S. dependency on petroleum as a major energy source.18 There have been a few industry officials, and some conservative think tanks, who deplore the SPR. They view it as another tool for gov-

244

The Strategic Petroleum Reserve

ernment intervention into the market, one that is all too easily abused. To them, the 1996 drawdowns made manifest their worst fears. Ironically, that same fear is testament to the fact that SPR drawdowns do have an impact on the market. Most of the American petroleum industry, however, supports the SPR, particularly those companies with downstream operations. These firms value the extra supply that the SPR can bring to a tight or disrupted market. This is especially true of independent refiners, marketers, and gasoline station owners who do not have integrated supply operations. For them, the reserve represents supply insurance. The handful of oil companies that have leased SPR pipelines and terminals, and the numerous companies that have lined up to buy SPR oil when it has been drawn down, points to at least some level of acceptance. So too the handful of crude oil lease and exchange agreements with companies that have had short-term supply problems. For the rest, the SPR is a more favored—or at least less threatening—energy security policy tool than price or supply controls, tariffs, quotas, inventory requirements, consumption taxes, or subsidized synthetic or alternative fuels programs.

THE SPR AND U.S. ENERGY POLICY Since the 1970s, the lack of a comprehensive U.S. energy policy has often been lamented by industry officials, members of government, and the media. There are those who contend that the United States does in fact have an energy policy: to provide an adequate supply of energy at a reasonable cost. But, there is a large measure of truth to the charge. There are many diverse economic and political entities in the United States with diametrically opposed goals and interests. For this reason, it is difficult, perhaps impossible, to formulate and implement a coherent, comprehensive, and long-term energy strategy. The SPR is the government’s only program that all interested groups support or object the least to. As the government’s primary energy emergency response tool, the SPR makes extra supply available during energy shortages. It conforms with the market and keeps government intervention to a minimum. If, as some industry officials have argued, the United States increasingly represents a political environment in which long-range energy policy becomes hostage to short-term crises, then the SPR is a tool that fits in well with that political reality. It is an energy insurance policy that allows the government to extinguish fires—energy shortages—as they appear, while avoiding the much more contentious issue of long-term, comprehensive energy policy. Government micro-

Conclusions

245

management of the U.S. energy economy, however, has been rejected by the American polity and marketplace. The United States no longer seeks to contain demand or its dependence on foreign oil. Their growth is now taken as a given, as is the lack of a larger national commitment to alternative and renewable energies. As a nation, the United States has the energy policy that it can collectively agree upon, or again, object the least to. That makes for a minimalistic policy, and the policy now is to let markets work; rely to a large extent upon petroleum-based forms of energy; and draw down strategic reserves in an emergency, or when extra supplies are needed. Of all the energy policy measures that came out of the 1970s, the SPR has been the government’s most enduring response to the energy crisis, its best effort at enhancing national energy security. The fact that the reserve is a passive, market-conforming tool has played no small part in its longevity. Events in the second half of the twentieth century have proved the need for strategic oil reserves. Disruptions in the supply of oil from the Middle East have occurred at least fifteen times in the post–World War II era. The United States is more dependent on foreign oil than ever before, and projections hold that it will become even more dependent in the future. From an energy security and public policy perspective, one must assume that disruptions can and will happen in the future, perhaps in ways unimaginable at present. In affording protection against the economic and political threats associated with disruptions, the SPR still serves a vital national security function. The greatest danger to the SPR, and similar IEA stockpiles, is not that they have become irrelevant. The far greater danger is that government officials, in an effort to generate revenue, and forgetful of economic national security, will draw down their reserves to the point that they are no longer credibly stocked or are liquidated altogether. Recent efforts by the U.S. government to replenish the SPR are evidence that the lessons of the energy crisis and the regulatory debacle it engendered have not been lost entirely.

EPILOGUE

In the wake of the terror attacks of September 11, President Bush in November 2001, ordered that the reserve be filled to capacity, to enhance the nation’s energy security. That decision would add 159 million barrels to the SPR through the existing royalty-in-kind (RIK) program and increase its total oil in storage to 700 million barrels by August 2005. But as crude oil prices increased and the world oil market tightened, criticism of the administration’s insistence on continuing SPR fill mounted. By 2002, growing demand had created a tight world oil market, and a series of supply disruptions began to inflate crude oil prices. In 2003, a general strike in Venezuela, civil unrest in Nigeria, and the war in Iraq caused the most significant oil supply disruption since the 1991 Persian Gulf war—some 2.1 million barrels per day of Venezuelan crude were lost from December 2002 to February 2003, and 1.3 million barrels per day of Iraqi and Nigerian crude were lost from March 2003 to August 2003.1 In the first quarter of 2003, prices rose to a twelve-year high, nearly $38 a barrel. Despite requests from members of Congress and refiners, President Bush declined to order a drawdown, preferring to leave alleviation of the price to market forces. The policy contrasted with the Clinton administration’s September 2000 decision to use the SPR to ease a tight heating oil market. Prices eventually dropped to around $26 before bouncing back to $30 for most of 2003, the result of lingering supply issues in Iraq and elsewhere.

Epilogue

247

But in the Bush second term, crude oil prices reached new heights, crossing the $40 per barrel mark in 2004, and surpassing $60 per barrel in August 2005. Prices were driven upward by concerns over the war in Iraq, an array of terror threats, unrest in key oil-producing countries, rising demand from China and India, and, in the United States, continued high demand, lean inventories, declining domestic production, and constrained refining capacity. Underlying it all was a tight world oil market with limited excess capacity, hovering about 1 percent above world daily demand. Yet despite the disruptions, record high prices, and the continued “war on terror,” President Bush refused to order a drawdown. This stance was perhaps not surprising, given Bush’s criticism of the Clinton administration’s SPR policy in 2000. And as prices continued to rise, the administration steadfastly maintained that the reserve should be used only to mitigate a “severe energy supply disruption” and not to “manipulate” price. The White House defined a “severe” disruption as the loss of 5 to 6 million barrels a day in U.S. imports. It became increasingly clear that the administration viewed the SPR in terms of security rather than economics—as a kind of emergency-only stash to be used only as a last resort. The rainy day policy had been revived.2 As the world oil market became tighter and more turbulent, calls for a drawdown—or at least a suspension in fill—increased. In March 2004, the Senate approved a plan to cancel the acquisition of 53 million barrels of oil for the SPR, to keep more crude on the market and ease record gasoline prices. A year later, in April 2005, with crude oil prices over $50 per barrel, House lawmakers voted to require the Secretary of Energy to suspend oil fill until the price fell below $40 per barrel for two consecutive weeks on the NYMEX. Certain segments of the airline industry and other oil-dependent sectors also called on the president to suspend oil fill. Members of Congress also renewed calls for a drawdown. In mid-May 2004, half a dozen Senate Democrats appealed to the president to release as much as 60 million barrels of oil from the reserve, arguing that such a move would inject much-needed supplies onto the market.3 But these efforts lacked broader congressional support and were consistently opposed by the Bush administration, which argued that the SPR needed to be filled to capacity; that suspending fill would not bring significant relief; and that the reserve should not be used as a tool to mitigate price. The controversy over SPR fill figured to become moot in August 2005 when it was projected that the RIK program would bring the amount of oil in the reserve to its full storage capacity.4

248

The Strategic Petroleum Reserve

Interestingly, this new world of high oil prices led some to rethink how the SPR should be used, at least outside the administration. In October 2004, as crude oil prices reached $55.67 per barrel, OPEC president (and Indonesian Minister of Energy and Mineral Resources) Purnomo Yusgiantoro took the highly unusual step of asking the Bush administration to release oil from the reserve to help “cool down” prices. Purnomo’s appeal was a dramatic about-face for OPEC, which had historically viewed the SPR as a threat to its economic interest. But this about-face was met with a rebuff from the White House, which renewed its arguments against using the reserve as a price lever.5 While the policy of price smoothing was abandoned, the use of the SPR’s exchange authority continued under the Bush administration. As inventories declined and the market tightened, refiners continued to ask for short-term supply assistance, especially when weather or other unforeseen circumstances brought about a supply disruption. This was the case in October 2002, when Hurricane Lili disrupted crude oil shipments into Gulf Coast distribution hubs and threatened to disrupt the flow of feedstock through the Capline pipeline to the Williams refinery at Memphis, Tennessee. The Capline operator, Shell Pipeline Co. LP, approached the DOE with an urgent request for help. Using the SPR’s exchange authority, the government loaned Shell 296,000 barrels for delivery to the Williams refinery and other refineries in the Midwest. Under the exchange agreement, the DOE received a comparable grade of replacement oil within 60 days.6 This trend continued in September 2004 after Hurricane Ivan damaged crude oil production and pipeline delivery systems in the Gulf of Mexico. Analysts characterized the disruption as one of the worst in the history of U.S. energy production. It removed more than 25.1 million barrels from the world market and held back more than 400,000 barrels a day for at least a month. The disruption, along with other ongoing factors, drove the price of oil over $50 per barrel. Once again the industry approached the government for help as the DOE received several emergency requests from refiners for short-term supply assistance. To relieve the shortages, the DOE loaned a total of 5.4 million barrels of crude to five companies: Placid Refining, Shell Trading, Conoco Phillips, Astra Oil, and Premcor. The oil was delivered to the refiners during September and early October 2004. By April 2005, the loaned oil had been returned to the reserve, plus 233,924 premium barrels paid to the government in return for the time exchange.7 While the exchange was not characterized as a broader marketcalming measure, it did renew criticism of the administration for its refusal to order a larger drawdown and its insistence on continuing SPR

Table E.1 SPR Sales and Exchanges

Sales •

2005 Hurricane Katrina Sale—11 million barrels

•

1996–97 total non-emergency sales—28 million barrels

•

1990 / 91 Desert Shield / Storm Sale—21.2 million barrels (3.9 million in

•

1985 Test Sale—1.1 million barrels

August 1990 test sale; 17.3 million in January 1991 drawdown)

Exchanges •

Sep / Oct 2005—exchanged 9.8 million barrels of sweet and sour crude due to disruptions in Gulf of Mexico production and damage to terminals, pipelines and refineries caused by Hurricane Katrina.

•

Sep / Nov 2004—exchanged 5.4 million barrels of sweet crude due to disruptions in the Gulf of Mexico caused by Hurricane Ivan.

•

Sep / Oct 2004—exchanged 5.4 million barrels in response to physical shortages of crude oil supplies in the Gulf of Mexico following Hurricane Ivan.

•

Oct 2002—exchanged 296,000 barrels with Shell Pipeline Co. to secure Capline storage tanks in advance of Hurricane Lili.

•

Sep / Oct 2000—exchanged 30 million barrels in response to concern over low distillate levels in Northeast.

•

July / August 2000—exchanged 2.8 million barrels of crude oil for first-year tank storage and stocks for 2 million barrel Northeast Home Heating Oil Reserve.

•

June 2000—exchanged 500,000 barrels each with CITGO and Conoco, due to blockage of the Calcasieu ship channel that allowed incoming crude oil shipments to those refineries. Action taken in order to avert temporary shutdown of both refineries.

•

August 1998—exchanged 11 million barrels of lower quality Maya crude in SPR with PEMEX for 8.5 million of higher quality crude more suitable for U.S. refineries.

•

April / May 1996—exchanged 900,000 barrels of SPR crude with ARCO to resolve company’s pipeline blockage problem.

SOURCE:

.html.

DOE, http: // www.fossil.energy.gov / programs / reserves / spr / spr-facts

250

The Strategic Petroleum Reserve

fill in a tight market. Interestingly, while the Hurricane Ivan disruption did bring actual physical shortages, the Hurricane Lili exchange was conducted in anticipation of a shortage. These episodes showed once again that presidential powers over SPR drawdowns are both discretionary and absolute. Hurricanes Katrina and Rita continued the trend of storm-related drawdowns, but on a much larger scale (see table E.1). In August and September 2005, these storms caused historic and unprecedented damage and resulted in a serious supply disruption. They forced the suspension of some 1.6 million barrels per day of crude oil production from the Outer Continental Shelf in the Gulf of Mexico and, by damaging onshore facilities, removed 1.3 million barrels per day of refining capacity in Alabama, Louisiana, and Texas for nearly two months. The disaster prompted President Bush to order the type of large-scale drawdown that some members of Congress had been urging for more than a year. In early September, as part of a collective action, the IEA agreed to market the equivalent of 2 million barrels per day of oil over a thirty-day period, with 94 percent of that coming from stockdraw. The DOE would provide 30 million barrels of crude oil from the SPR, and other IEA nations would provide 30 million barrels of refined products from their emergency reserve systems. Ultimately, the DOE sold 10.8 million barrels of sweet crude oil and another 200,000 barrels of sour crude, and agreed to loan another 9.8 million barrels, placing roughly 21 million barrels on the market. With the loss of refining capacity, the U.S. market also showed a keen demand for the gasoline, middle distillate, and fuel oil products released by the other IEA member nations. The collective action was credited with having “calmed markets” by the end of the first week in September.8 Entering the twenty-first century, the value of strategic oil stocks has gained greater acceptance. The United States has filled its reserve to capacity, and the European Union and the Philippines have announced plans to increase their strategic stocks. Moreover, the governments of Russia, China, India, Nigeria, and Malaysia have announced their intention to create strategic reserves in their respective countries. These trends stood in stark contrast to the commentaries of the mid-1990s, when financial analysts and economists argued that strategic reserves were no longer needed. That world was awash in surplus oil. The early twenty-first century is proving to be very different, and the value of strategic oil reserves is no longer in doubt.9

NOTES INTRODUCTION 1. Michael B. Stoff, Oil, War, and National Security: The Search for a National Policy in Foreign Oil, 1941–1947 (New Haven: Yale University Press, 1980); Aaron David Miller, The Search for Security: Saudi Arabian Oil and American Foreign Policy, 1939–1949 (Chapel Hill: University of North Carolina Press, 1980); Irvine H. Anderson, Aramco, the United States, and Saudi Arabia: A Study of the Dynamics of Foreign Oil Policy, 1933–1950 (Princeton University Press, 1981); Stephen J. Randall, United States Foreign Oil Policy, 1919–1948: For Profits and Security (Toronto: McGill-Queens University Press, 1985); David S. Painter, Oil and the American Century: The Political Economy of U.S. Foreign Oil Policy, 1941–1954 (Baltimore: The Johns Hopkins University Press, 1986). The works on the SPR and other oil-stockpiling programs include Edward N. Krapels, Oil Crisis Management: Strategic Stockpiling for International Security (Baltimore: Johns Hopkins University Press, 1980); Gregory Treverton, ed., Energy and Security (Montclair, N.J.: International Institute for Strategic Studies by Gower and Allanheld, Osmun, 1980); David A. Deese and Joseph S. Nye, eds., Energy and Security (Cambridge, Mass.: Ballinger Publishing Co., 1981); George Horwich and Edward J. Mitchell, eds., Policies for Coping With Oil-Supply Disruptions (Washington, D.C.: American Enterprise Institute, 1982); David Leo Weimer, The Strategic Petroleum Reserve: Planning, Implementation, and Analysis (Westport, Conn.: Greenwood Press, 1982); Charles K. Ebinger, The Critical Link: Energy and National Security in the 1980s (Cambridge, Mass.: Ballinger Publishing Co., 1982); James L. Plummer, ed., Energy and Vulnerability (Cambridge, Mass.: Ballinger Publishing Co., 1982); George Horwich and David Leo Weimer’s Oil Price Shocks, Market Response, Contingency Planning (Washington, D.C.: American Enterprise Institute, 1984); George Horwich and David Leo Weimer, eds., Responding to International Oil Crises (Washington, D.C.: American Enterprise Institute, 1988). 2. The story of the naval petroleum reserves is probably best described in James Leonard Bates, The Origins of Teapot Dome: Progressives, Parties, and Petroleum, 1909–1921 (Urbana: University of Illinois Press, 1963). See also Gerald D. Nash, United States Oil Policy: Business and Government in Twentieth Century America, 1890–1964 (University of Pittsburgh Press, 1968). 3. There is a fairly immense literature on the Petroleum Reserves Corporation (PRC), most of it in works on U.S. foreign oil policy. Much of the documentary foundation for the PRC can be found in the Senate Subcommittee report, A Documentary History of the Petroleum Reserves Corporation, 1943–1944, Subcommittee on Multinational Corporations, Committee on Foreign Relations, United States Senate, 93rd Cong., 2nd Sess., May 8, 1974 (GPO, 1974). This study of the PRC was produced as part of the Senate Subcommittee on Multinational Corporations’ investigations into U.S. foreign oil policy in the wake of the 1973–74 energy crisis. Many of the afore cited works on foreign oil policy deal with the PRC at length. See Nash, United States Oil Policy, 172–76, 187; Michael B. Stoff, Oil, War, and National Security, 73–88, 95–99, 107–118, 124–42, 159, 168, 207, 210; Miller, Search for Security, xv, 74–89, 95–98, 206–207, 211, 245, 249, 254–55; Irvine H. Anderson, Aramco,

252

Notes to pages 3–5

the United States, and Saudi Arabia, 42, 50–67, 68, 70, 73, 75, 81–86, 90, 92, 96–99, 102, 106, 135, 200, 201, 207, 214; Stephen J. Randall, “Harold Ickes and United States Foreign Petroleum Policy Planning,” 372–87; and Ibid., United States Foreign Oil Policy, 15, 114–18, 128–56, 165, 170, 172, 182, 199, 240, 258; Painter, Oil and the American Century, 38–47, 52–59, Chester, United States Oil Policy and Diplomacy, 19, 236, 237, 319; Krueger, The United States and International Oil, 49–52, gives a very brief and concise history of the PRC. 4. See Michael B. Stoff, Oil, War, and National Security: The Search for a National Policy in Foreign Oil, 1941–1947 (1980); Aaron David Miller, The Search for Security: Saudi Arabian Oil and American Foreign Policy, 1939– 1949 (1980); and Irvine H. Anderson, Aramco, the United States, and Saudi Arabia: A Study of the Dynamics of Foreign Oil Policy, 1933–1950 (1981). See also Burton Kaufman, The Oil Cartel Case: A Documentary Study of Antitrust Activity in the Cold War Era (Westport, Conn.: Greenwood Press, 1978), Stephen J. Randall, United States Foreign Oil Policy, 1919–1948: For Profits and Security (Toronto: McGill-Queens University Press, 1985), and David S. Painter, Oil and the American Century: The Political Economy of U.S. Foreign Oil Policy, 1941–1954 (Baltimore: The Johns Hopkins University Press, 1986). 5. Anti “Big Oil” sentiment has a long tradition in American history and literature, dating back at least to Ida Tarbell’s History of Standard Oil (1904). That sentiment grew stronger with the energy crises of the 1970s. In that decade, academicians, journalists, and other observers of the energy crisis wrote works that were harshly critical of the “powerful and rapacious” multinational oil-majors. Following the public opinion of the time, they largely blamed “Big Oil” for the energy shortages of 1973–75. Leading the way in this interpretation was journalist Anthony Sampson’s The Seven Sisters: The Great Oil Companies and the World They Made (New York: The Viking Press, 1975), published just as the energy shortages and related inflation were wreaking havoc with the American economy. The “Seven Sisters,” a phrase coined by Italian oil magnate Enrico Mattei, referred to U.S. companies in the Arabian-American Oil Company (Aramco)—Standard Oil-California (Chevron), Standard Oil-New York (Mobil), Standard Oil-New Jersey, and Texaco—along with Gulf Oil, British Petroleum (Anglo-Iranian), and Royal Dutch-Shell. Other examples of this interpretation included political scientist Robert Engler’s The Brotherhood of Oil: Energy Policy and the Public Interest (University of Chicago Press, 1977), and economist John C. Blair’s The Control of Oil (New York: Pantheon Books, 1977). Blair had served as an economist and assistant to the Federal Trade Commission and the Senate Subcommittee on Antitrust and Monopoly, and was a co-author of the Senate’s Small Business Committee publication, The International Petroleum Cartel (Washington, D.C.: GPO, 1952), which had advocated anti trust proceedings during the Truman administration. In The Control of Oil, Blair suggested antitrust measures as preventative and antidote to the energy crises. This interpretation continued into the 1980s, with journalist Robert Sherrill’s The Oil Follies of 1970–1980: How the Petroleum Industry Stole the Show (And Much More Besides) (New York: Anchor Press, 1983), and John G. Clark’s Energy and the Federal Government: Fossil Fuel Policies, 1900–1946 (Urbana & Chicago: University of Illinois Press, 1987), 388–90. Although the works of Blair and Clark were more systematic and scholarly than those of Engler, Sampson, and Sherrill, all shared a basic premise, one that was shared

Notes to pages 5–15

253

by much of the American public at the time: “Big Oil” was at the bottom of the shortages and price hikes. Through the collusive control of markets, the supply of oil, and well-funded lobbying efforts, the oil majors had successfully exerted their enormous influence and profiteered from an unprepared American polity. In contrast, Melosi notes that even before the 1973 embargo, the United States was experiencing energy shortages. And a “key to the potential disruption of the economy and society due to oil shortages was rising consumption. Energy consumption had doubled since 1950, while the population rose by only 1.3 times.” See Martin V. Melosi, Coping With Abundance: Energy and Environment in Industrial America (Philadelphia: Temple University Press, 1985), 282 (quote), see also 283–93. Vietor’s argument is further removed from the Big Oil thesis. While he places greater emphasis upon depletion of domestic reserves, Vietor also acknowledged the role of consumption in bringing on the energy crisis. It was, in his view, “Depletion of easily accessible oil and gas deposits in the United States . . . together with runaway demand [that] was the real cause [of the crisis]. In a nation where . . . abundance had prevailed . . . conservation equated to inconvenience or reduced standard of living, neither of which had much popular appeal. [Thus], organized political support for effective conservation was lacking.” See Richard H. K. Vietor, in Energy Policy in America Since 1945: A Study of Business-Government Relations (Cambridge University Press, 1984), 193, 340. 6. Vietor, Energy Policy in America Since 1945, 9. 7. Allan Dodds Frank, “Ace in the Hole,” Forbes (July 5, 1982): 44 (“another card”). 8. James Cook, “A Federal Reserve for oil,” Forbes (March 4, 1991): 86.

CHAPTER ONE 1. David H. Davis, Energy Politics (New York: St. Martin’s Press, 1982, 3rd ed.), 105; James E. Akins, “The Oil Crisis: This Time the Wolf Is Here,” Foreign Affairs, Vol. 51, No. 3 (April 1973): 467 (“other Arabs”), 488 (“measures” through “sake”), 462–90; Author’s interview with James E. Akins, (former) White House Energy Advisor and U.S. Ambassador to Saudi Arabia, February 14, 1997 (telephone interview). 2. National Petroleum Council, Emergency Preparedness for Interruption of Petroleum Imports into the United States, July 1973, An Interim Report of the National Petroleum Council (Washington, D.C.: NPC, 1973), 49. 3. Ibid., 1–14. 4. NPC, Emergency Preparedness for Interruption of Petroleum Imports into the United States, September 1974, A Report of the National Petroleum Council (Washington, D.C.: 1974), 3. 5. NPC, Emergency Preparedness for Interruption of Petroleum Imports into the United States, September 1974, 1–3, 13–21, 97–115. 6. U.S. Congress, Senate, Committee on Interior and Insular Affairs, Strategic Petroleum Reserves, 93rd Congress, 1st Sess., May 30 and July 26, 1973 (Washington, D.C.: GPO, 1973), 2 (Jackson quote), 3–16. 7. Ibid., 422 (Bonner testimony), 101 (Lichtblau testimony). 8. On industry opposition to surge capacity prorationing and inventory requirements, see statement of John H. Lichtblau of the Petroleum Industry

254

Notes to pages 16–18

Research Foundation, U.S. Congress, Senate, Committee on Interior and Insular Affairs, Strategic Petroleum Reserves, 84–93, also 103–106, and Bonner H. Templeton of Mobil Oil, 414, 427. On the Ford administration’s position on the Jackson bill (S. 1586), see Letter, Senator Paul J. Fannin (R-Ariz.) to William E. Timmons, Assistant to the President, 16 August 1974, folder Strategic Petroleum Reserves, box 42, Glenn R. Schleede Files, Ford Library. 9. Peter Allen, The Yom Kippur War (New York: Charles Scribner’s Sons, 1982); Herzog, The Arab Israeli Wars, 153–63. 10. U.S. Energy Information Administration, DOE, Annual Energy Review: 1994 (Washington, D.C.: GPO, July 1995), 139. 11. A detailed yet concise review of the Arab oil embargo and OPEC price increases can be found in “A Review of the Energy Situation During the Arab Oil Embargo,” Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office/White House Collection, Box 18, George Bush Presidential Library. In the secondary literature, see Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Touchstone/ Simon & Schuster, 1992, c. 1991), 614; Melosi, Coping With Abundance, 280; U.S. Congress, House, Committee on Foreign Affairs, The U.S. Oil Shortage and the Arab-Israeli Conflict; DeGoyler and MacNaughton, Twentieth Century Petroleum Statistics, 3, 13; Petroleum Intelligence Weekly, October 20, 1980, 11–12. 12. Memo, “Office of Energy and Strategic Resource Policy Comments on Strategic Petroleum Reserve Papers Forwarded Under Cover Of General Scowcroft’s Memorandum of October 22, 1976,” 12 November 1976, folder Convenience F6-Economic-Energy-Institutional (4), box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, 4, Ford Library; “A Review of the Energy Situation During the Arab Oil Embargo,” Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, George Bush Presidential Library. 13. Office of International Energy Affairs, Federal Energy Administration, U.S. Oil Companies and the Arab Oil Embargo: The International Allocation of Constricted Supplies, prepared for the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, U.S. Senate, January 27, 1975 (Washington, D.C.: GPO, 1975), 7–8, 13–18. 14. In 1973, American power utilities depended upon petroleum products—residual fuel oil, distillate, fuel oil, jet fuel, and petroleum coke—for 22 percent of their boiler fuel needs. By 1997, that figure had fallen to 3.8 percent; EIA, DOE, Annual Energy Review, 1997 (Washington, D.C.: EIA / DOE, 1998), 223. 15. On the energy shortages, see “Impact on America of Arab Oil Cutback,” U.S. News (October 29, 1973): 26; “Pinch at the Pump Begins: Spreading Shock Waves,” Time (November 12, 1973): 107–108; “Facing up to Cold Reality: Down Go the Thermostats,” Newsweek (November 19, 1973): 109–12; “Meanest Winter of the Century: Effect of Petroleum Shortages on New England,” Time (December, 17, 1973): 35; H. P. Allen, “Electric Utilities: Can They Meet Future Power Needs?,” Annals of the American Academy of Political and Social Science (November, 1973): 86–96; “Panic at the Pump,” Time (January 14, 1974): 15–16; on rationing, see “Step Toward Rationing,” Newsweek (May 21, 1973): 76; “What’s Being Done as Gasoline Shortages Grow,” U.S. News (June 18, 1973): 78–79; “Energy Crisis Turns Ugly,” Science News (December

Notes to pages 18–22

255

22, 1973): 391; “Trucks and Trains,” The New Republic (December 22, 1973): 7–8; “Highways of Violence,” Time (February 11, 1974): 28–30; “Payoff for Terror on the Road,” Time (February 18, 1974): 36. 16. “Address to the Nation About Policies to Deal with Energy Shortages, November 7, 1973,” in Public Papers of the Presidents: Richard Nixon, 1973 (Washington, D.C.: GPO, 1975), 916–22. 17. Emergency Petroleum Allocation Act, PL 93–159, United States Statutes at Large, Vol. 87: 1973, November 27, 1973, 87 Stat. 627–635 (Washington, D.C.: GPO, 1974); “Energy Crunch: Who’ll Get Hurt,” U.S. News, November 26, 1973, 17–20. In June 1974, the FEA developed a “Buy / Sell List Program,” under which the 15 largest integrated oil companies were required to sell crude oil, at pre-embargo prices, to approximately 100 small and independent refiners. See Vietor, Energy Policy in America Since 1945, 245. Many industry officials argued that to the extent that crude oil was transferred from larger, more efficient refiners to smaller, less efficient processing refiners, fewer refined products were ultimately made available to consumers. Thus, by discouraging additional imports and allocating the remaining scarce supplies to less efficient refiners, the program worked to aggravate rather than mitigate the effects of the embargo. See National Petroleum Council, Factors Affecting U.S. Oil and Gas Outlook: A Report of the National Petroleum Council (Washington, D.C.: NPC, 1987), 46. 18. Federal Energy Administration, Project Independence Report, Part 1 (Washington, D.C.: GPO, November 1974), 8–11, 19; Project Independence Report, Part 2, 377–91. For an abridged version, see FEA, Project Independence: A Summary (Washington, D.C.: GPO, November 1974); Joel Havemann and James G. Phillips, “Energy Report / Independence Blueprint Weighs Various Options,” National Journal Reports 6, No. 44 (November 2, 1974): 1636. 19. FEA, Project Independence Report, Part 1, 10. 20. Ibid. 21. On the experience with petroleum storage in salt domes, Bill Spanke, in “Salting Away Oil,” Popular Science 212, 77 (January 1978): 77, stated that “Natural gas and petroleum products have been stored safely in salt caverns in several other countries for 20 years.” The FEA’s SPR Plan of 1976 stated that “the feasibility of using leached caverns in salt for storage has been demonstrated in France and Germany, where significant amounts of hydrocarbons are currently being stored.” “In the United States,” the report went on, “natural gas and petroleum-related products have been stored in salt caverns for 20 years. In North America, over 900 solution-mined caverns, with a total capacity exceeding 300 million barrels, have been developed in salt deposits and converted for storage.” See SPR Office / FEA, Strategic Petroleum Reserve Plan, December 15, 1976 (Washington, D.C.: GPO, 1977), 72, 92–93; see also “Energy: Salt Domes,” Newsweek (August 22, 1977): 55. 22. “Impact on America of Arab Oil Cutback,” U.S. News (October 29, 1973): 26; FEA, Project Independence: A Summary (Washington, D.C.: GPO, November 1974), 18; National Petroleum Council Committee on Emergency Preparedness, Emergency Preparedness for Interruption of Petroleum Imports into the United States, 40–45; Robert A. Feldman, The Impact of Oil Import Prices Shocks on Domestic Prices (Boulder, Colo.: Westview Press, 1982), xi– xii, 179–81.

256

Notes to pages 23–25

23. U.S. Senate, Subcommittee On Multinational Corporations Report, Multinational Oil Corporations and U.S. Foreign Policy, 1 (“unprecedented transfer”). A current account surplus, or balance, includes all current international income and expenses for a nation, see David Gisselquist, Oil Prices and Trade Deficits: U.S. Conflicts with Japan and West Germany (New York: Praeger Publishers, 1979), 70–73. See also Knut Anton Mork, Energy Prices, Inflation, and Economic Activity (Cambridge, Mass.: Ballinger Publishing Company, 1981); Jaime R. Marquez, Oil Price Effects and OPEC’s Pricing Policy (Lexington, Mass.: Lexington Books, 1984); Edward R. Fried and Charles L. Schultze, eds., Higher Oil Prices and the World Economy: The Adjustment Problem (Washington, D.C.: The Brookings Institution, 1975). 24. Jack Beatty, “Who Speaks for the Middle Class?,” The Atlantic Monthly, Vol. 273, No. 5 (May 1994): 68. 25. David A. Couts and George Horwich, “Government Contingency Planning for Petroleum-Supply Interruptions: A History and a Market Perspective,” in George Horwich and Edward J. Mitchell, eds., Policies for Coping with Oil-Supply Disruptions (Washington, D.C.: American Enterprise Institute, 1982), 131–32; National Petroleum Council, Emergency Preparedness for Interruption of Petroleum Imports into the United States, 40–45. 26. Anthony Sampson, The Seven Sisters: The Great Oil Companies and the World They Made (New York: The Viking Press, 1975); Robert Engler, The Brotherhood of Oil: Energy Policy and the Public Interest (University of Chicago Press, 1977); also in this vein, see Robert Sherrill, The Oil Follies of 1970– 1980: How the Petroleum Industry Stole the Show (and Much More Besides) (New York: Anchor Press, 1983). 27. U.S. Congress, Senate, Committee on Insular and Interior Affairs, Special Subcommittee on Integrated Oil Operations, Market Performance and Competition in the Petroleum Industry, Part 3, 93rd Cong., 1st Sess., December 12 and 13, 1973 (Washington, D.C.: GPO, 1973), 829–69, 1032–53, 1873–76; Louis M. Kohlmeier, “Antitrust Legislation Becomes Fashionable,” National Journal Reports (November 2, 1974): 1659; U.S. Federal Trade Commission, Staff Report, Concentration Levels and Trends in the Energy Sector of the U.S. Economy (Washington, D.C.: GPO, 1974), 67–95; U.S. Senate, Committee on the Judiciary, Subcommittee on Antitrust and Monopoly, Interfuel Competition, 94th Cong., 1st Sess., June 17, 18, 19, July 14, October 21 and 22, 1975 (Washington, D.C.: GPO, 1975); Senate, Committee on the Judiciary, Subcommittee on Antitrust and Monopoly, The Petroleum Industry, Part 3, 94th Cong., 1st Sess., January 21–February 18, 1976 (Washington, D.C.: GPO, 1976), 1852– 80; Senate, Committee on Insular and Interior Affairs, Special Subcommittee on Integrated Oil Operations, The Structure of the U.S. Petroleum Industry: A Summary of Survey Data, 94th Cong., 2nd Sess. (Washington, D.C.: GPO, 1976); Edward M. Kennedy, “Big Oil’s Ominous Energy Monopoly,” Business and Society Review (Summer 1978): 16–20; Chase Manhattan Bank, Annual Financial Analysis of a Group of Petroleum Companies, 1975 (New York: Chase Manhattan Bank, September 1976), and 1978 (New York: Chase Manhattan Bank, December 1979); American Petroleum Institute, Witnesses for Oil: The Case Against Dismemberment (Washington, D.C.: API, 1976), 35–190. 28. “OCS Oil: Mammoth Lease Plan Encounters Heavy Opposition,” Sci-

Notes to pages 26–28

257

ence (November 15, 1974): 615 (“not our job”); Michael J. P. Boland, “The Consumer Is in Charge,” Environment, Vol. 25, No. 2 (March 1983): 10–15, 35–37. 29. “Too Little for Rainy Day,” Forbes (April 30, 1979): 74. 30. While the United States had become dependent on foreign oil, it did not suffer the abject dependency of France, Germany, or Japan. Even with the energy crises, the United States still had an advantage over the Europeans and the Japanese in that it still produced about 50 percent of the oil it used, and about 70 percent of its total energy needs. 31. Krapels, Oil Crisis Management, 118 (“complex oil market”), 56–75, 86–87. 32. On France’s position toward the IEA, see Edward N. Krapels, “International Energy Security Policy: A Reappraisal,” in U.S. Congress, House, Energy Emergency Preparedness, Hearings before the Subcommittee on Fossil and Synthetic Fuels of the Committee on Energy and Commerce, 98th Cong., 2nd Sess., February 1, 2, and 21, 1984 (Washington, D.C.: GPO, 1984), 24. 33. U.S. Congress, Senate, Committee on Interior and Insular Affairs, Agreement on an International Energy Program (Washington, D.C.: GPO, 1974), 1–24; IEA, Oil Supply Security, 17–24; IEA, The History of the International Energy Agency, Volume I: Origins and Structure (Paris: OECD / IEA, 1994), 115. 34. FEA / DOE, The Role of Foreign Governments in the Energy Industries (Washington, D.C.: GPO, October 1977), 111–160, 191–204, 321–30; U.S. Congress, Senate, Agreement on an International Energy Program, 1–24; IEA, Oil Supply Security, 17–24; IEA, The History of the International Energy Agency, Volume I, 115; IEA, The History of the International Energy Agency, Volume III: Principal Documents (Paris: OECD / IEA, 1995), 93–94; Memo, C. Arthur Borg, Executive Secretary, Department of State, to Brent Scowcroft, The White House, Subject “Strategic Petroleum Reserve Plan,” December 8, 1976, folder Convenience F6-Economic-Energy-Institutional (4), box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, 4, Gerald R. Ford Presidential Library. 35. IEA, Oil Supply Security, 17–24; IEA, The History of the International Energy Agency, Volume I, 115; IEA, The History of the International Energy Agency, Volume III, 93–94. 36. Richard Johns, “Crude Stocks: Building up a Panic Buffer,” Houston Chronicle, May 28, 1984, 2–2; Daniel Yergin and Joseph Stanislaw, “The U.S. Strategic Petroleum Reserve and U.S. Energy Security,” Council on Foreign Relations Paper, Cambridge Energy Associates Report, April 16, 1990, in U.S. Congress, Senate, Committee on Energy and Natural Resources, World Oil Outlook (Washington, D.C.: GPO, 1990), 152–55; IEA, Oil Supply Security, 17–24; IEA, The History of the International Energy Agency, Volume I, 115; IEA, The History of the International Energy Agency, Volume III, 93–94. 37. FEA, Project Independence Report, 9; Havemann and Phillips, “Energy Report / Independence Blueprint Weighs Various Options,” 1653; Neil de Marchi, “The Ford Administration: Energy as a Political Good,” Energy Policy in Perspective, 482–87; Thomas H. Tietenberg, Energy Planning and Policy: The Political Economy of Project Independence (Lexington, Mass.: Lexington Books, 1976), 88–92.

258

Notes to pages 29–36

38. The FEA’s Project Independence Report had explored the possibilities of thermal standards for homes and offices, and efficiency standards for automobiles and electrical products; Treasury Department officials balked at the being “in the business of deciding for John Q. Public how warm his bedroom should be and how bright his dining room should be.” Other executive branch departments and agencies had other criticisms. See FEA, Project Independence Report, 9; Havemann and Phillips, “Energy Report / Independence Blueprint Weighs Various Options,” 1653; de Marchi, “The Ford Administration: Energy as a Political Good,” 482–87; Tietenberg, Energy Planning and Policy, 88–92; Author’s interview with Frank Zarb, (former) FEA Administrator, January 28, 1997 (telephone interview). Ford’s proposed Energy Independence Act of 1975 was introduced in the House as H.R. 2633 and 2650; in the Senate as S. 594. 39. National Petroleum Council, Committee on Emergency Preparedness, Petroleum Storage for National Security (Washington, D.C.: NPC, 1975), 119–20 (Carlson letter). 40. National Petroleum Council, Petroleum Storage for National Security, i (“sound objective”), 8 (“protect against”), ii (“genuine security”). 41. Ibid., 19 (“ultimately seek”), 21 (“Federal government”). 42. Ibid., ii (“Nation as a whole” through “difficult recommendation”). 43. National Petroleum Council, Emergency Preparedness for Interruption of Petroleum Imports into the United States: A Report of the National Petroleum Council (Washington, D.C.: NPC, September 1974), 7 (“legal and economic problems,” “timely”); National Petroleum Council, Petroleum Storage for National Security, 12 (“within several months”); Interview with John Guy, Deputy Executive Director, National Petroleum Council, National Petroleum Council Offices, Washington, D.C., November 13, 1996, Interviewed by Joseph Pratt. 44. National Petroleum Council, Petroleum Storage for National Security, 108 (“more compact”). 45. Ibid., 21, 1–24. 46. Ibid., 7–8 (“insure against” through “resource development”). 47. Ibid., 104 (“Since protection” through “called upon”). 48. Ibid., i (“imperative”). 49. “Strategic Energy Reserves Act of 1975,” Cong. Rec., 94th Cong., 1st Sess., February 12, 1975, Vol. 121, Part 3 (Washington, D.C.: GPO, 1975), 3014 (Jackson quote). 50. On the “entitlements” program, see Vietor, Energy Policy in America Since 1945, 246: National Petroleum Council, Factors Affecting U.S. Oil and Gas Outlook, 47; Goodwin, Energy Policy in Perspective, 466–73. 51. In 1976, a task force appointed by President Ford concluded that the costs of FEA’s regulatory program—particularly the entitlements program— outweighed its benefits. See Paul W. MacAvoy, ed., Federal Energy Administration Regulation: A Report of the Presidential Task Force (Washington, D.C.: American Enterprise Institute for Public Policy Research, 1977), 139–76. 52. U.S. Congress, Energy Policy and Conservation Act of 1975 (hereafter cited as EPCA), PL 94–163, Statutes At Large, Vol. 89, December 22, 1975, 89 Stat. 871–969 (Washington, D.C.: GPO, 1977); “Senate Considers Strategic Energy Reserves,” Congressional Quarterly Weekly Report (CQWR) (July 5, 1975): 1437–38; “Senate Action: Energy Reserves,” CQWR (July 12, 1975):

Notes to pages 36–42

259

1503; “House Passes Energy Policy Bill, 255–148,” CQWR (September 27, 1975): 2043; “Final Energy Bill Faces Uncertain Fate,” CQWR (December 13, 1975): 2689–93; Cong. Rec., 94th Cong., 1st Sess., May 7, 1975, Vol. 121, Part 11 (Washington, D.C.: GPO, 1975), 13490–91; Cong. Rec., 94th Cong., 1st Sess., June 20, 1975, Vol. 121, Part 15 (Washington, D.C.: GPO, 1975), 20001–2. See also Letter, Donald H. Rumsfeld, Secretary of Defense, to Frank G. Zarb, FEA Administrator, 3 November 1976, folder Convenience File-Economics-EnergyInstitutional 4, box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, Gerald R. Ford Library. 53. The Arab embargo had involved the raw material crude oil, not refined petroleum products, such as automobile gasoline and jet fuel. But the 1975 EPCA legislation included crude oil under an umbrella definition of petroleum products. See EPCA, Sec. 3(3). 54. EPCA, Sec. 153, 89 Stat. 882 (SPR Office); EPCA, Sec. 155(b), 89 Stat. 884 (ESR and regional protection). 55. “Senate Action: Energy Reserves,” CQWR (July 12, 1975): 1503; “Energy and Environment: Action Completed,” CQWR (December 27, 1975): 2850–52; EPCA, Sec. 156, 89 Stat. 885 (IPR provision). Also on the debate in the Senate over the IPR provision, and for Zarb’s letter to Senator Jackson, see Cong. Rec., 94th Cong., 1st Sess., July 8, 1975, Vol. 121, Part 11 (Washington, D.C.: GPO, 1975), 21438–446; Author’s interview with Frank Zarb, (former) FEA Administrator, January 28, 1997 (telephone interview); JRB Associates, Inc., Final Report: Feasibility Study For Requiring Storage Of Crude Oil, Residual Fuel Oil And / Or Refined Petroleum Products By Industry, Submitted to the Federal Energy Administration, December 2nd, 1976 (McLean, Virginia: JRB Associates, Inc., 1976), 1–2. 56. EPCA, Sec. 159(e)(B), 89 Stat. 887 (eminent domain provision). 57. EPCA, Sec. 158, 89 Stat. 886 (Other Storage Reserves provision). 58. EPCA, Sec. 166(2), 89 Stat. 890 (SPR appropriation). In a December 8, 1975, letter from Jim Cannon, President Ford’s Domestic Advisor, to FEA Administrator Frank G. Zarb on the desirability of the EPCA legislation, Cannon wrote that “On its merits, the legislation seems right on the margin of whether it is good enough to sign, or so bad it has to be vetoed. From the standpoint of the President’s policy decision to reduce the Federal government, the bill is bad because it would increase Federal intervention. However, I believe there is a larger question throughout the country: ‘Will Washington ever get together on an energy program?’ . . . Consequently, I recommend that the President sign this imperfect bill with a candid message pointing to the good and the bad in the bill, and stating that amendments will be sent to Congress to correct these faults,” Letter, Cannon to Zarb, 8 December 1975, folder 11 / 25 / 75 to 12 / 12 / 75, Frank G. Zarb Papers, box 2, Gerald R. Ford Library.

CHAPTER TWO 1. Strategic Petroleum Reserve Office, Early Storage Reserve Plan (Washington, D.C.: GPO, 1976), 7–11. 2. FEA paper, “SPR Size,” October 6, 1976, 2, folder Convenience F6Economic-Energy-Institutional (4), box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, 4, Gerald R. Ford Presidential Library.

260

Notes to pages 42–47

3. Ibid., 4–5. The FEA also prepared a separate paper on this issue, entitled “Supply Interruption Scenarios for Use in the SPR,” October 1, 1976, folder Convenience F6-Economic-Energy-Institutional (4), box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, 4, Ford Library. This “Supply Interruption Scenarios” paper examined the same scenarios outlined in the “SPR Size” paper, but in greater detail. 4. FEA paper, “SPR Size,” October 6, 1976, 7–9. 5. Ibid., 11. 6. Ibid., 18. 7. Ibid., 2. 8. Letter, Brent Scowcroft, Assistant to the President for National Security Affairs, to Frank G. Zarb, FEA Administrator, Subject “Your Papers on the Strategic Petroleum Reserves,” January 3, 1977; “CEA’s Response to Zarb’s Memo on SPR,” December 10, 1976; Memo, George H. Dixon, Acting Secretary of Treasury, to Brent Scowcroft, Assistant to the President for National Security Affairs, Subject “Strategic Petroleum Reserves,” October 30, 1976; Memo, U.S. Department of Commerce, The Assistant Secretary for Policy, to the Office of Energy and Strategic Resource Policy, “Comments on Strategic Petroleum Reserve Papers, Forwarded Under Cover of General Scowcroft’s Memorandum of October 22, 1976,” November 12, 1976 (“not unreasonable”). These materials can be found in folder Convenience F6-Economic-Energy-Institutional (4), box A5, Henry A. Kissinger and Brent Scowcroft: Temporary Parallel File, 4, Ford Presidential Library. 9. Memo, “Comments on Strategic Petroleum Reserve Papers, Forwarded Under Cover of General Scowcroft’s Memorandum of October 22, 1976,” November 12, 1976, Ford Presidential Library. 10. SPR Office / FEA, Strategic Petroleum Reserve Plan, December 15, 1976 (Washington, D.C.: GPO, 1977), 10. 11. SPR Office / FEA, Strategic Petroleum Reserve Plan, 10 (“would be desirable”). 12. By the mid-1990s, the SPR held more than 590 million barrels of crude—66 percent sour, 34 percent sweet. But the DOE’s specifications for sour crudes, which prescribed a maximum 1.99 percent sulfur content, made most of the SPR oils, according to SPR official Rick Furiga, “pretty low in sulfur content.” Author’s interview with Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves, September 5, 1996, DOE Headquarters, Washington, D.C.: SPR Office, DOE, Strategic Petroleum Reserve Annual Report, February 15, 1996 (Washington, D.C.: SPR Office / DOE, 1996), 18, 55. 13. SPR Office / FEA, Strategic Petroleum Reserve Plan, 7–11, 14, 15–16, 20, 23, 38–42, 45–66, 93–94, 67–104, 179, 195. The eight ESR candidate sites were Bayou Choctaw, West Hackberry, Cote Blanche Island, and Weeks Island in Louisiana; Bryan Mound and Kleer in Texas; Central Rock, Kentucky; and Ironton, Ohio. The thirteen SPR candidate sites were Black Bayou, Chacoula, Eugene Island, Iberia, Napoleonville, Vinton, and White Castle in Louisiana; Allen, Big Hill, Damond Mound, Nash, San Luis Pass, and West Columbia in Texas. 14. In July 1980, under Congressional mandate, the DOE transferred oil from the Elk Hills-NPR to the SPR. In February 1999, the DOE announced plans to store 28 million barrels of royalty oil in the SPR, received from production in

Notes to pages 47–53

261

federal offshore lands in the Gulf of Mexico. See DOE Press Release, “Richardson Announces Plan to Re-fill the Strategic Petroleum Reserve,” February 11, 1999. 15. U.S. Congress, House, Strategic Petroleum Reserve, Hearing Before the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, 95th Cong., 1st Sess., February 16, 1977 (Washington, D.C.: GPO, 1977), 5; SPR Office / FEA, Strategic Petroleum Reserve Plan, 46–47, 61–66. 16. On the $500 million in savings via “entitlements,” see statement of John F. O’Leary, U.S. Congress, House, Strategic Petroleum Reserve, Hearing Before the Subcommittee on Energy and Power, February 16, 1977, 5; SPR Office / FEA, Strategic Petroleum Reserve Plan, 46–47, 61–66; U.S. Congress, Senate, Review of the Strategic Petroleum Reserve Plan, Hearing Before the Committee on Interior and Insular Affairs, 95th Cong., 1st Sess., February 4, 1977 (Washington, D.C.: GPO, 1977), 25. 17. On the reasons for and possible benefits of using foreign oil to stock the SPR, see statement of U.S. Senator from Louisiana J. Bennett Johnston, in U.S. Congress, Senate, Review of the Strategic Petroleum Reserve Plan, February 4, 1977, 25; Author’s interview with Wayne Cuttrell, (former) Director of Oil Acquisitions / Contract Administrator, SPR Office, FEA and the SPR-PMO, 1975–1984, November 5, 1998 (telephone interview) (“The reasoning” through “bargaining chip”). Through 1978, the DFSC purchased 33.4 percent of SPR crude oil from Mexico; 24 percent from the British North Sea; 19.8 percent from Libya; 17.8 percent from Iran; 3.2 percent from Saudi Arabia; 1.0 percent from Venezuela; .5 percent from Ecuador; and .3 percent from Algeria. See SPR Office, DOE, Annual Strategic Petroleum Report, February 16, 1979 (Washington, D.C.: GPO, 1979), 33. 18. JRB Associates, Inc., Final Report: Feasibility Study For Requiring Storage Of Crude Oil, Residual Fuel Oil And / Or Refined Petroleum Products By Industry, Section 1, pages 2–3, Section 2, pages 5–6, 8–9, 42, Section IV, page 6. 19. SPR Office / FEA, Strategic Petroleum Reserve Plan, December 15, 1976 (Washington, D.C.: GPO, 1977), 145 (“budgetary benefits”). 20. David Leo Weimer, The Strategic Petroleum Reserve: Planning, Implementation, and Analysis (Westport, Conn.: Greenwood Press, 1982), 145. 21. Letters, Derr to the FEA, 5 August 1976, and Bradley to Seidman, 23 August 1976, folder From Frank Bradley Re: Strategic Petroleum Reserve, box 10, L. William Seidman Papers, Gerald R. Ford Library, (Kerr and Bradley quotes). 22. EPCA, Sec. 161(a), 3(8). 23. EPCA, Sec. 161(d). 24. SPR Office / FEA, Strategic Petroleum Reserve Plan, 11 (“flexibility”), 42–43, 161 (“infeasible”),–178. 25. IEA, The History of the International Energy Agency, Volume II: Major Policies and Actions (Paris: OECD / IEA, 1995), 38–39; IEA, The History of the International Energy Agency, Volume III: Principal Documents (Paris: OECD / IEA, 1995), 149 (“increased risk”), 144–52. 26. U.S. Department of Energy, Assistant Secretary for Resource Applications, Strategic Petroleum Reserve Plan Amendment No. 3: Distribution Plan for the Strategic Petroleum Reserve, Energy Action DOE No. 5, October 31,

262

Notes to pages 53–57

1979 (Washington, D.C.: GPO, 1979) 15 (“primary purpose” through “crude oil and products”). 27. SPR Office / FEA, Strategic Petroleum Reserve Plan, 11, 42–43, 161– 78; EPCA, Sec. 161(a), Sec. 3(8); U.S. Department of Energy, Strategic Petroleum Reserve Plan Amendment No. 3: Distribution Plan for the Strategic Petroleum Reserve, October 31, 1979, 4–20; U.S. Congress, House, Energy Action DOE No. 5 (An Amendment to the Strategic Reserve Plan), Hearings Before the Subcommittee on Energy and Power, Committee of Interstate and Foreign Commerce, 95th Cong., 1st Sess., November 9, 1979 (Washington, D.C.: GPO: 1980); DOE, A Report to the Congress: Strategic Petroleum Reserve Drawdown Plan, Amendment No. 4, December 1, 1982 (Washington, D.C.: DOE, 1982), 3. 28. In his testimony before the Senate Interior and Insular Committee, Assistant FEA Administrator Thomas E. Noel characterized dumping into the Gulf of Mexico as the most “attractive proposition for disposal of large amounts of brine,” see Review of the Strategic Petroleum Reserve Plan, 23. 29. SPR Office / FEA, Strategic Petroleum Reserve Plan, 205–215, 235 (“extremely low”), 217–49. 30. See statements and testimony of Monte Canfield Jr., of the GAO, Thomas E. Noel of the FEA, and report put out by the Comptroller General of the United States, GAO, Issues Needing Attention in Developing the Strategic Petroleum Reserve, both contained in U.S. Congress, House, Subcommittee on Energy and Power, Strategic Petroleum Reserve, February 16, 1977, 140–91. 31. See statements and testimony of Joseph W. Cole Jr., of the Petrochemical Ecology Committee of Louisiana, and Kenneth S. Kamlet, of the National Wildlife Federation, Strategic Petroleum Reserve, February 16, 1977, 221–56; statement of John H. Lichtblau, Director, Petroleum Industry Research Foundation, Review of the Strategic Petroleum Reserve Plan, 103–110. 32. Statement of Zeb D. Alford, New England Regional Council, Review of the Strategic Petroleum Reserve Plan, 117–18, and New England Federal Regional Council, “A Report on Emergency Petroleum Storage in New England” (October 1976), Ibid., 184–86, 131–230; see also U.S. Congress, House, Strategic Petroleum Reserves, Hearing Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, 95th Cong., 1st Sess., February 16, 1977 (Washington, D.C.: GPO, 1977); Review of the Strategic Petroleum Reserve Plan, 2–3. 33. Statement of John H. Lichtblau, Director, Petroleum Industry Research Foundation, Review of the Strategic Petroleum Reserve Plan, 104 (“crash program”), 103–110. 34. Testimony of John F. O’Leary, Review of the Strategic Petroleum Reserve Plan, 20 (“get on with” through “petroleum”), 20–30. Section 159(b) of the EPCA provided that the Strategic Petroleum Reserve Plan would be effective if, after forty-five days of continuous Congressional session, there was no resolution of disapproval from either the House or Senate. While the FEA submitted the SPR Plan to Congress on December 15, 1976, because Congress was not in session, the effective date of transmittal was February 16, 1977; thus the SPR Plan became effective forty-five days later on April 18, 1977. 35. U.S. Congress, House, Strategic Petroleum Reserve, February 16, 1977, 3; JRB Associates, Inc., Feasibility Study For Requiring Storage Of Crude Oil,

Notes to pages 60–69

263

Residual Fuel Oil And / Or Refined Petroleum Products By Industry, Section 2, page 10. 36. SPR Office, FEA, Strategic Petroleum Reserve Plan, 179–93; SPR Office, FEA, Strategic Petroleum Reserve Plan Amendment No. 1: Acceleration of the Development Schedule, Energy Action No. 12, May 25, 1977 (Washington, D.C.: GPO, 1977), 35–72; SPR Office, DOE, Annual Strategic Petroleum Reserve Report, DOE / RA-0033, February 16, 1979 (Washington, D.C.: GPO, 1979), 18–19, A1–A28. 37. “U.S. Moves on Strategic Stockpiling of Oil,” Petroleum Economist (February 1977): 52; U.S. Department of Energy, Energy Insider, July 10, 1978 (Washington, D.C.: DOE, 1978), 1; Author’s interview with C. Curtis Johnson, (former) SPR Project Manager, Dyn-McDermott office building, New Orleans, Louisiana, October 28, 1996; Author’s interview with James R. Schlesinger, (former) Secretary of Energy, June 26, 1997 (telephone interview). 38. “Stockpile Oil Valve is Opened,” The New Orleans Times-Picayune, July 22, 1977, Section 1, page 7; Edward Symonds, “U.S. Stockpile Programme Expected to Meet Target,” Petroleum Economist (August 1977): 302; DOE, Strategic Petroleum Reserve Annual Report, February 15, 1996 (Washington, D.C.: DOE, 1996), 1. 39. DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” DOE / FE-0214P, January 1991 (Washington, D.C.: DOE, 1991), 5 (“pinpricks”). 40. U.S. Congress, House, Strategic Petroleum Reserve: Reprogramming of Funds, Hearing Before the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, 95th Cong., 2nd Sess., December 18, 1978 (Washington, D.C.: GPO, 1979), 21. 41. SPR Office, Department of Energy, “Impacts of Regulation on the Strategic Petroleum Reserve: A Selective Analysis,” in U.S. Cong., House, Strategic Petroleum Reserves: Oil Supply and Construction Problems, Hearing Before the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, 96th Cong., 2nd Sess., September 10, 1979 (Washington, D.C.: GPO, 1980), 79–95; Ann Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” CQWR (February 3, 1979): 204–205; W. A. Bachman, “Problems Plague U.S. Crude Storage Program,” O&G Journal (August 6, 1979): 49–53; Robert G. Lawson, “Strategic Petroleum Reserve Construction Ends First Phase,” O&G Journal (July 21, 1980): 47–53. 42. Author’s Interview with Ted Siomporas, (former) Director of Procurement, SPR-PMO, 1977–1980, December 15, 1997 (telephone interview). 43. Interview with Ted Siomporas, December 15, 1997. 44. U.S. Congress, House, Strategic Petroleum Reserves: Oil Supply and Construction Problems, 2, 65–66; Transcript, “Oil in the Bank,” 60 Minutes (CBS Documentary), Vol. XII, No. 2, September 23, 1979, 15; Christopher Drew, “Salt Dome Oil Storage Wasteful, Says Energy Department Officials,” New Orleans Times-Picayune, July 28, 1980, 6–4. 45. Allan Dodds Frank, “Ace in the Hole,” Forbes (July 5, 1982): 44; “Oil Storage Whistleblower stands by story,” United Press International release, April 1, 1982 (electronic periodical publication); “U.S. Will Have to Change SPR Fill Techniques, Capacity Plans: DOE Aide,” Platt’s Oilgram News, Vol.

264

Notes to pages 69–74

60, No. 148 (August 3, 1982): 4; Author’s interview with James B. Edwards, (former) Secretary of Energy, April 18, 1997, (telephone interview); Author’s interview with John W. Bartholomew, (former) Assistant Secretary for the SPR, 1979–1996, April 6, 1998 (telephone interview); Interview with Wayne Cuttrell, November 5, 1998; “DOE rebuts reports of inferior oil in strategic reserve,” O&G Journal (April 9, 1984): 48–49; Patrick Crow, “SPR: A growing cushion against shock of lost U.S. crude imports,” O&G Journal (June 4, 1984): 30. 46. Interview with Ted Siomporas, December 15, 1997. 47. Author’s interview with John Scango, (former) SPR Assistant Project Manager for Engineering, January 9, 1997 (telephone interview); Author’s interview with Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves, September 5, 1996, DOE Headquarters, Washington, D.C.; SPR Office, DOE, “Impacts of Regulation on the Strategic Petroleum Reserve: A Selective Analysis,” 79–95; Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” CQWR, 204–205; Bachman, “Problems Plague U.S. Crude Storage Program,” O&G Journal, 49–53. 48. Interview with John Scango, January 9, 1997. In 1992, the DOE announced that it would decommission the Sulphur Mines site. Ever since the government acquired it in 1979, it had the highest maintenance costs of any SPR site. In 1995, the DOE announced that it would decommission the Weeks Island site, which had begun to develop crevasses and faults in the surrounding salt-dome area above the mine, allowing groundwater to seep into the oil storage area. Both sites were less than optimal in terms of structural soundness for storing oil and had been chosen when the pressure was highest to “get oil in the ground.” In both cases, the stored oil was drawn down and removed to the Bayou Choctaw and Big Hill sites. 49. Interview with John Scango, (former) SPR Assistant Project Manager for Engineering, January 9, 1997 (“Our biggest problem” through “done before”). 50. Ibid. 51. “Oil in the Bank,” transcript, 60 Minutes documentary, September 23, 1979, 13 (DeLuca quote). 52. Comptroller General, GAO, Questionable Suitability of Certain Salt Caverns And Mines For The Strategic Petroleum Reserve, EMD-78–65, August 14, 1978 (Washington, D.C.: GAO, 1978), i–vi, 1–6, 17–23; SPR Office, DOE, “Impacts of Regulation on the Strategic Petroleum Reserve: A Selective Analysis,” 79–95; Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” CQWR, 204–205; Bachman, “Problems Plague U.S. Crude Storage Program,” O&G Journal, 49–53; Lawson, “Strategic Petroleum Reserve Construction Ends First Phase,” O&G Journal, 47–53; U.S. Government Accounting Office (GAO), “Need to Minimize Risks of Using Salt Caverns for the Strategic Petroleum Reserve,” January 9, 1978 (Washington, D.C.: GAO, 1978). 53. U.S. Department of Energy, Report on the Explosion, Fire, and Oil Spill Resulting in One Fatality and Injury on September 21, 1978, at Well 6 of Cavern 6 at the West Hackberry, Louisiana Oil Storage Site of the Strategic Petroleum Reserve, DOE / EV-0032, November 1978 (Washington, D.C.: GPO, 1978), (committee quote) 1–3. 54. DOE, Energy Insider, July 10, 1978, 1; Pelham, “Energy Department

Notes to pages 75–80

265

Trying to Work Out Problems of Costly Storage Program,” CQWR (February 3, 1979): 204–205; Bachman, “Problems Plague U.S. Crude Storage Program,” 49–53; SPR Office, DOE, Annual Strategic Petroleum Report, February 16, 1979 (Washington, D.C.: GPO, 1979), 42–46; Author’s interview with William C. Gibson Jr., SPR Project Manager, October 28, 1996, Project Management Office, 900 Commerce Road East, New Orleans, Louisiana (“catastrophic event”); Author’s interview with C. Curtis Johnson, October 28, 1996. 55. “Stockpile Oil Valve Is Opened,” The New Orleans Times-Picayune, July 22, 1977, Section 1, page 7 (“perfect demonstration”); “Oil in the Bank,” transcript, 60 Minutes documentary, September 23, 1979, 13 (“And so we stopped them”). 56. SPR Office, “Impacts of Regulation on the Strategic Petroleum Reserve: A Selective Analysis,” U.S. Cong., House, Strategic Petroleum Reserves: Oil Supply and Construction Problems, 91 (“impingement”). 57. Author’s Interview with Harry A. Jones, (former) DOE Deputy Assistant Secretary for the SPR, 1980–1981, November 9, 1997 (telephone interview) (“strong-armed”); Interview with Ted Siomporas, December 15, 1997 (“quid pro quo”); Author’s interview with Jan Nichols-Fletcher, (former) Chief of Administrative Division, SPR-PMO, 1978–1984, December 15, 1997 (telephone interview). 58. Letter, Edwin W. Edwards to author, July 1, 1997; Weimer, The Strategic Petroleum Reserve: Planning, Implementation, and Analysis (Westport, Conn.: Greenwood Press, 1982), 51 (“rat hole”). 59. Interview with Richard D. Furiga, September 5, 1996 (“shrimp nets”). 60. U.S. Congress, House, Strategic Petroleum Reserve: Reprogramming of Funds, 27 (“five months ago”). 61. U.S. Senate, Strategic Petroleum Reserve-DOE Energy Action No. 1, Hearing Before the Subcommittee on Energy Production and Supply of the Committee on Energy and Natural Resources, 95th Cong., 2nd Sess., April 10, 1978 (Washington, D.C.: GPO, 1978), 39–40; “Salt-makers map impact of oil storage,” Chemical Week (August 24, 1977): 36; Ann Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” CQWR (February 3, 1979): 204–205; Bachman, “Problems Plague U.S. Crude Storage Program,” 49–53; SPR Office, “Impacts of Regulation on the Strategic Petroleum Reserve: A Selective Analysis,” U.S. Cong., House, Strategic Petroleum Reserves: Oil Supply and Construction Problems, 79–95; Ruth Davis, “National Strategic Petroleum Reserve,” Science, Vol. 213 (August 7, 1981): 618–22; Allan Dodds Frank, “Ace in the Hole,” Forbes (July 5, 1982): 43–44. The Department of Energy was still addressing the concerns of local oyster-harvesters about the environmental implications of brine disposal in the Gulf in 1980. See letter of Luke V. Petrovich, Louisiana Oyster Dealers and Growers Association, to U.S. Representative Lyndy Boggs (D-La.), February 8, 1980, in Lyndy Boggs Papers, Folder 1980, Federal Agencies, Energy, S.P.R.O., Subject Files, Manuscripts Collection 1000, Special Collections, Howard-Tilton Memorial Library, Tulane University, New Orleans, Louisiana. 62. Author’s interview with James R. Schlesinger, (former) Secretary of Energy, June 26, 1997 (“We didn’t know”); Jimmy Carter, Keeping Faith: Memoirs of a President (London: Bantam, 1982), 92 (“deeply resented”),–97.

266

Notes to pages 80–85

63. “Oil in the Bank,” transcript, 60 Minutes documentary, September 23, 1979, 10 (“What they did not do”). 64. Interview with James R. Schlesinger, (former) Secretary of Energy, June 26, 1997 (“The one billion barrel goal”); Memo, President Carter to James Schlesinger, April 21, 1997, “FG 6–1–1 / Schlesinger, James, 1 / 20 / 77–5 / 31 / 77” folder, Box FG-62, Subject File, Federal Government-Organizations, White House Central Files, Jimmy Carter Library, Atlanta, Georgia. 65. “The Energy Problem, April 18, 1977,” and “National Energy Plan, April 20, 1977,” in Public Papers of the Presidents: Jimmy Carter, Book I (Washington, D.C.: GPO, 1977), 656, 660, 664; James L. Cochrane, “Carter Energy Policy and the Ninety-Fifth Congress,” in Craufurd D. Goodwin, ed., Energy Policy in Perspective: Today’s Problems, Yesterday’s Solutions (Washington, D.C.: The Brookings Institution, 1981), 551–83; James Schlesinger, America at Century’s End (New York: Columbia University Press, 1989), 94–99. 66. SPR Office, FEA, Strategic Petroleum Reserve Plan Amendment No. 1: Acceleration of the Development Schedule, Energy Action No. 12, May 25, 1977 (Washington, D.C.: GPO, 1977), 94, 4–13, 15; U.S. Congress, House, Amendment No. 1 to the Strategic Petroleum Reserve Plan, Hearing Before the Subcommittee on Energy Production and Supply, Committee on Energy and Natural Resources, 95th Cong., 1st Sess., June 9, 1977 (Washington, D.C.: GPO, 1977), 3 30, 40, 58; Section 159(d) of the EPCA authorizes amendments to the SPR Plan; Section 551 states that an amendment to the SPR Plan would become effective if neither House of Congress disapproved, or both Houses approved, within fifteen days of continuous session after the amendment’s transmittal. 67. SPR Office, FEA, Strategic Petroleum Reserve Plan: Expansion of the Strategic Petroleum Reserve Amendment No. 2, Energy Action DOE No. 1, March 1978 (Washington, D.C.: GPO, 1978), 3–4 (“far more dependent” through “hardship”), 5–7; U.S. Senate, Strategic Petroleum Reserve-DOE Energy Action No. 1, Hearing Before the Subcommittee on Energy Production and Supply, April 10, 1978, 2–12, 15; SPR Office, FEA, Strategic Petroleum Reserve Plan: Expansion of the Strategic Petroleum Reserve Amendment No. 2, Energy Action DOE No. 2, June 1978 (Washington, D.C.: GPO, 1978). 68. U.S. Congress, House, “Cost / Benefit of the Strategic Petroleum Reserve,” Department of Energy Authorization-Fiscal Year 1979, Hearings Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, 95th Cong., 2nd Sess., February 16, 17, and 23, 1978 (Washington, D.C.: GPO, 1978), 152–53, 102–104; “Carter Energy Proposals Carry No Major Initiatives,” CQWR (January 28, 1978): 177; Richard Corrigan, “No Room in the Caverns—U.S. Running Out of Storage Space for Oil Reserve,” National Journal (October 31, 1981): 1939 (“poor estimate costs” through “another embargo”). 69. U.S. Congress, “The Department of Energy Organization Act,” PL 95–91, U.S. Statutes At Large: 1977, Vol. 91, August 4, 1977, 91 Stat. 565–613 (Washington, D.C.: GPO, 1980); Christopher Madison, “The Department of Energy at Three: Still Trying to Establish Itself,” National Journal (October 4, 1980): 1644–49. 70. Letter to Undersecretary John M. Deutch from Jay R. Brill, October 19, 1979, in U.S. Congress, House, Filling the Strategic Petroleum Reserve:

Notes to pages 86–90

267

Oversight; and H.R. 7252: Use of Naval Petroleum Reserves, Hearing Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, 96th Cong., 2nd Sess., April 25, May 21, and September 15, 1980 (Washington, D.C.: GPO, 1980), 70 (Brill quote); Yergin, The Prize, 663 (Schlesinger quote). 71. “Carter Energy Proposals Carry No Major Initiatives,” CQWR (January 28, 1978), 177; Interview with Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves, September 5, 1996, Washington, D.C. (“short term”). 72. “Oil in the Bank,” transcript, 60 Minutes documentary, September 23, 1979; Author’s interview with C. Curtis Johnson, (former) SPR Project Manager, President and CEO of DynMcDermott Petroleum Operations Company, October 28, 1996, DynMcDermott Offices, New Orleans, Louisiana; Interview with John W. Bartholomew, April 6, 1998 (telephone interview). 73. Ann Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” 204 (“fiscal disaster”). 74. U.S. Congress, House, Strategic Petroleum Reserve: Reprogramming of Funds, 3 (Dingell quote), 1–3; Letter to Undersecretary John M. Deutch from Jay R. Brill, October 19, 1979, in U.S. Congress, House, Filling the Strategic Petroleum Reserve: Oversight; and H.R. 7252: Use of Naval Petroleum Reserves, 81. 75. Juan Cameron, “Washington’s Ill-Starred Efforts to Stash Crude,” Fortune (September 8, 1980), 68 (“Find out”); “Oil in the Bank,” transcript, 60 Minutes documentary, September 23, 1979, 12 (“vast construction job”). 76. Cameron, “Washington’s Ill-Starred Efforts to Stash Crude,” 68 (“nowhere to put it”), 66–67; U.S. Congress, House, Strategic Petroleum Reserve: Reprogramming of Funds, 28 (“Fill, fill, fill” / ”salt-properties”). 77. “Oil in the Bank,” 12 (“differing contracts” through “endeavors or missions”). 78. “Oil in the Bank,” 12–13; Interview with Ted Siomporas, December 15, 1997; Interview with C. Curtis Johnson, October 28, 1996. 79. Weimer, The Strategic Petroleum Reserve, 149–51. 80. U.S. Congress, House, Strategic Petroleum Reserve: Reprogramming of Funds, 3–4 (Dingell quotes). 81. “Information memorandum from Director, Strategic Petroleum Reserve, DOE, to Under Secretary, through the Assistant Secretary for resource Applications, re turnkey development of SPR sites for final 100–350 million barrels of Government storage,” U.S. Cong., House, Strategic Petroleum Reserve: Reprogramming of Funds, 73–142; Pelham, “Energy Department Trying to Work Out Problems of Costly Storage Program,” 204–205; Bachman, “Problems Plague U.S. Crude Storage Program,” 49–53. 82. Bachman, “Problems Plague U.S. Crude Storage Program,” 53 (“reluctant partners”); Interview with Ted Siomporas, December 15, 1997; U.S. Cong., House, Strategic Petroleum Reserve: Oil Supply and Construction Problems, Hearing Before the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, 96th Cong., 2nd Sess., September 10, 1979 (Washington, D.C.: GPO, 1980), 26; “Information memorandum from Director, Strategic Petroleum Reserve, DOE, to Under Secretary, through the Assistant

268

Notes to pages 92–97

Secretary for resource Applications, re turnkey development of SPR sites for final 100–350 million barrels of Government storage,” in U.S. Cong., House, Strategic Petroleum Reserve: Reprogramming of Funds, 73–142. 83. Interview with Ted Siomporas, December 15, 1997.

CHAPTER THREE 1. On oil prices 1976 through 1978, see the Energy Information Administration, Department of Energy, 1982 Annual Energy Review (Washington, D.C.: DOE / EIA, April 1983), 87, 97. 2. The literature on U.S.-Iranian relations leading up to the 1978–79 Revolution, and on the revolution itself, is immense. A select sampling would include: Richard W. Cottam, Iran and the United States: A Cold War Case Study (Pittsburgh: University of Pittsburgh Press, 1988); James A. Bill, The Eagle and the Lion: The Tragedy of American-Iranian Relations (New Haven: Yale University Press, 1988); M. Reza Ghods, Iran in the Twentieth Century: A Political History (Boulder: L. Rienner Publishers, 1989); Miron Rezun, ed., Iran at the Crossroads: Global Relations in a Turbulent Decade (Boulder: Westview Press, 1990); Shaul Bakhash, The Politics of Oil and Revolution in Iran: A Staff Paper (Washington, D.C.: Brookings Institution, 1982); John L. Esposito, ed., The Iranian Revolution: Its Global Impact (Miami: Florida International University Press, 1990). 3. On oil imports into the United States in 1978, and in the 1970s generally, see Energy Information Administration, 1982 Annual Energy Review (Washington, D.C.: DOE / EIA, April 1983), 57. 4. “A Review of the Energy Situation During the Iranian Revolution,” Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, George Bush Presidential Library. 5. Robert Stobaugh and Daniel Yergin, eds., Energy Future: Report of the Energy Project at the Harvard Business School (New York Vintage, 1980), 342 (“free for all”); “A Review of the Energy Situation During the Iranian Revolution,” Bush Presidential Library; “Presidential Documents,” in Public Papers of the Presidents of the United States, Jimmy Carter, 1979, Book II, June 23 to December 31, 1979 (Washington, D.C.: GPO, 1980), 1181–82; EIA, 1997 Annual Energy Review (Washington, D.C.: DOE / EIA, July 1998), 149. 6. Some argued that these demand restraint policies did have a long-term impact. For example, they shifted U.S. power plant input (boiler fuel) from oil to natural gas and nuclear in the years that followed. See Energy Security Analysis, Inc. (ESAI), “How and When to Use Strategic Reserves,” January 2003, 3, 6. 7. EIA, DOE, Annual Energy Review, 1997, 223. 8. “Presidential Documents,” Public Papers of the Presidents, Jimmy Carter, 1979, Book II, June 23 to December 31, 1979, 1225–28; on the gasoline lines see U.S. Department of Justice, Anti-Trust Division, Report of the Justice Department to the President Concerning the Gasoline Shortage of 1979 (Washington, D.C.: GPO, 1980); Memo, Stuart Eizenstat to the President, Energy, June 28, 1979, “Organization of Petroleum Exporting Countries (All Other Documentation) 10 / 77–9 / 79 [CF, O / A 713]” folder, Box 39, Staff Offices Files, Counsel’s Office, Robert Lipshutz File, Jimmy Carter Library, Atlanta, Geor-

Notes to pages 97–101

269

gia (“Nothing else”); The Gallup Poll: Public Opinion 1979 (Wilmington, Del.: Scholarly Resources Inc., 1980), 167–68, 200–202. 9. “Energy Address to the Nation, April 5, 1979,” Public Papers of the Presidents of the United States, Jimmy Carter, 1979, Book I January 1 to June 22, 1979 (Washington, D.C.: GPO, 1980), 609–614. For the “crisis of confidence” speech, see “Energy and National Goals: Address to the Nation, July 15, 1979,” Public Papers of the Presidents of the United States, Jimmy Carter, 1979, Book II, June 23 to December 31, 1979 (Washington, D.C.: GPO, 1980), 1235–47. 10. Bachman, “Problems Plague U.S. Crude Storage Program,” 49 (“useless boondoggle”); Author’s interview with C. Curtis Johnson, October 28, 1996. 11. Christopher Drew, “Oil Reserve Woes Persist,” The States-Item, April 1, 1980, in U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, April 18, 1980, 65. 12. U.S. Congress, House, Filling the Strategic Petroleum Reserve: Oversight; and H.R. 7252: Use of the Naval Petroleum Reserves, Hearings Before the Subcommittee on Interstate and Foreign Commerce, 96th Cong., 2d Sess., April 25, May 21, and September 15, 1980, Ser. No., 96–198 (Washington, D.C.: GPO, 1980), 237–38; see also W. A. Bachman, “Problems Plague U.S. Crude Storage Program,” O&G Journal (August 6, 1979): 50. On the oil stockpiling by private firms, and the Tokyo Economic Summit, see U.S. Department of Energy, International Affairs, “International Energy Indicators,” June 1981, 8. Tokyo Communiqué, “Joint Declaration of Tokyo Summit Conference,” June 29, 1979. In Public Papers of the Presidents of the United States, Jimmy Carter, Book II June 23 to December 31, 1979 (Washington, D.C.: GPO, 1980), 1197–1201. 13. Memo, Frank Zarb to Executive Committee, Energy Resources Council, 12 October 1976, folder Federal Energy Administration 1, box 9, U.S. Council of Economic Advisers Records, RG 459, Gerald R. Ford Library, (“blasted”); OAPEC: Organisation of Arab Petroleum Exporting Countries News Bulletin (OAPEC News Bulletin), Vol. 2, No. 3 (March 1976): 1 (“very high cost” through “strategic stockpiling”); OAPEC News Bulletin, Vol. 2, No. 6 (June 1976): 1 (“new U.S. scheme” through “confrontation with producers”); OAPEC News Bulletin, Vol. 2, No. 8 & 9 (August–September 1976): 1 (“challenge”). At the Washington Energy Conference in February 1974, Secretary of State Henry A. Kissinger had stated that “Cooperation not confrontation must mark our relations with the producers”; see International Energy Agency, The History of the International Energy Agency, Volume I: Origins and Structure of the IEA (Paris: OECD / IEA, 1994), 45. 14. U.S. Department of State telegram, 16 June 1976, folder Federal Energy Administration 1, box 9, U.S. Council of Economic Advisers Records, RG 459, Ford Library (Attiga and Zarb quotes). Ultimately, all the OPEC nations save Indonesia supplied oil to the SPR, comprising 22 percent of the entire stockpile by the mid 1990s; see SPR Office, DOE, Strategic Petroleum Reserve Annual Report, February 15, 1996 (Washington, D.C.: SPR Office / DOE, 1996), 15. 15. In September 1981, U.S. Senator Bill Bradley stated that the Saudis “now understand that the SPR is a life-support system for the American economy, and [that] it is not meant to attack them economically,” see Andy Plattner, “Strategic Reserve: Insurance Against a Disruption,” Congressional Quarterly Weekly Review (CQWR) (September 26, 1981): 1848 (“attack”);

270

Notes to pages 101–104

Memo, Schirmer to Eizenstat, January 23, 1980, “Strategic Petroleum Reserve” folder, Box 284, Staff Offices Files, Domestic Policy Staff, Stuart Eizenstat File, Jimmy Carter Library (“cautious” and “very sensitive”). 16. Author’s interview with James E. Akins, (former) White House Energy Advisor and U.S. Ambassador to Saudi Arabia, August 20, 1997 (telephone interview), (Yamani quote); Richard D. Lyons, “The Nation’s Strategic Oil Reserves Are Thirsting Anew,” NYT, June 22, 1980, E-9; Christopher Madison, “How Can We Build a Reserve Without Offending the Saudis?,” National Journal (June 28, 1980): 1044–49; U.S. Congress, Senate, Energy Policy and Conservation Act Amendments of 1990, Hearing Before the Committee on Energy and Natural Resources, Senate, 101st Cong., 2nd Sess., March 20, 1990 (Washington, D.C.: GPO, 1990), 135. 17. On increased Saudi production, see “Saudi Arabian Crude Oil Production: White House Statement, July 9, 1979,” in Public Papers of the Presidents of the United States, Jimmy Carter, Book II June 23 to December 31, 1979 (Washington, D.C.: GPO, 1980), 1226. See also U.S. Congress, House, Filling the Strategic Petroleum Reserve: Oversight; and H.R. 7252: Use of the Naval Petroleum Reserves, 41–47, 351–59. 18. Madison, “How Can We Build a Reserve Without Offending the Saudis?,” National Journal (June 28, 1980): 1044 (“quid pro quo”). 19. Author’s interview with Charles W. Duncan Jr., (former) Secretary of Energy, DOE, April 5, 1995, (telephone interview), (“major investment”). 20. Drew, “Oil Reserve Woes Persist,” U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, April 18, 1980, 64 (“seek commitments”). 21. Drew, “Oil Reserve Woes Persist,” U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, April 18, 1980, 65 (“It’s a fact . . .”). According to one high-ranking DOE official, Secretary Duncan did in fact ask the Saudis their position on a possible resumption of oil stockpiling for the SPR; see James Schlesinger Interview (transcript), White Burkett Miller Center Jimmy Carter Oral History Project, Jimmy Carter Library; Robert A. Rosenblatt, “Petroleum Reserve Program is Bogged Down,” Los Angeles Times, in The New Orleans Times-Picayune, May 4, 1980, 5–26; Plattner, “Strategic Reserve: Insurance Against a Disruption,” CQWR (September 26, 1981): 1848 (Erb quote); John Camerone, “Washington’s Ill-Starred Efforts to Stash Crude,” Fortune (September 8, 1980): 66–68; NYT, July 21, 1979, A-1, 8–9; U.S. Congress, House, Fiscal Year 1981 Authorization for the Department of Energy and the Federal Regulatory Commission, Hearings Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce, 96th Cong., 2nd Sess., February 8, 11, 12, 13, 20, and 29, 1980: 82. 22. Thomas J. Moore, “Saudis Vetoed the Filling of Oil Reserve: Our Unfilled Oil Reserve,” Chicago Sun-Times (CST), April 10, 1980, 5 (“specific and blunt”), 50; see also Moore’s series on the SPR and energy crisis, “U.S. Vulnerable to Oil Import Cutoff: Our Unfilled Oil Reserve,” CST, April 11, 1980, and “Oil Pinch May Push U.S. to War: Our Unfilled Oil Reserve,” CST, April 13, 1980, which, along with other similar articles, can be found in U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, April 18, 1980, 56–65; William Greider, “Try Building Our Oil Reserves Rather Than the MX,” Washington Post, April 6, 1980, E-1 (“Our friends”), E-5; also “To

Notes to pages 104–107

271

Fill the Oil Reserve,” editorial, Washington Post, April 16, 1980, A-18 (“symbol of American vulnerability”); and “Get Moving On Oil Reserve,” editorial, CST, April 14, 1980. More moderate were Christopher Madison, “How Can We Build an Oil Reserve Without Offending the Saudis?,” National Journal (June 28, 1980): 1044–49; and “DOE slates 100,000 b / d of oil for SPR by Dec. 1,” O&G Journal (September 22, 1980): 57; Interview with Charles W. Duncan, Jr., April 5, 1995. See also Duncan’s testimony before the House Subcommittee on Energy and Power in U.S. Congress, House, Filling the Strategic Petroleum Reserve: Oversight; and H.R. 7252: Use of the Naval Petroleum Reserves, Hearings Before the Subcommittee on Energy and Power, Committee on Interstate and Foreign Commerce, 96th Cong., 2nd Sess., April 25, 1980. 23. “Softening Demand Causing OPEC Oil Output to Drop,” Petroleum Intelligence Weekly (March 10, 1980): 1; “Algeria Joins Efforts in OPEC to Reduce Oil Surplus,” Petroleum Intelligence Weekly (March 31, 1980): 3–4; On the Carter administration, the Saudis, and the SPR, see “Too Little for a Rainy Day,” Forbes (April 30, 1979): 74; Camerone, “Washington’s Ill-Starred Efforts to Stash Crude,” 66–68. 24. Madison, “How Can We Build an Oil Reserve Without Offending the Saudis?,” 1048; U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, April 18, 1980, 2, 29, 30, 37 (“push us around”). 25. U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, 31 (Davis quotes), 31 (Bradley quote), 26–27, 30–34. 26. Rosenblatt, “Petroleum Reserve Program is Bogged Down,” 5–26; Madison, “How Can We Build an Oil Reserve Without Offending the Saudis?,” 1048. 27. U.S. Congress, House, Filling the Strategic Petroleum Reserve, 1, 43 (Dingell quote), 44, 40 (Duncan quotes); Author’s interview with Charles W. Duncan Jr., April 5, 1995. 28. U.S. Congress, House, Filling the Strategic Petroleum Reserve, 42 (“a complex mix”). 29. On the Desert One operation, see Paul B. Ryan, The Iranian Rescue Mission: Why It Failed (Annapolis, Md.: Naval Institute Press, 1985); see also Jimmy Carter, Keeping Faith: Memoirs of a President (New York: Bantam Books, 1982), 512–24, and also Cyrus Vance, Hard Choices: Critical Years in America’s Foreign Policy (New York; Simon & Schuster, 1983), 406–12. 30. U.S. Congress, House, Filling the Strategic Petroleum Reserve, 41 (“legislative mandates”). 31. U.S. Congress, House, Filling the Strategic Petroleum Reserve, 356 (Gramm and Chayes quotes). 32. On the DOE’s considerations of the OPEC conference in June 1980, see testimony of Dr. Ruth M. Davis, in U.S. Congress, Senate, Strategic Petroleum Reserve and the Naval Petroleum Reserve, Hearing Before the Subcommittee on Energy Resources and Materials Production of the Committee on Energy and Natural Resources, United States Senate, April 18, 1980, 7, 36–38; On the Energy Security Act of 1980, see PL 96–294 (S. 932), 96th Cong., 2nd Sess., June 30, 1979, 94 Stat. 611–779; Madison, “How Can We Build an Oil Reserve . . . ,” 1049. 33. U.S. Congress, Department of the Interior and Related Agencies Act [PL 96–514], December 12, 1980, Statutes At Large, Vol. 94, Part 3 (Washington,

272

Notes to pages 107–119

D.C.: GPO, 1981), 94 Stat. 2976 (“seek to undertake”); Richard Corrigan, “No Room in the Caverns—U.S. Running Out of Storage Space for the Reserve,” National Journal (October 31, 1981): 1937. 34. Madison, “How Can We Build an Oil Reserve . . . ,” 1048; “DOE slates 100,000 b / d of Oil for SPR by Dec. 1,” O&G Journal (September 22, 1980): 57 (“timidity,” “national scandal”). 35. “DOE slates 100,000 b / d of Oil for SPR by Dec. 1,” O&G Journal (September 22, 1980): 57. On the costs of the SPR program, see Strategic Petroleum Reserve Office, Federal Energy Administration, Strategic Petroleum Reserve Plan (December 15, 1976), 15; U.S. Department of Energy, Strategic Petroleum Reserve: Annual Report (February 16, 1981), 18; Charles K. Ebinger, The Critical Link: Energy and National Security in the 1980s (Cambridge, Mass.: Ballinger Publishing Company, 1982), 90. 36. Interview with Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves, September 5, 1996, Washington, D.C. (“In retrospect”); Jimmy Carter, Keeping Faith, 109–110, 122; Madison, “How Can We Build an Oil Reserve . . . ,” 1049 (“failed miserably”).

CHAPTER FOUR 1. CQWR (August 16, 1980): 2408–2409 (Democratic platform); CQWR (July 19, 1980): 2045 (Republican platform); “Washington and the Utilities: Reagan’s Plan,” PUF (March 4, 1982): 45 (“social experiment”)–47. 2. CQWR (July 19, 1980): 2045 (Republican platform); U.S. Congress, Senate, “Strategic Petroleum Reserve Amendments Act of 1981,” May 15, 1981, 97th Cong., 1st Sess. (Washington, D.C.: GPO, 1981), 32 (“I favor” through “do occur”). 3. “Oiled,” The Economist (September 22, 1990): 25 (Stockman quote). 4. “Remarks at the Opening Ceremonies for the Knoxville International Energy Exposition (World’s Fair) in Tennessee,” May 1, 1982, Public Papers of the Presidents of the United States, Ronald Reagan, 1982, January 1 to July 2, 1982 (Washington, D.C.: GPO, 1983), 544 (“managing scarcity”); Andy Plattner, “Reagan Budget Sets New Energy Priorities,” CQWR (March 14, 1981): 463; “New Energy Department breakup plan offered,” National Journal (May 29, 1982, No. 22): 971; “Why the next oil crisis could be a disaster,” Business Week (BW) (November 23, 1981): 132–33; Daniel Yergin, “America in the Strait of Stringency,” in Daniel Yergin and Martin Hillenbrand, eds., Global Insecurity: A Strategy for Energy and Economic Renewal (Boston: Houghton Mifflin Company, 1982), 109–13; Vietor, Energy Policy in America Since 1945, 340–44. 5. Author’s interview with James B. Edwards, (former) Secretary of Energy, April 18, 1997 (telephone interview). 6. Allan Dodds Frank, “Ace in the Hole,” Forbes (July 5, 1982): 43 (“fill that rascal”); Robert D. Hormats, “Strategic Petroleum Reserve,” Statement Before the Subcommittee on Energy and Mineral and Resources of the Senate Energy and Natural Resources Committee, May 8, 1981, Department of State Bulletin, Vol. 81, No. 2052, July 1981 (Washington, D.C.: GPO, 1981), 33. 7. On the administration’s support for an “off-budget” financing mechanism, see Memo, Henry R. Nau, Director of International Economics, Planning and Evaluation Directorate, National Security Council, to Richard V. Allen,

Notes to pages 120–124

273

Assistant to the President for National Security Affairs, May 29, 1981, folder “018611CS,” box 12, WHORM, Subject File, Domestic Policy Council (FG 010– 02), Reagan Library; Memo, Fred F. Fielding to Richard G. Darman, May 6, 1981, ID# 018554CS, folder “Begin-019000,” box 22, WHORM, Subject Files, Gas-Oil (NR006), Reagan Library; Richard D. Lyons, “The Nation’s Strategic Reserves Are Thirsting Anew,” NYT, June 22, 1980, E-9. 8. John H. Jennrich, “In-kind Crude Tariff Pushed for the SPR,” O&G Journal (December 15, 1980): 46; Andy Plattner, “Congress Seeks Ways to Pay for Filling Petroleum Reserve,” CQWR (March 28, 1981): 556 (Sharp quote); “Renewed Momentum for Oil-backed Bonds,” BW (April 13, 1981): 47. 9. When the Iran-Iraq war broke out in September 1980, U.S. and OECD days’ supply levels were high, at 83 days and 120 days, respectively. Two months later, increased production from Saudi Arabia, Kuwait, Nigeria, and the United Kingdom had reduced the shortfall to only 80,000 barrels per day. U.S. refiners’ imported crude oil acquisition costs rose by only 3 percent, and gasoline prices actually remained flat. See “A Review of the Energy Situation During the Outbreak of the Iran / Iraq War: 1980,” Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, George Bush Presidential Library. 10. “Going Private with the Stockpile,” BW (May 4, 1981): 104 (Sternfels quote). 11. Ibid. 12. Phillip K. Verleger Jr., “Let the Market Fill the U.S. Petroleum Reserve,” Wall Street Journal (WSJ) (April 28, 1981): 30. A group of industrial petroleum consumers whose collective purpose was to address the major legislative and regulatory issues confronting industrial oil users, the IOCG was composed of Aluminum Co. of America, Armco Inc., Bethlehem Steel Corp., Cone Mills Co., General Motors Corp., Georgia-Pacific Corp., Jones & Laughlin Steel Corp., Kimberly-Clark Corp., and United States Steel Corp. On the IOCG’s call for SPR options, see James L. Plummer, “Institutional Alternatives for Financing and Operating the Strategic Petroleum Reserve,” in Alvin L. Alm and Robert J. Weiner, eds., Oil Shock: Policy Response and Implementation, 171–72. In February 1984, Harvard University Kennedy School of Government professor Steven Kelman also promoted the idea that the government should sell call options on SPR oil. See U.S. Congress, House, Energy Emergency Preparedness, February 1, 2, and 21, 1984, 42–44. 13. “Going Private with the Stockpile,” BW (May 4, 1981): 104 (Goldstein quote); Marvin Stone, “Three Billion Well Spent,” U.S. News and World Report (June 1, 1981): 76; Carol E. Curtis, “A Business?,” Forbes (December 5, 1983): 47. 14. Roger Vielvoye, “The Futures Market,” O&G Journal (February 16, 1981): 66; Elias Crim, “Trading Black Gold: A Guide to Energy Futures,” Futures, Vol. 12, No. 10 (October 1983): special section, 1–30. 15. “Renewed Momentum for Oil-backed Bonds,” BW (April 13, 1981): 47. 16. William Marbach and William J. Cook, “Buy Oil Bonds for Uncle Sam?,” Newsweek (March 30, 1981): 69; Plattner, “Congress Seeks Ways to Pay for Filling Petroleum Reserve,” CQWR (March 28, 1981): 556 (“public good”); “Renewed Momentum for Oil-backed Bonds,” BW (April 13, 1981): 47.

274

Notes to pages 124–130

17. U.S. Congress, Senate, “Strategic Petroleum Reserve Amendments Act of 1981,” May 15, 1981, 97th Cong., 1st Sess. (Washington, D.C.: GPO, 1981), 6. 18. Donald T. Regan, Memorandum for the Cabinet, “Financing the Strategic Petroleum Reserve,” April 22, 1981, WHORM, Subject File, FG 010–01, Cabinet Meetings, Letter Case 018510CS, Reagan Library (Regan quote); Department of Treasury, “Financing the Strategic Petroleum Reserve,” May 5, 1981, WHORM, Subject File, FG 010–01, Cabinet Meetings, Letter Case 018510CS, Reagan Library. 19. The Cabinet Council on Economic Affairs, Memorandum for the President, “Strategic Petroleum Reserve Financing,” May 5, 1981, WHORM, Subject File, FG 010–01, Cabinet Meetings, Letter Case 018510CS, Reagan Library. 20. U.S. Congress, Senate, Committee on Energy and Natural Resources, Strategic Petroleum Reserve Amendments Act of 1981: Report, 97th Cong., 1st Sess., May 15, 1981 (Washington, D.C.: GPO, Committee Print, 1981), 10 (Stockman quote), 1–11. 21. U.S. Congress, Omnibus Budget Reconciliation Act of 1981 [PL 97–35], August 13, 1981, United States Statutes At Large: 1981, Vol. 95 (Washington, D.C.: GPO, 1982), 95 Stat. 609. 22. “Off-Off Budget,” WSJ (May 14, 1981): 26; Marvin Stone, “3 Billion Well-Spent,” Newsweek (June 1, 1981), 76; “Appropriations: Department of Energy,” CQWR (August 8, 1981): 1453; Andy Plattner, “Strategic Reserve Funding, First Energy Authorization in Reconciliation Measure,” CQWR (August 15, 1981): 1501–1508; “Energy: Strategic Oil Reserve,” CQWR (December 19, 1981): 2512; U.S. Congress, Omnibus Budget Reconciliation Act of 1981 [PL 97–35], August 13, 1981, United States Statutes At Large: 1981, Vol. 95 (Washington, D.C.: GPO, 1982), 95 Stat. 618–21; Author’s interview with Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves, September 5, 1996, Washington, D.C. (“narrow margins” through “no free lunch”). 23. Author’s interview with Richard D. Furiga, September 5, 1996, (“natural marriage”); Author’s interview with James B. Edwards, April 18, 1997, (“as much oil as we could buy”). 24. Nicholas Asheshov, “The Mexican Petrotrauma,” Institutional Investor (November 1981): 297 (“major bailout”); “DOE to buy more crude from Pemex for SPR,” O&G Journal (August 31, 1981): 114 (“The beauty”); Interview with Richard D. Furiga, September 5, 1996, (“feeling each other out”); Author’s interviews with John Gavin, (former) U.S. Ambassador to Mexico, May 2, 1997, and June 13, 1997 (telephone interviews); Interview with Harry A. Jones, November 9, 1997; “Mexico to Sell Oil for U.S. Strategic Reserve,” National Journal (August 29, 1981): 1556; DOE, Strategic Petroleum Reserve Annual Report, February 16, 1982 (Washington, D.C.: DOE, 1982), v; “Strategic Petroleum Reserve Fact Sheet,” DOE News (DOE press release), May 24, 1984, National Archives II, College Park, Maryland, Record Group 434-PR, Records of the Department of Energy, Box 1, Item 1. 25. “DOE to buy more crude from Pemex for SPR,” O&G Journal (August 31, 1981): 115; Asheshov, “The Mexican Petrotrauma,” Institutional Investor (November 1981): 289–305; Author’s interview with C. Curtis Johnson, (former) SPR Project Manager, President and CEO of DynMcDermott Petroleum

Notes to pages 131–136

275

Operations Company, October 28, 1996, DynMcDermott Offices, New Orleans, Louisiana; Interview with John W. Bartholomew, April 6, 1998; DOE, Strategic Petroleum Reserve Annual Report, February 16, 1983 (Washington, D.C.: DOE, 1983), v; “U.S. taps mostly Mexican crude for SPR fill,” O&G Journal (December 5, 1983): 66; Malcolm S. Forbes and Jerry Flint, “Hard Questions, Good Answers On Our Strategic Oil Reserve,” Forbes (April 9, 1984): 25–26; U.S. Department of Energy, Strategic Petroleum Reserve Annual Report, February 16, 1984 (Washington, D.C.: DOE, 1984), v, 4; “Strategic Petroleum Reserve Fact Sheet,” DOE News (DOE press release), May 24, 1984, National Archives II, College Park, Maryland, Record Group 434-PR, Records of the Department of Energy, Box 1, Item 1; Interview with Richard D. Furiga, September 5, 1996; Interviews with John Gavin, May 2, 1997, and June 13, 1997. 26. Asheshov, “The Mexican Petrotrauma,” Institutional Investor (November 1981): 297 (“white-knight image”). 27. Ron Thibodeaux, “Oil dome reserves praised by Ford as vital U.S. weapon,” The New Orleans Times-Picayune / The States-Item, April 6, 1982, 1–15 (Ford quote), section 1, page 16. 28. Cong. Rec., 97th Cong., 2nd Sess., Vol. 128, Part 14, July 30, 1982 (Washington, D.C.: GPO, 1982), 18745–18746; U.S. Congress, Senate, Energy Emergency Preparedness: International and Domestic Issues, Hearing Before the Committee on Energy and Natural Resources, 97th Cong., 2nd Sess., May 6, 1982 (Washington, D.C.: GPO, 1982); “Energy Emergency Preparedness Act” [PL 97–229], August 3, 1982, United States Statutes At Large: 1982, Vol. 96, Part 1 (Washington, D.C.: GPO, 1984), 96 Stat. 248–255. 29. “Congress is moving to cushion an oil shock,” BW (June 14, 1982): 34–35. 30. Richard Corrigan, “No Room in the Caverns—U.S. Running Out of Storage Space for Oil Reserve,” National Journal (October 31, 1981): 1937–40. 31. Letter, David C. Treen to Ronald Reagan, January 31, 1983, ID# 123034, WHORM, Subject File, Naval Petroleum Reserves (NR006–01), Reagan Library (brine diffusion); Ruth M. Davis, “National Strategic Petroleum Reserve,” Science, Vol. 213 (August 7, 1981): 618, 621–22. 32. SPR Office, DOE, Strategic Petroleum Reserve, Texoma Group Salt Domes: West Hackberry Expansion, Black Bayou, Vinton, Big Hill: Cameron and Calcasieu Parishes, Louisiana and Jefferson County, Texas: Final Environmental Impact Statement (Springfield, Va.: DOE, 1978); Richard Stewart, “Big Hill: Salt dome readied as petroleum reserve site,” Houston Chronicle, November 7, 1983, section 1, 12. 33. Ruth M. Davis, “National Strategic Petroleum Reserve,” Science, Vol. 213 (August 7, 1981): 618, 621–22; “Oil Reserve Undergoes Shakedown,” New Orleans Times-Picayune, May 4, 1980, 5–26. 34. “Toward a petroleum stockpile policy,” Chemical Week (June 23, 1982): 33–34; U.S. Congress, House, Strategic Petroleum Reserve Issues, Hearings Before the Subcommittee on Fossil and Synthetic Fuels, March 2, 1982, 132–33. 35. Memo, James B. Edwards to the Cabinet Council on Economic Affairs, September 24, 1981, WHORM Subject File, FG 010–02, Cabinet Councils, Letter Case 018948CA, Reagan Library. 36. Memo, Danny J. Boggs to the Cabinet Council on Natural Resources

276

Notes to pages 136–139

and Environment, November 15, 1982, WHORM Subject File, FG 010–02, Cabinet Councils, Letter Case 077594CA, Reagan Library. 37. Memo, Danny J. Boggs to the Cabinet Council on Natural Resources and Environment, November 15, 1982, WHORM Subject File, FG 010–02, Cabinet Councils, Letter Case 077594CA, Reagan Library. 38. DOE, A Report to the Congress: Strategic Petroleum Reserve Drawdown Plan, Amendment No. 4, December 1, 1982 (Washington, D.C.: DOE, 1982), 2–3 (“more in line” / extraordinary option”). 39. Ronald Reagan, “Strategic Petroleum Reserve,” December 1, 1982, Department of State Bulletin, Vol. 83 (Washington, D.C.: GPO, February, 1983), 11–12; “Message to Congress on the Strategic Petroleum Reserve,” December 1, 1982, Public Papers of the President of the United States: Ronald Reagan, 1982, Book II, July 3 to December 31, 1982 (Washington, D.C.: GPO, 1983), 1537; DOE, Strategic Petroleum Reserve Drawdown Plan, Amendment No. 4, December 1, 1982, 6 (“supply interruption”), 4–7; “Strategic Petroleum Reserve Fact Sheet,” DOE News (DOE press release), May 24, 1984, National Archives II, College Park, Maryland, Record Group 434-PR, Records of the Department of Energy, Box 1, Item 1, 1–3. 40. In October 1983, President Reagan had stated that “I do not believe the free world would stand by and allow anyone to close the Strait of Hormuz.” See Lawrence Mosher, “Next Time the Persian Gulf Shuts Down, The U.S. May Be Ready to Act,” National Journal (February 25, 1984, No. 8): 368; Richard L. Hudson, “Persian Gulf Shipping Falls Only Slightly Despite Widening of the Iran-Iraq Conflict,” WSJ (May 18, 1984): 31; David Ignatius and Paul Blustein, “Reagan Vows Open Shipping in Gulf But Says U.S. Hasn’t Offered to Intervene,” WSJ (May 23, 1984): 4; U.S. Congress, Senate, World Petroleum Outlook—1984, Hearing Before the Committee on Energy and Natural Resources, 98th Cong., 2nd Sess., January 30, 1984 (Washington, D.C.: GPO, 1984), 1–26. 41. “United States Achieves 400-Million Barrel, 80-Day Oil Reserve ‘Cushion’; Secretary Outlines Moves to Cut Dependence on Oil,” DOE This Month, June 1984, Vol. 7, No. 6, 1; “What About the Persian Gulf? Fact Sheet— U.S. Oil Imports, 1973–1984,” DOE This Month, June 1984, Vol. 7, No. 6, 2; Youssef M. Ibrahim, “Gulf Fight Spurs Saudis to Ship Oil Via Red Sea,” WSJ (May 30, 1984): 37. 42. Miller, “Another Oil Crunch Coming?,” Industry Week (June 11, 1984): 19 (“no doubt”); Andy Pasztor, “Persian Gulf Attacks Stir Debate On Distributing U.S. Oil Reserves,” WSJ (May 24, 1984): section 2, page 35. 43. Sheila Tefft, “U.S. oil reserve: Can it really deliver?,” Chicago Tribune, May 6, 1984, section 7, page 1; Edward N. Krapels, “International Energy Security Policy: A Reappraisal,” in U.S. Congress, House, Energy Emergency Preparedness, 16–41; Mosher, “Next Time the Persian Gulf Shuts Down, The U.S. May Be Ready to Act,” National Journal (February 25, 1984, No. 8): 365–68. 44. Tefft, “U.S. oil reserve: Can it really deliver?,” 7–1 (“The questions”); Patrick Crow, “SPR: A growing cushion against shock of lost U.S. crude imports,” O&G Journal (June 4, 1984): 26–27. By the 1990s, the Seaway and Texoma pipeline systems would be restored to crude oil service, and were available to transport SPR crude to Oklahoma and the Midwest.

Notes to pages 139–143

277

45. Richard Johns, “Crude stocks: Building up a panic buffer,” Financial Times, appearing in the Houston Chronicle, May 28, 1984, section 2, page 2. 46. U.S. Congress, House, Energy Emergency Preparedness, February 1, 1984, 20–23. 47. National Petroleum Council, Committee on Emergency Preparedness, Emergency Preparedness for Interruption of Petroleum Imports into the United States, April 1981 (Washington, D.C.: NPC, 1981), 10, 97–98. 48. NYMEX president John E. Treat argued for a price trigger to be set at about 30 percent higher than the market price of oil at the time of the auction. Treat also advocated establishing a commercial market for the government options, which would in effect establish a futures market for strategic reserve oil, like the heating oil futures market that exitsed in the NYMEX. On the other hand, Shell Oil’s energy regulation manager A. C. Anderson argued against a price trigger on the grounds that an administration should remain flexible on the use of the SPR, due to the difficulty of anticipating exactly how an energy emergency would unfold and how long it would last. See Mosher, “Next Time the Persian Gulf Shuts Down, The U.S. May Be Ready to Act,” 367–68. 49. U.S. Congress, House, Energy Emergency Preparedness, 14–15, 105– 106, 473. 50. Mosher, “Next Time the Persian Gulf Shuts Down, The U.S. May Be Ready to Act,” 368 (Sharp quote); U.S. Congress, House, Preparing for the Next Energy Crisis: DOE’s Management of the International Oil Sharing Test, 38th Report, Committee on Government Operations, May 17, 1984 (Washington, D.C.: GPO, 1984), 45 (“specific delineation), 43–46; Preparing for the Next Energy Crisis, May 17, 1984, 39. 51. Dan Baum and Richard L. Hudson, “Iran Said to Hit Another Tanker Off Saudi Coast,” WSJ (May 25, 1984): 33. 52. Clayton, “Hodel sees no threat of severe oil cutoff,” Houston Chronicle, May 25, 1984, Section 1, page 11; Crow, “SPR: A growing cushion against shock of lost U.S. crude imports,” 26 (“We will use”); “United States Achieves 400-Million Barrel, 80-Day Oil Reserve ‘Cushion’; Secretary Outlines Moves to Cut Dependence on Oil,” DOE This Month, 1; Interview with Donald P. Hodel, February 25, 1997, (“manipulate prices”). 53. “United States Achieves 400-Million Barrel . . . ,” DOE This Month, 1. 54. Interview with Donald P. Hodel, February 25, 1997, (“unworkable strategy”). 55. Crim, “Trading Black Gold: A Guide to Energy Futures,” Futures, Vol. 12, No. 10 (October 1983): special section, 8; Crow, “SPR: A growing cushion against shock of lost U.S. crude imports,” 26; Interview with Donald P. Hodel, February 25, 1997, (“The reality is”). On the decline of crude oil prices in late May 1984, see testimony of Senator James A. McClure (R-Idaho), in U.S. Congress, Senate, Energy Policy and Conservation Act Amendments of 1990, Hearing Before the Committee on Energy and Natural Resources, 101st Cong., 2nd Sess., March 20, 1990 (Washington, D.C.: GPO, 1990), 140. 56. Tefft, “U.S. oil reserve: Can it really deliver?,” Chicago Tribune, May 6, 1984, section 7, page 1 (“economic tool”; “fine distinction”). 57. “Summary: Strategic Petroleum Reserve Fill Analysis,” for the Do-

278

Notes to pages 143–149

mestic Policy Council, June 1986, page 9, Letter Case 317166CS, WHORM, Subject File, Domestic Policy Council (FG010–03), Reagan Library; IEA, The History of the International Energy Agency, Volume II: Major Policies and Actions, 124–28; Ibid., The History of the International Energy Agency, Volume III: Principal Documents, 139 (“particularly effective”), 137–43. In fact, some IEA officials had begun pushing for the policy change of early stock drawdown since the second oil shock. After the 1979–1980 energy supply crisis, IEA executive director Ulf Lantzke began to push for the IEA to respond to situations that involved oil price increases without a corresponding physical reduction in supply, a so-called “sub-trigger crisis.” This endeavor was supported by the Commission of European Communities and a number of member governments. The focus of this group of sub-trigger policy advocates was emergency oil stocks. They argued that in these situations, stocks ought to be the first line of defense, not the last. See Edward N. Krapels, ed., International Oil Supplies and Stockpiling (London: Economist Intelligence Unit, 1982), 41–45, 46–51. 58. Clyde Jones, “Boon or Boondoggle?,” Oil and Gas Investor, 37 (Krapels quote). 59. National Petroleum Council, The Strategic Petroleum Reserve: A Report on the Capability to Distribute Oil, December 1984 (Washington, D.C.: NPC, 1984), 5–9. 60. Tefft, “U.S. oil reserve: Can it really deliver?,” Chicago Tribune, May 6, 1984, section 7, page 2 (“dynamic”). 61. Interview with John Guy, Deputy Executive Director, National Petroleum Council, National Petroleum Council Offices, Washington, D.C., November 13, 1996, interviewed by Joseph Pratt (“gained the confidence” through “invited in”). 62. Author’s interview with C. Raymond Somerlock, November 14, 1996 (telephone interview). On the November 1985 test sale, see Clyde Jones, “Boon or Boondoggle?,” Oil and Gas Investor, Vol. 8, No. 11 (June 1989): 36; DOE, Assistant Secretary for Fossil Energy, Office of Petroleum Reserves, Strategic Petroleum Reserve, Annual / Quarterly Report, February 15, 1986 (Washington, D.C.: DOE, 1986), 16; and DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” DOE / FE-0214P, January 1991 (Washington, D.C.: DOE, 1991), 16. For the EPCA Amendments Act of 1985, see U.S. Congress, “EPCA Amendments Act of 1985,” PL [99–58], July 2, 1985, Statutes At Large, Vol. 99, Part 1 (Washington, D.C.: GPO, 1987), 99 Stat. 102–109; Tefft, “U.S. oil reserve: Can it really deliver?,” 7–2 (“We’re ready”). 63. In 1983 the Reagan administration agreed to a $.05 per gallon increase in the federal tax on gasoline, ostensibly as a means of funding highway maintenance, repairs, and new construction. Other reasons may have included a desire to shore up falling crude oil prices and the need to generate additional revenue without raising income taxes. See Melosi, Coping With Abundance, 328. 64. Interview with John W. Bartholomew, April 6, 1998.

CHAPTER FIVE 1. James R. Schlesinger, “Oil Euphoria Obscures Potential Political Problems,” Financier, Vol. 10, No. 4 (April 1986): 16–18; Louis Bley, “OPEC’s Best Friend,” Euromoney (June / July 1990), 49–50.

Notes to pages 151–152

279

2. Not all economists and analysts agree that the 1990 oil-supply disruption in fact produced a “shock.” On one hand, Vito Stagliano, DOE Senior Energy Analyst during the Bush administration, contended that “the interesting thing was that the historically largest oil supply disruption did not in fact produce a shock.” Stagliano letter to author, June 26, 1997. On the other hand, Massachusetts Institute of Technology oil economist M. A. Adelman contended otherwise. He viewed the 1990 crisis as much the same as past crises, as evidenced in his article, “The 1990 Oil Shock is Like the Others,” The Energy Journal, Vol. 11, No. 4 (1990): 1–13. Analyst and consultant Phillip K. Verleger Jr., sounded a similar theme. “As in past crises, companies responded to uncertainty concerning future supplies by husbanding stocks and bidding aggressively for additional supplies.” See Verleger, “Understanding the 1990 Oil Crisis,” The Energy Journal, Vol. 11, No. 4 (1990): 23. It may be true that the debate over whether a “shock” occurs depends on its definition, and whether actual physical shortages, reduced demand, and higher prices are all crucial to that definition. In September 1990, New York-based oil consultant Dimitrious Koutsomitis noted that “There has been a price shock, but so far there hasn’t really been a demand shock.” See Matthew L. Wald, “Oil prices up despite Bush move,” NYT, September 28, 1990, D-1. 3. Later estimates placed the 1990 disruption at 4.6 million barrels per day; see EIA, DOE, World Oil Supply Disruptions, EIA website (www.eia.doe .gov / emeu / security / distable.html). See also U.S. Congress, House, Energy Impact of the Persian Gulf Crisis, Joint Hearings Before the Subcommittee on Energy and Power and the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, 101st Cong., 2nd Sess., August 7, September 10, and 27, 1990 (Washington, D.C.: GPO, 1991), 32–33; EIA, DOE, World Oil Supply Disruptions, EIA website (www.eia.doe.gov / emeu / security / distable .html). 4. Leonard Silk, “How Hussein Miscalculated,” NYT, August 10, 1990, D-6; Author’s interview with Philip K. Verleger Jr., energy market analyst and senior consultant, Charles River Associates, August 21, 1997 (telephone interview) (“panic demand”); Verleger, “Understanding the 1990 Oil Crisis,” 21–23; Memo, Steve Hart to Tom Olson, Department of Energy Office of Public Affairs, August 29, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, George Bush Presidential Library. 5. Richard W. Stevenson, “For High Gas Prices, Many Villains to Blame,” NYT, August 10, 1990, D-1 (“the entire system”), D-19; U.S. Congress, Senate, Consumer Energy Price Increases, Hearing Before the Subcommittee on the Consumer of the Committee on Commerce, Science, and Transportation, 101st Cong., 2nd Sess., August 7, 1990 (Washington, D.C.: GPO, 1990), 74 (“psychological reaction”); Memo, Steve Hart to Tom Olson, August 29, 1990, Bush Library. 6. E. L. Morse, “We Can Keep Oil Cheap . . . ,” NYT, August 8, 1990, A-21; Verleger, “Understanding the 1990 Oil Crisis,” 23–25, 15–33; Adelman, “The 1990 Oil Shock is Like the Others,” 1–13; Ahmad Zaki Yamani, “The Gulf Crisis: Oil Fundamentals, Market Perceptions and Political Realities,” The Energy Journal, Vol. 12, No. 2 (1991): 1–8; Memo, Steve Hart to Tom Olson, Bush Presidential Library. At the time of the Iraqi invasion of Kuwait,

280

Notes to pages 153–155

oil-storing companies in the IEA nations held roughly 70 days’ worth of supply, a sharp increase over year-earlier levels. This high overall stock level allowed for a drawdown of private reserves at the rate of 1 million barrels daily in the third quarter of 1990 and 1.5 million barrels in the fourth quarter; see “IEA less sanguine about 1991 world oil and product supply,” Oil and Gas Investor, Vol. 10, No. 7 (February 1991), 5. 7. Stevenson, “For High Gas Prices, Many Villains to Blame,” NYT, August 10, 1990, D-1; Johnathan Fuerbringer, “Some Oil Companies Cut Prices,” NYT, August 10, 1990, D-1, D-6; “Address to the Nation Announcing the Deployment of United States Armed Forces to Saudi Arabia,” August 8, 1990, Public Papers of the Presidents of the United States: George Bush, 1990, Book II—July 1 to December 31, 1990 (Washington, D.C.: GPO, 1991), 1109 (“fair share / restraint”). 8. U.S. Congress, Senate, Consumer Energy Price Increases, 7 (“ripped off”), 3, 87; Thomas C. Hayes, “Confrontation in the Gulf: Fearing Backlash, Oil Companies Will Trim Profits,” NYT, September 16, 1990, A-1; Fuerbringer, “Some Oil Companies Cut Prices,” NYT, August 10, 1990, D-1, D-6. 9. Thomas W. Lippman and Mark Potts, “Oil Prices Rise; Officials Discount Supply Threat,” The Washington Post, August 8, 1990, A-18; Verleger, “Understanding the 1990 Oil Crisis,” 32. 10. “World Oil Supply Situation,” August 22, 1990, and “Oil / Energy,” August 29, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library (“highest levels”); Nash, “Pressure is Mounting to Tap U.S. Stockpile,” NYT, September 18, 1990, D-6. 11. Susan Camaniti, “Scorecards on the Oil Giants,” Fortune (September 10, 1990): 45–46; “Average production increases for the month of August,” August 29, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 12. DOE, Office of Press Secretary, “Strategic Petroleum Reserve” (fact sheet), September 27, 1990, Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 13. See Joseph Stanislaw and Daniel Yergin, “The Strategic Petroleum Reserve and U.S. Energy Security,” in U.S. Congress, Senate, Committee on Energy and Natural Resources, World Oil Outlook, 149, 129–157. 14. Martha M. Hamilton, “U.S.’s Ace in the Hole: Strategic Petroleum Reserve,” The Washington Post, August 7, 1990, A-13. 15. U.S. Congress, House, Energy Impact of the Persian Gulf Crisis, August 7, 1990, 1 (“Now is the time”), 54 (“severity of the situation”), 53 (“significant shortfall”), 2–3, 65–67; Lippman and Potts, “Oil Prices Rise; Officials Discount Supply Threat,” The Washington Post, August 8, 1990, A-1, A-18; Nash, “Pressure is Mounting to Tap U.S. Stockpile,” NYT, September 18, 1990, D-6; “Address to the Nation Announcing the Deployment of United States Armed Forces to Saudi Arabia,” August 8, 1990, Public Papers of the Presidents of the United States: George Bush, 1990, Book II, 1109 (“explore”); Ann Reilly Dowd, “George Bush as Crisis Manager,” Fortune (September 10, 1990): 55–56. 16. Interagency Working Group, “Strategic Petroleum Reserve: Analysis

Notes to pages 155–159

281

of Size Options,” February 1990 (Washington, D.C.: DOE, 1990), VII-5 (report quote). 17. Author’s interview with Vito Stagliano, (former) DOE Senior Energy Analyst, March 25, 1997 (telephone interview). 18. ESAI, “How and When to Use Strategic Reserves,” January 2003, 5. 19. According to Stagliano, “the people who opposed it [using the SPR] most strongly were the Secretary of Treasury and the OMB Director”—Nicholas F. Brady and Richard G. Darman, respectively; interview with Stagliano, March 25, 1997. It is also worth noting that in 1990, Brady doubted the effectiveness of the reserve. He believed that even a large-scale SPR drawdown would be “infinitesimal” in the context of the much larger international spot and futures crude oil markets, and would have little if any affect on the international energy arena. Author’s interview with Nicholas F. Brady, (former) Secretary of Treasury, April 18, 1997, (telephone interview), (“influence oil prices”). 20. “Remarks by the President during briefing for regional reporters,” September 17, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 21. Ibid. 22. Steven Greenhouse, “Oil Shortage is Seen by Year-End,” NYT, August 31, 1990, D-1, 4 (“influencing the market”); IEA, The History of the International Energy Agency, Volume II: Major Policies and Actions (Paris: OECD / IEA, 1995), 143 (“reflected fears”). 23. IEA, The History of the International Energy Agency, Volume II, 38– 39; IEA, The History of the International Energy Agency, Volume III: Principal Documents (Paris: OECD / IEA, 1995), 149 (“increased risk”), 144–52. 24. Author’s interview with Vito Stagliano, March 25, 1997 (telephone interview), (“had not understood” through “actual physical shortages”). See also Adelman, “The 1990 Oil Shock is Like the Others,” 4–5; Verleger, “Understanding the 1990 Oil Crisis,” 31; and Bright E. Okogu, “What Use the IEA Emergency Stockpiles? A Price-Based Model of Oil Stock Management,” The Energy Journal, Vol. 13, No. 1 (1992): 79–96. 25. “The Emergency’s Here: Use the Oil,” NYT, August 8, 1990, A-20 (“misses the point” through “what lifeboats are for”). 26. Peter Passell, “On Tapping Oil Reserve,” NYT, August 9, 1990, D-1, D-19; Nash, “Pressure is Mounting to Tap U.S. Stockpile,” NYT, September 18, 1990, D-6 (Dole quote). 27. Passell, “On Tapping Oil Reserve,” NYT, August 9, 1990, D-19 (“credibility”; “great lesson”); Hamilton, “U.S.’s Ace in the Hole: Strategic Petroleum Reserve,” The Washington Post, August 7, 1990, A-13 (“The whole lesson”); Using a “supply a storage function” model, Verleger contended that a 30-million barrel SPR drawdown in August and September 1990 would have greatly eased the tightness of the U.S. market, complementing the drawdown of private inventories that was ongoing, and reducing oil prices to what they had been before the crisis; see Verleger, “Understanding the 1990 Oil Crisis,” 26, 25 (“The failure”); James Cook, “A Federal Reserve for Oil,” Forbes (March 4, 1991): 86; see also Verleger’s statement to the House subcommittee on Energy and Power, in U.S. Congress, House, Energy Impact of the Persian Gulf Crisis, August 7, 1990, 9–10.

282

Notes to pages 160–165

28. “Keep oil in reserve,” The Economist (October 20, 1990): 15–16 (“Leave them to plead,” “When shooting starts”). 29. U.S. Congress, Senate, Implications of the Middle Eastern Crisis for Near-Term and Mid-Term Oil Supply, Hearing Before the Committee on Energy and Natural Resources, September 13, 1990, 101st Cong., 2nd Sess. (Washington, D.C.: GPO, 1990), 9, 45 (“mis-use it”); Robert D. Hershey Jr., “U.S. Says it May Tap Oil Reserve,” NYT, September 14, 1990, D-1. 30. Statement of Shell Oil Company, “Petroleum Pricing,” U.S. Congress, Senate, Consumer Energy Price Increases, 126; Nash, “Pressure is Mounting to Tap U.S. Stockpile,” NYT, September 18, 1990, D-6 (“bargaining chip”). 31. U.S. Congress, “Energy Policy and Conservation Act Amendments of 1990 (EPCA Amendments)” [PL 101–383], Statutes At Large: 1990, Vol. 104, Part 1, September 15, 1990 (Washington, D.C.: GPO, 1991), 104 Stat. 727–35. 32. EPCA, Section 161(d); Sec. 161(a), 3(8). 33. John S. Cook and Charles P. Shirkey, “A Review of Valdez Oil Spill Market Impacts,” EIA / Petroleum Marketing Monthly, March 1989 (Washington, D.C.: EIA / DOE, June 1989), 5–8. On the administration’s position on authorities to include domestic as well as imported oil supply disruptions, see Memo, Richard G. Darman to POTUS, Re: Enrolled Bill S. 2088—Energy Policy and Conservation Act Amendments of 1990, September 14, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 34. U.S. Congress, House, “Strategic Petroleum Reserve Amendments of 1990: Report,” July 16, 1990, 101st Cong., 2nd Sess., Report 101–604 (Washington, D.C.: GPO, 1990), 11 (“only regional”), 1–15. The DOE’s opposition to this and other proposed features of the 1990 EPCA Amendments can be seen in Deputy Energy Secretary W. Henson Moore’s letter of June 22, 1990, to Philip R. Sharp, Chairman of the House Subcommittee on Energy and Power, Ibid., 24–25, 26–28. 35. U.S. Congress, EPCA Amendments, Section 7, Subpart 3 (“most dependent”). On the administration’s opposition to the refined product reserve, see Memo, Darman to POTUS, Re: Enrolled Bill S. 2088—Energy Policy and Conservation Act Amendments of 1990, September 14, 1990, Bush Library. 36. U.S. Congress, EPCA Amendments, Section 4. The Bush administration’s position on stockpiling goals and other SPR-related matters is detailed in letters of W. Henson Moore to Phil R. Sharp, April 4, 1990, and June 22, 1990, in U.S. Congress, House, “Strategic Petroleum Reserve Amendments of 1990: Report,” July 16, 1990, 24–28. So too the anonymous notes of an administration meeting on the SPR and the EPCA Amendments; see “E.P.C.: Strategic Petroleum Reserve,” January 23, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. Also see Memo, Darman to POTUS, Re: Enrolled Bill S. 2088—Energy Policy and Conservation Act Amendments of 1990, September 14, 1990, Bush Library. 37. U.S. Congress, EPCA Amendments, Section 5, Subpart (a)(f); Section 10; Section 8. 38. Memo, Darman to POTUS, Re: Enrolled Bill S. 2088—Energy Policy and Conservation Act Amendments of 1990, September 14, 1990, Bush Library;

Notes to pages 165–168

283

Phil Kuntz, “House Urges Bush To Use SPR Oil,” CQWR (September 29, 1990): 3120 (“pretty tough”). 39. To see some of the Congressional intent for the bill, see U.S. Congress, House, “Strategic Petroleum Reserve Amendments of 1990: Conference Report,” September 13, 1990, 101st Cong., 2nd Sess., Report 101–698 (Washington, D.C.: GPO, 1990), 1–12; U.S. Congress, “Energy Policy and Conservation Act Amendments of 1990” [PL 101–383], Statutes At Large: 1990, Vol. 104, Part 1, September 15, 1990 (Washington, D.C.: GPO, 1991), 104 Stat. 727–735. 40. Interview with Vito Stagliano (“poor alternative”). 41. Kenneth R. Sheets, “Should the U.S. tap its oil reserve?,” U.S. News and World Report (September 10, 1990): 69; Nash, “Pressure is Mounting to Tap U.S. Stockpile,” NYT, September 18, 1990, D-6 (“We know” through “any day”). 42. Keith Bradsher, “Oil Prices Climb on War Fears,” NYT, September 18, 1990, D-1; Janet Duncan, “Crude prices soar to nine-year high,” Reuters News Services, in Houston Chronicle, September 22, 1990, C-1; “Oiled,” The Economist (September 22, 1990): 24–25. 43. “News Summary: Office of the Press Secretary,” folder Wednesday, September 26, 1990 [OA 4539], Marlin Fitzwater Guidance Files, Press Office / White House Collection, Box 88, Bush Library (“designed to reduce”); Matthew L. Wald, “U.S. to sell oil from its reserve to ease prices,” NYT, September 28, 1990, D-16. 44. Keith Bradsher, “Oil jumps in futures trading,” NYT, September 27, 1990, D-1; Matthew L. Wald, “Oil prices up despite Bush move,” NYT, September 28, 1990, D-1; Dan Balz and Mark Potts, “Bush orders sale of stockpiled oil,” Washington Post, September 27, 1990, A-36; Wald, “U.S. to sell oil from its reserve to ease prices,” NYT, September 28, 1990, D-16 (“political point of view”). 45. Interview with John W. Bartholomew, April 6, 1998 (“It got to a point”). 46. “Remarks by the President at Lynn Martin for Senate Rally,” Rosemont Horizon Arena, Chicago, Illinois, September 26, 1990, Subject File Strategic Petroleum Reserve [3] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 47. “Oil prices up despite Bush move,” NYT, September 28, 1990, D-1; Paul Wiseman, “Oil market shrugs off Bush’s move,” USA Today, September 28, 1990, B-1; “Oil prices up despite Bush move,” NYT, September 28, 1990, D-1; Wald, “U.S. to sell oil from its reserve to ease prices,” NYT, September 28, 1990, D-16 (“fear market,” “so scared”); “News Summary: Office of the Press Secretary,” folder Friday, September 28, 1990 [OA 4539], Marlin Fitzwater Guidance Files, Press Office / White House Collection, Box 88, Bush Library. 48. Wald, “U.S. to sell oil from its reserve to ease prices,” NYT, September 28, 1990, D-16 (Watkins quote); “Secretary Watkins responds to Presidential Directive by ordering 5 million barrel test of strategic reserve,” DOE News (DOE press release), September 27, 1990, Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library; Robert D. Hershey Jr., “Tripling of Oil Drawdown Sought,” NYT, September 28, 1990, D-5; Bill

284

Notes to pages 168–170

Javetski, et. al., “The Toll That War Could Take On The Economy,” BW (January 28, 1991): 32–33. 49. Youssef Ibrahim, NYT, D-5 (“strong signal,” Haussman quote). 50. “Managers praise oil sale success, stress readiness,” Esprit Special Edition: Test Sale 1990, Vol. 7, No. 1, January 1991 (publication of Boeing Petroleum Services, Inc., 1991): 1; DOE, Office of Fossil Energy, “The Strategic Petroleum Reserve: America’s Energy Insurance,” 16; DOE, Assistant Secretary for Fossil Energy, Office of Petroleum Reserves, Strategic Petroleum Reserve: Annual / Quarterly and Test Sale Report, February 15, 1991 (Washington, D.C.: DOE, 1991), 9–15. An administration document dated January 17, 1991, states that the 1990 test sale enabled the DOE to improve and streamline several processes and operations related to the SPR’s drawdown, sale, and distribution systems. It also states that industry feedback was favorable: the process required no significant change, and there were no concerns regarding ability to refine SPR crude oil. Industry also favored the SDOE’s price adjustment mechanism over the fixed-price method of sale. See “Test Sale-90 Lessons Learned / Corrective Actions Taken,” January 17, 1991, Subject File Strategic Petroleum Reserve [1] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 51. In March 1997, former DOE Senior Energy Analyst Vito Stagliano commented that the Bush administration found that the “IEA was too slow and cumbersome,” and that, as a result, General Brent Scowcroft, Assistant to the President for National Security Affairs, sent letters to the Prime Minister of Japan and the West German Chancellor “essentially telling them that we were going to drawdown in conjunction with the launching of Operation Desert Storm, and that he wanted them to do the same.” Interview with Vito Stagliano, (former) DOE Senior Energy Analyst, March 25, 1997. See also “IEA less sanguine about 1991 world oil and product supply,” Oil and Gas Investor, Vol. 10, No. 7 (February 1991), 7; IEA, The History of the International Energy Agency, Volume III: Principal Documents, 151–52. 52. Memo, James D. Watkins to John H. Sununu and Brent Scowcroft, “Strategic Petroleum Reserve,” October 23, 1990, Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library (“we seem to have weathered / backburner”). 53. “U.S. Energy Policy and the Persian Gulf Crisis,” presentation by Admiral James D. Watkins before the Council on Foreign Relations, New York, New York, December 7, 1990, Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 54. See IEA / OECD press release, “Governing Board Conclusions on the Gulf Situation,” January 11, 1990. See also the January 11, 1990, memo subject titled “Oil Emergency Planning,” from Timothy E. Deal, Special Assistant for National Security Affairs, to Roman Popadiuk, Deputy Press Secretary. Deal comments that “It will be important to emphasize in any response to the press . . . that the U.S. would contribute to it [the IEA emergency response plan] through the use of our Strategic Petroleum Reserve. Both documents can be found in Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18,

Notes to pages 170–173

285

Bush Library; James Tanner, “Energy Agency Plans to Calm Oil Markets,” WSJ (January 14, 1991), A-2; Steven Greenhouse, “Emergency Oil Reserve Plan is Set,” NYT, January 12, 1991, L-31. 55. Greenhouse, “Emergency Oil Reserve Plan is Set,” NYT, January 12, 1991, L-32; Tanner, “Energy Agency Plans to Calm Oil Markets,” WSJ (January 14, 1991), A-2 (Chipperfield quote). 56. NPC, Short-Term Petroleum Outlook . . . An Examination of Issues and Projections, January 23, 1991 (Washington, D.C.: NPC, 1991), Appendix A (Watkins request letter). 57. The draft report provided the substance of the National Petroleum Council’s official report, Short-Term Petroleum Outlook . . . An Examination of Issues and Projections, January 23, 1991. See also Allanna Sullivan, “Oil Concerns Figure They Can Weather Brief War if U.S. Taps Strategic Reserve,” WSJ (January 7, 1991), B4-B (“critical cornerstone,” “producing flat out”); NPC, Short-Term Petroleum Outlook, 7 (“within the framework”), 3, 6–8, 18–23, 40–45; Author’s interview with John H. Guy, Deputy Executive Director, National Petroleum Council, March 14, 1997 (telephone interview). 58. National Petroleum Council, Short-Term Petroleum Outlook . . . An Examination of Issues and Projections, January 23, 1991 (Washington, D.C.: NPC, 1991), 3, 6–8, 18–23, 40–45; Author’s interview with John H. Guy, Deputy Executive Director, National Petroleum Council, March 14, 1997 (telephone interview); IEA, The History of the International Energy Agency, Volume III: Principal Documents, 153–55. 59. “Statement by Press Secretary Fitzwater on the Strategic Petroleum Reserve,” January 16, 1991, Public Papers of the Presidents of the United States: George Bush, 1991, Book I—January 1 to June 30, 1991 (Washington, D.C.: GPO, 1992), 45; “Strategic Petroleum Reserve,” January 17, 1991, Subject File Strategic Petroleum Reserve [1] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library (“intended use”). 60. “President Directs Drawdown of Strategic Reserve,” DOE News, January 16, 1991, 1, 2 (“clear signal”); “Oil markets brace for price collapse as Mideast war rages amid oil glut,” O&G Journal (January 28, 1991), 26 (“strong, forceful action”). 61. “DOE Issues Sales Notice for Strategic Reserve Drawdown,” DOE News, January 17, 1991, 2 (“light crude”); “Strategic Petroleum Reserve Crude Oil Marketing Plan,” January 17, 1991, Subject File Strategic Petroleum Reserve [1] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. With regard to “sweet” versus “sour” oil, the DOE contends that the bulk of the SPR’s sour oil is comparable to the majority of petroleum imported by the United States. The one exception was the SPR’s Mexican Maya oil, which had a sulfur content of 3.28 percent by weight. But even with the Maya oil included (which made up about 2 percent of the reserve’s stocks), SPR crude oils, on average, had a sulfur content of 1.11 percent. Within certain contexts, the DOE contended, all SPR oil (except for the Maya), could be called sweet and not sour. For example, Alaskan North Slope (ANS) oil, both Saudi medium and heavy, and most Venezuelan crudes all had a significantly higher sulfur content. Interview with Richard D. Furiga, September 5, 1996.

286

Notes to pages 173–176

62. “DOE Issues Sales Notice for Strategic Reserve Drawdown,” DOE News (DOE press release), January 17, 1991, 1; “DOE Receives Bids From 26 Companies to Purchase Strategic Reserve Oil,” DOE News, January 28, 1991, 1. 63. “DOE Issues Sales Notice for Strategic Reserve Drawdown,” DOE News (DOE press release), January 17, 1991, 2; “DOE Selects 13 Firms Offering Best Prices for Crude Oil From Strategic Reserve Sale,” DOE News, January 30, 1991, 1; IEA, Oil Supply Security: The Emergency Response Potential of IEA Countries (Paris: OECD / IEA, 1995), 66–67, 96, 120–121, 133, 150, 220–21. 64. “DOE Selects 13 Firms Offering Best Prices for Crude Oil From Strategic Reserve Sale,” DOE News, January 30, 1991, 1. 65. Ibid. 66. “First Oil Shipped From the Strategic Petroleum Reserve,” DOE News, February 5, 1991, 1 (“an historic event”), 2 (“oil to the market”); “Energy Department Completes First Emergency Sale of 17.3 Million Barrels of Strategic Reserve Crude Oil,” DOE News, April 3, 1991, 2 (“important message”); Cook, “A Federal Reserve for Oil,” 86; Robert Buderi, Blanca Reimer, and John Rossant, “Is it Finally Time to Call up the Oil Reserves?,” BW (January 28, 1991): 35. 67. “Daily Schedule,” January 16, 1991, folder Presidential Daily Backup, 1 / 16 / 91 [CF OA 1804], Bush Presidential Records, Office of Appointments and Scheduling Collection, Box 46, Bush Library. 68. “Statement by Press Secretary Fitzwater on the Strategic Petroleum Reserve,” (January 16, 1991, Public Papers), 45. According to Forbes, the DOE announced the drawdown at 11 p.m. Eastern time. See Cook, “A Federal Reserve for Oil,” Forbes (March 4, 1991): 86. See also “Daily Schedule,” January 16, 1991, Bush Library; “Strategic Petroleum Reserve Drawdown Actions,” Subject File Strategic Petroleum Reserve [1] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. In October 1998, Roger Porter, who had been Assistant to President for Economic and Domestic Policy at the time, said that the announcement of the SPR drawdown was deliberately made after the markets had closed, so that no firm or trader would gain any undue advantage from the news; Author’s Interview with Roger Porter, (former) Assistant to President for Economic and Domestic Policy, October 5, 1998 (telephone interview). 69. Dirk Beveridge, “Oil falls fast as war with Iraq Seen Progressing Smoothly,” Associated Press, January 17, 1991 (“The prediction”); James Tanner and Allanna Sullivan, “Waves of U.S. Planes Attack Iraq As War Breaks Out in the Persian Gulf,” WSJ (January 17, 1991), A-1, A-7. 70. “Strategic Petroleum Reserve Crude Oil Marketing Plan,” January 17, 1991, Bush Library; Talking Points, NSC Deputy’s Meeting, John Tuck, Under Secretary of Energy, Subject File Strategic Petroleum Reserve [1] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, Bush Library. 71. Beveridge, “Oil falls fast as war with Iraq Seen Progressing Smoothly,” Associated Press, January 17, 1991; James Tanner and Allanna Sullivan, “Waves of U.S. Planes Attack Iraq As War Breaks Out in the Persian Gulf,” WSJ (January 17, 1991), A-1, A-7; “Markets Are Euphoric on First Day’s Success, But Anxiety Persists,” WSJ (January 18, 1991), A-1; James Tanner and Barbara Rosewicz,

Notes to pages 176–179

287

“Energy Agency Rethinks Its Plan on Oil Reserves,” WSJ (January 18, 1991), A-3; Caleb Solomon, “Oil Firms Caught Off Guard By Volatile Crude Markets,” WSJ (January 18, 1991), A-5; Stanley W. Angrist and Neil Behrmann, “Many Industrial Commodities Expected to Soar if Gulf War Ends Soon but Rallies Will Be Short,” WSJ (January 21, 1991), C-12; Oil markets brace for price collapse as Mideast war rages amid oil glut,” O&G Journal (January 28, 1991), 21. 72. The media reports are cited in the above note. 73. Tanner and Rosewicz, “Energy Agency Rethinks Its Plan on Oil Reserves,” WSJ (January 18, 1991), A-3 (“positive impact”). One IEA official said that the agency, which had hoped to calm markets in the event of war with its emergency response plan, was drawing criticism for “destabilizing” petroleum prices; also Tanner and Rosewicz, A-3 (“destabilizing”). 74. Interview with Vito Stagliano, (“decisive”); Interview with C. Curtis Johnson, (former) SPR Project Manager, President and CEO of DynMcDermott Petroleum Operations Company, October 28, 1996, DynMcDermott Offices, New Orleans, Louisiana (“monumental,” “out of sight”); Author’s interview with Robert H. Gentile, Assistant Secretary of Energy for Fossil Fuel, February 21, 1997, (telephone interview); Sam Fletcher, “3 Years Later, energy markets depressed,” Houston Post, February 27, 1994, D-2; Howard G. Borgstrom, Director, Office of Management Operations, Strategic Petroleum Reserve, DOE, “Experience of the Gulf Crisis: Practical Stockdraw Lessons,” in IEA, Stockdraw and Emergency Response Policies and Management, 200–201. 75. “Nobody at the DOE,” or anywhere else, Verleger commented, “has been able to provide one iota of quantitative evidence that the release of the SPR had any impact upon prices.” Interview with Phillip K. Verleger Jr., August 21, 1997. 76. Author’s interview with Joe Lastelic, spokesman, American Petroleum Institute, October 27, 1997 (telephone interview). Lastelic also commented that “The SPR should only be used in a true, bona fide emergency, where there is an actual shortage of oil on the world market. The SPR should not be used for a one or two day price phenomenon.” 77. Author’s interview with Edward N. Krapels, president, Energy Security Analysis Incorporated, October 7, 1997 (telephone interview). 78. Author’s interview with John H. Lichtblau, chairman, Petroleum Industry Research Foundation (PIRINC), October 10, 1997 (telephone interview) (“a significant factor” through “actual factor”); Patrick Crow, “SPR raids signaling demise of U.S. emergency stockpile?,” O&G Journal (January 13, 1997): 24 (“instantaneous counterforce”); John H. Lichtblau, “Comments on the U.S. Department of Energy Draft “Comprehensive National Energy Strategy,” February 19, 1998, Washington, D.C., 2 (“The security benefits”). 79. Interview with Richard D. Furiga, September 5, 1996 (“very small part”); Interview with William Dorsey, EIA Director of Planning, former SPR Assistant Project Manager, June 23, 1995 (telephone interview); Interview with William C. Gibson, SPR Project Manager, October 28, 1996, Project Management Office, New Orleans, Louisiana (“we like to feel”). 80. Author’s interview with John H. Guy, National Petroleum Council, February 14, 1997, (telephone interview), (“the very announcement”); Interview with John Guy, Deputy Executive Director, National Petroleum Council, November 13, 1996, interviewed by Joseph A. Pratt (“watershed event”).

288

Notes to pages 182–186

CHAPTER SIX 1. In June 1995, DOE Deputy Energy Secretary Bill White described the Republican proposal to sell off parts of the SPR as “simply a dumb idea.” See Bill Mintz, “Republicans unveil energy plans,” Houston Chronicle, June 9, 1995, E-1, E-8. 2. Chris Woodyard, “Clinton wants to sell part of oil in reserve,” Houston Chronicle, April 3, 1996, C-1 (“maintenance”). In early October 1997, the DOE announced the sale of its 78 percent share of the oil and gas reserves in the Elk Hills Naval Petroleum Reserve, located in Kern County, California, fifteen miles west of Bakersfield, to the Occidental Petroleum Company for $3.65 billion. Chevron USA Production Co. retained the remaining 22 percent of the field. The Elk Hills field, comprising roughly 73 square miles, and encompassing more than 47,000 acres, had more than 1,000 producing wells at the time of the sale. The DOE’s sale of its share of the Elk Hills field, part of a two-year privatization process mandated by Congress under the 1996 National Defense Authorization Act, was expected to be complete by February 1998. It was the largest privatization of government assets in U.S. history. See Michael Davis, “Occidental to buy naval reserve field,” Houston Chronicle, October 7, 1997, C-1, C-12; also “Elk Hills Purchase is Part of Larger Change in Oxy’s Strategic Direction,” Hart’s Petroleum Finance Week (October 13, 1997), 1, 4–6. 3. DOE press release, “DOE Begins Final Step of Filling Weeks Island Strategic Reserve Site with Brine to Stabilize Underground Mine,” November, 24, 1998. Author’s interview with Robert C. Porter, DOE spokesman, December 17, 1998. 4. DOE, SPR Annual Report, February 15, 1996 (Washington, D.C.: DOE, 1996), 2–3; Chris Woodyard, “Deficit reason for reserve sale,” Houston Chronicle, May 1, 1996, C-5 (“camel’s nose”). 5. Crow, “SPR raids signaling demise of U.S. emergency stockpile?,” O&G Journal (January 13, 1997), 20–21,–24. 6. Woodyard, “Clinton wants to sell part of oil in reserve,” Houston Chronicle, April 3, 1996, C-3 (“shortsighted,” “regrets”); Daniel Southerland and Clay Chandler, “Clinton, Dole Oil the Gears of Politics,” The Washington Post (May 1, 1996) A-1. 7. Woodyard, “Opinions sought about oil reserve,” Houston Chronicle (September 7, 1996), C-8 (“piggy bank”). 8. Anne Reifenberg and Allanna Sullivan, “Rising Gasoline Prices: Everyone Else’s Fault,” WSJ (May 1, 1996): B-1, B-8. 9. “President’s Remarks at Democratic National Dinner,” April 29, 1996 (from the White House website at [www.pub.whitehouse.gov / uri-res / 12R?urn:pdi: // oma.eop.gov.us / 1996 / 4 / 30 / 1.text.1]; Woodyard, “President taps into reserve oil,” Houston Chronicle, April 30, 1996, A-1 (“very concerned”); Southerland and Chandler, “Clinton, Dole Oil the Gears of Politics,” The Washington Post, May 1, 1996, A-1, A-12. 10. Woodyard, “President taps into reserve oil,” Houston Chronicle, April 30, 1996, A-8 (“softening effect”); “Prices drop on decision to sell off oil,” Houston Chronicle, May 1, 1996, C-4 (“forest fire”); Charles R. Matthews, “Blueprint for a rational energy policy,” Houston Chronicle, May 12, 1996, C-1. 11. “Prices drop on decision to sell off oil,” Houston Chronicle, May 1,

Notes to pages 187–191

289

1996, C-4 (“tip the scale,” “psychological impact”); see also testimony of C. Kyle Simpson, Associate Deputy Secretary, in U.S. Congess, The Future of the Strategic Petroleum Reserve, May 8, 1996 (Washington, D.C.: GPO, 1996), 40, 14–41. 12. U.S. Congress, “Energy Policy Act of 1992” [PL 102–486], Statutes At Large: 1992, Vol. 106, Part 4, October 24, 1992 (Washington, D.C.: GPO, 1993), 106 Stat. 2994, Sec. 1401(B) and (C); U.S. Congress, House, Subcommittee on Energy and Power, The Future of the Strategic Petroleum Reserve, 104th Cong., 2nd Sess., May 8, 1996 (Washington, D.C.: GPO, 1996), 89; Interview with John W. Bartholomew, April 6, 1998. 13. U.S. Congess, House, Subcommittee on Energy and Power, The Future of the Strategic Petroleum Reserve, 70 (Dibona quote), 79–80; Woodyard, “Clinton wants to sell part of oil in reserve,” Houston Chronicle, April 3, 1996, C-3; Crow, “SPR raids signaling demise of U.S. emergency stockpile?,” O&G Journal (January 13, 1997), 21. 14. A year later, Senator Frank Murkowski (R-Alas.) estimated that in total, U.S. taxpayers took a $420-million loss on the 1996 SPR drawdowns; “An Insurance Policy. Not a Checkbook,” IPAA statement on the SPR, from the IPAA website (www.ipaa.org); Crow, “SPR raids signaling demise of U.S. emergency stockpile?” O&G Journal (January 13, 1997), 21 (“a great mistake”); Woodyard, “Clinton wants to sell part of oil in reserve,” Houston Chronicle, April 3, 1996, C-3; Belcher, “Independents Take to the Floor,” Oil and Gas World (July 1997): 47; U.S. Senate, Miscellaneous Energy Policy and Conservation Act Bills, May 13, 1997, 4. 15. Woodyard, “Deficit reason for reserve sale,” Houston Chronicle, May 1, 1996, C-1, C-5 (“I don’t mind”); “Oily Politics,” Houston Chronicle, May 1, 1996, A-24; U.S. Congress, House, Subcommittee on Energy and Power, The Future of the Strategic Petroleum Reserve, 3 (Pallone quote). 16. Interview with Richard D. Furiga, September 5, 1996. 17. 1990 EPCA amendments, Sec. 3, 2(C); 1975 EPCA, Sec 3(8). 18. U.S. Senate, Miscellaneous Energy Policy and Conservation Act Bills, Hearing Before the Committee on Energy and Natural Resources, May 13, 1997 (Washington, D.C.: GPO, 1997), 13–32; see also “Independent Issues,” and Jack Belcher, “Independents Take to the Floor,” in Hart’s Oil and Gas World (July 1997): 38 (Peña quote), 47; “Selling oil reserves is ‘off the table,’ “ Houston Chronicle, May 17, 1997, C-2. 19. U.S. Congress, Senate, Miscellaneous Energy Policy and Conservation Act Bills, 4, 8, 26; U.S. Congress, House, Subcommittee on Energy and Power, The Future of the Strategic Petroleum Reserve, 47. On the Department of the Interior and Related Agencies Appropriations Act of 1998 [H.R. 2107], see Library of Congress Internet site, “Thomas Legislative Information on the Internet” [http: // thomas.loc.gov]; DOE press release, “DOE Cancels Strategic Oil Sale for FY 1998,” May 11, 1998. 20. DOE press release, “DOE Agrees to Help Keep Oil Flowing 32 Major Refineries in America’s Heartland,” May 4, 1996 (Caldwell quote); U.S. Congess, House, Subcommittee on Energy and Power, The Future of the Strategic Petroleum Reserve, May 8, 1996 (Washington, D.C.: GPO, 1996), 18, 76. 21. See “DOE using SPR to help tight markets,” Platt’s Oilgram News, June 19, 2000, Vol. 78, No. 117, 1, 5; “Supply crunch eases for Lousiana re-

290

Notes to pages 191–197

finers,” Platt’s Oilgram News, June 20, 2000, Vol. 78, No. 118, 3. DOE press release, “Energy Department to Exchange Strategic Reserve Oil to Avert Temporary Shutdown of Louisiana Refinery,” June 15, 2000; DOE press release, “Energy Department Agrees to 2nd Oil Exchange to Keep Gasoline, Diesel Flowing,” June 16, 2000; “Citgo in new deal for crude from U.S. strategic reserve,” Reuters, June 19, 2000. 22. Jim Kennit, “2 refineries to get national reserve oil,” Houston Chronicle, February 17, 2000, 3 (“influence the market”). 23. Gerald Karey, “U.S. bill seeks to fill SPR,” Platt’s Oilgram News (Vol. 77, No. 23, February 4, 1999): 5. 24. DOE press release, “Remarks by Secretary of Energy Bill Richardson. Press Conference, Strategic Petroleum Reserve,” February 11, 1999 (Richardson quote); DOE press release, “Richardson Announces Plan to Re-fill the Strategic Petroleum Reserve,” February 11, 1999; David Ivanovich, “U.S. government to buy oil for the reserve,” Houston Chronicle, February 12, 1999, C-2; “U.S. to boost strategic oil reserve by 28-mil bbl,” Platt’s Oilgram News (Vol. 77, No. 29, February 12, 1999): 1, 5. 25. See DOE press releases: “First Contracts for Royalty Oil Transfer to Strategic Petroleum Reserve Signed Today,” March 31, 1999, “Oil Flowing Into Strategic Petroleum Reserve For First Time in Five Years,” May 7, 1999, and “Energy, Interior Departments Sign New Contracts to Use Federal Royalty Oil to Re-Fill Strategic Petroleum Reserve,” June 16, 1999. Also Robin Brown, “Royalty-in-kind helping fill reserve,” Houston Chronicle, June 26, 1999, C-1, C-3. 26. Letter, Senator Joseph Lieberman, et. al., to Energy Secretary Hazel R. O’Leary, September 18, 1996, letter obtained from Senator Lieberman’s Office; Anne Reifenberg, “Oil Supplies Help Prices Defy Gravity,” WSJ (Aug. 19, 1996), C-1. 27. Reifenberg, “Oil Supplies Help Prices Defy Gravity,” WSJ (Aug. 19, 1996), C-1, C-14. 28. Letter, Lieberman, et. al., to O’Leary, September 18, 1996. 29. David Ivanovich, “Officials Seek heating oil supply boost,” Houston Chronicle, September 20, 1996, C-1, C-8. 30. Ibid. 31. Ibid. 32. Chris Woodyard, “O’Leary: No heating oil intervention,” Houston Chronicle, October 19, 1996, C-1 (“impending crisis”), C-3. 33. Press Release, Office of Joseph Kennedy, “DOE Studies Kennedy Proposal for a Regional Heating Oil Reserve,” October 18, 1996 (“may be benefits”). 34. Ibid. 35. Press Release, Office of Joseph Kennedy, “DOE Studies Kennedy Proposal for a Regional Heating Oil Reserve,” October 18, 1996 (“significant changes” through “reexamination”); Woodyard, “O’Leary: No heating oil intervention,” Houston Chronicle, October 19, 1996, C-1, C-3. 36. Press Release, Office of Joseph Kennedy, “DOE Studies Kennedy Proposal for a Regional Heating Oil Reserve,” October 18, 1996; Woodyard, “O’Leary: No heating oil intervention,” Houston Chronicle, October 19, 1996,

Notes to pages 197–201

291

C-3; Press Release, Office of Joseph Kennedy, “Kennedy Meets With Energy Secretary O’Leary on Heating Oil,” October 28, 1996. 37. DOE, Report to Congress on the Feasibility of Establishing a Heating Oil Component to the Strategic Petroleum Reserve, June 1998, Vol. 1 (Washington, D.C.: DOE, June 1998, 2 vols.), ES-1 through ES-7; “U.S. oil stockpile held in Texas, Louisiana caverns,” Reuters, September 13, 2000; Crow, “SPR raids signaling demise of U.S. emergency stockpile?” O&G Journal (January 13, 1997): 20. 38. DOE, Report to Congress on the Feasibility of Establishing a Heating Oil Component to the Strategic Petroleum Reserve, June 1998, Vol. 1, ES-6. In 1998, Hawaii did get some legislative support in its efforts for regional energy protection. On November 13, 1998, President Clinton signed PL 105–388, an act that extended the EPCA, which included a provision that during a drawdown, the State of Hawaii could submit a binding offer for SPR oil, and be entitled to purchase that oil at a price equal to a weighted average price of the successful competitive bids for oil in that category. See SPR Annual Report for Calendar Year 1998, 5. 39. DOE press release, “Northeast Heating Oil Reserve,” October 14, 2000. 40. Scott Allen, “Northeast Oil Gouging: ‘A Classic Case of Market Failure,’” Boston Globe, February 9, 2000 (at the Common Dreams Newscenter website, [http: // www.commondreams.org / headlines / 020900–01.htm]. 41. The percentage of home heating oil users in the U.S. had been declining for years. In 1978, some 22 percent of American households used heating oil; by 1997, only about 10 percent of the nation’s households used heating oil or kerosene as their primary fuel, according to a DOE survey. See Matthew L. Wald, “Clinton refines oil measures,” NYT, appearing in Houston Chronicle, September 24, A-26. Scott Allen, “Northeast Oil Gouging: ‘A Classic Case of Market Failure,’ “ Boston Globe, February 9, 2000 (at the Common Dreams Newscenter website, [http: // www.commondreams.org / headlines / 020900–01 .htm]. 42. “Heating oil prices jump another 8%,” Houston Chronicle, January 22, 2000, C-3; Rudolph W. Giuliani, “Alleviating the Home Heating Oil Crisis,” Mayor’s Message (radio address), February 13, 2000, 1 [http: // www.ci.nyc.ny .us / html / rwg / html / 2000a / me000213.html]. 43. “U.S. energy chief to tackle high heating oil prices,” Reuters, January 26, 2000; Cathy Landry, “U.S. won’t release crude, says DOE leader,” Platt’s Oilgram News, January 27, 2000, 1, 5. 44. Marc Humbert, “Giuliani Attacks President Clinton,” Associated Press, February 17, 2000, 1. 45. “Energy Caution” (editorial), Houston Chronicle, February 1, 2000, A-16; Red Cavaney, president, API, “Handling energy market,” letter to editor, Houston Chronicle, February 2000. 46. Tom Doggett, “White House unlikely to approve reserve oil swap,” Reuters, January 31, 2000; David Ivanovich, “Clinton seeks stability in oil prices,” Houston Chronicle, February 17, 2000, C-4, 1; “Clinton says oil reserve may be an option,” Houston Chronicle, March 1, 2000, C-4; “More money released to help poor buy heat,” Houston Chronicle, February 11, 2000, C-5;

292

Notes to pages 201–204

“Clinton worried on heating oil costs,” Associated Press, 1 [http: // www.house .gov / bernie / publications / articles / 2000–02–15-oil-ap-3.html]. In July 2000, the Houston Chronicle further affirmed this viewpoint, editorializing that “The SPR exists for real national emergencies—like wars.” See “Heating Oil,” editorial, Houston Chronicle, July 15, 2000. 47. Cathy Landry, “Clinton says U.S. still devising response to jump in oil prices,” Platt’s Oilgram News, February 16, 2000, 5. 48. Ibid. 49. “Clinton Worried on Heating Oil Costs,” Associated Press, 2. 50. “Heating oil prices jump another 8%,” Houston Chronicle, January 22, 2000, C-3; “More money released to help poor buy heat,” Houston Chronicle, C-5; Landry, “Clinton says U.S. . . . ,” 5; “Radio Address by the President to the Nation,” March 18, 2000 (from the DOE website, [http: // www.fe.doe.gov / remarks / wh_031800radio.html] (“protect consumers”). 51. DOE press release, “Administration to Establish Heating Oil Component of Strategic Petroleum Reserve,” July 10, 2000 [http: // www.fe.doe.gov / techline / tl_spr_heatingoil.html]; Patrick Connole, “Clinton Unveils Interim Northeast Heating Oil Reserve,” Reuters, July 10, 2001. 52. DOE, “Administration to Establish . . . ,”; Connole, “Clinton Unveils Interim . . . ,” (“is more appropriate”). 53. EIA, DOE, Annual Energy Review 2000, 155. 54. Connole, “Clinton Unveils Interim . . .”; Tom Doggett, “U.S. picks sites for Northeast heating oil reserve,” Reuters, August 18, 2000; DOE press release, “Solicitation to Exchange Strategic Reserve Crude Oil for Heating Oil Issued,” July 19, 2000; DOE press release, “Contracts for Heating Oil Reserve in Place Ahead of Schedule,” August 29, 2000. 55. “Congress creates bill to tap national heating oil reserve,” Houston Chronicle, August 23, 2000, 3C (“Under no circumstances”); Tom Doggett, “U.S. fills rest of Northeast heating oil reserve,” Reuters, August 29, 2000. 56. Connole, “Clinton Unveils Interim . . .” (API statement); Petroleum Industry Research Foundation, Inc., “A Regional Heating Oil Reserve: A ‘Solution’ With its Own Problems,” March 22, 2000 [http: // www.pirinc.org / download / OilReserve.pdf]; CEI Statement on Northeast Home Heating Oil Reserve, March 6, 2001 [http: // www.cei.org / utils / printer.cfm?AID=2501]. 57. “Consumer Federation Chairman Applauds President for Creating New Heating Oil Reserve,” July 11, 2000 [http: // www.consumerfed.org / oil .pdf]; “Congress creates bill to tap national heating oil reserve,” Houston Chronicle, August 23, 2000, 3C. 58. This group included Senators Bob Smith (R-N.H.), Olympia Snowe (R-Maine) and Representatives John Sununu (R-N.H.), Charlie Bass (R-N.H.), Ed Markey (D-Mass.), Bernie Sanders (Ind.-Vt.), Joe Moakley (D-Mass.), as well as Schumer (D-N.Y.) and Collins (R-Maine), among others; DOE press release, “Abraham Formally Establishes Northeast Home Heating Oil Reserve,” March 6, 2001. 59. Ibid; Patricia Wilson, “Bush Unveils $7.1 Billion Energy Program,” Reuters, September 29, 2000, 2. 60. DOE press release, “Abraham Formally Establishes Northeast Home Heating Oil Reserve,” March 6, 2001. 61. Ibid.

Notes to pages 205–209

293

62. Patrick Connole, “Energy Dept Memo Stirs Debate Over Midwest Price Spikes,” Reuters, July 14, 2000, 1–2; and also Alan Elsner, “Gore Accuses Oil Companies, Bush Blasts Gore,” Reuters, June 21, 2000, 2; “Oil companies, White House at Odds,” Reuters, June 21, 2000, 1. 63. In late September, crude oil stocks were down by 2.239 million barrels, to 284.3 million barrels, about 20.7 million barrels lower than previousyear levels. Inventories of distillates, which included heating oil and diesel fuel, were down more than 30 million barrels lower than previous-year levels. David Ivanovich, “GOP criticizes plan to tap reserve,” Houston Chronicle, September 27, 2000. Interestingly, OPEC cited conditions within the U.S. as causing the price runup: refinery bottlenecks, oil market speculation, and high taxes. See “Oil prices fall after Gore suggests tapping reserve,” Houston Chronicle, September 21, 2000, 2–3; Ivanovich, “Industry exec blasts plans for oil reserve,” Houston Chronicle, September 21, 2000, 1; Peg Mackay, “Oil Eases, U.S. Considers Releasing Stocks,” Reuters, September 21, 2000, 2; “Oil remains near $32 as U.S. heating oil stocks stay low,” Reuters, October 4, 2000, 1; Katherine Spector, “Data suggests that heating oil demand peaked early this year,” Oil Daily, October 6, 2000, 2 (“panic buying”); “Clinton asked to ban heating oil exports,” Platt’s Oilgram News, October 13, 2000, 4. 64. Robert A. Manning and Amy Myers Jaffe, “Facing the most precarious time since ’73 oil shocks,” Houston Chronicle, June 18, 2000, C-4. 65. Robert A. Manning and Amy Myers Jaffe, “Facing the most precarious time since ’73 oil shocks,” Houston Chronicle, June 18, 2000, C-4. 66. Michael Davis, “Debate rages above, but all is quiet below,” Houston Chronicle, September 21, 2000, D-3. 67. H. Josef Hebert, “Gore: Tap oil reserve to stabilize prices,” Associated Press, September 21, 2000, 5; “Summers Says Gore’s Oil Plan Could Be Appropriate,” Reuters, September 21, 2000; Mohammed, “Clinton Aides Paper Over Split on Releasing SPR Oil,” Reuters, September 21, 1; David E. Sanger, “Release result of ‘price shock’ rather than actual energy crisis,” NYT, September 24, 2000. 68. H. Josef Hebert, “Gore Urges Clinton on Oil Reserve,” Associated Press, September 21, 2000, 1. 69. Bennett Roth and David Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 1–2. 70. Roth and Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 2; Arshad Mohammed, “Clinton Aides Paper Over Split on Releasing SPR Oil,” Reuters, September 21, 1; Mark Egan, “Gore Blasts Big Oil, Calls Bush ‘Apologist’ for Oil,” Reuters, September 22, 2000, 2. 71. H. Josef Hebert, “Gore: Tap oil reserve to stabilize prices,” Associated Press, September 21, 2000, 5; “Summers Says Gore’s Oil Plan Could Be Appropriate,” Reuters, September 21, 2000; Mohammed, “Clinton Aides Paper Over Split on Releasing SPR Oil,” Reuters, September 21, 1. 72. Hebert, “Gore Urges Clinton on Oil Reserve,” Associated Press, September 21, 2000, 3; Oil prices fall after Gore suggests tapping reserve,” Houston Chronicle, September 21, 2000, 1; Ivanovich, “Industry exec blasts plans for oil reserve,” Houston Chronicle, September 21, 2000, 3. 73. Egan, “Gore Blasts Big Oil, Calls Bush ‘Apologist’ for Oil,” Reuters, September 22, 2000, 1, 3–4.

294

Notes to pages 209–212

74. Roth and Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 3; Egan, “Gore Blasts Big Oil, Calls Bush ‘Apologist’ for Oil,” Reuters, September 22, 2000, 2; “U.S. to Tap Oil Reserve to Curb Energy Prices,” Reuters, September 22, 1–2; H. Josef Hebert, “Gore Urges Clinton on Oil Reserve,” Associated Press, September 21, 2000, 2. 75. Elsner, “Gore Accuses Oil Companies . . . ,” Reuters, June 21, 2000, 1; H. Josef Hebert, “Gore Urges Clinton on Oil Reserve,” Associated Press, September 21, 2000, 2–3; Roth and Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 2; Egan, “Gore Blasts Big Oil, Calls Bush ‘Apologist’ for Oil,” Reuters, September 22, 2000, 1. 76. H. Josef Hebert, “Gore Urges Clinton on Oil Reserve,” Associated Press, September 21, 2000, 2–3; Sandra Sobieraj, “Gore, Bush Tangle Over Releasing Oil,” Associated Press, September 22, 2000, 2. 77. “Oil prices fall after Gore suggests tapping reserve,” Houston Chronicle, September 21, 2000, 1; Davis, “Debate rages above . . . ,” Houston Chronicle, September 21, 2000, D-1. 78. Roth and Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 2; David Ivanovich and Michael Davis, “Oil reserve plan sends prices south,” Houston Chronicle, September 26, 2000, A-1, 10 (“History has shown”); Nelson Antosh, “Oil from reserve in high demand,” Houston Chronicle, October 5, 2000, C-1, 9; “The oil release: How much good will it really do?,” October 2, 2000 (editorial) [http: // www.bergen.com / editorials / oi120001002.htm]; “Oil remains near $32 . . . ,” Reuters, October 4, 2000, 2; “Oil market remains ‘on edge,’ “ Associated Press, October 10, 2000, 1. 79. Adam Geller, “Economist Caution on Oil Reserves,” Associated Press, September 22, 2000, 1–2. 80. David Ivanovich and Patty Reinert, “U.S. unveils plan to draft oil reserves,” Houston Chronicle, September 23, 2000, A-18; Roth and Ivanovich, “Gore calls for tapping oil reserves,” Houston Chronicle, September 21, 2000, 5; Conversely, Heal also commented that it might be a better solution to stand aside and let market forces work on their own. See Geller, “Economist Caution on Oil Reserves,” Associated Press, September 22, 2000, 3. 81. The DOE recognized that only 10 to 15 percent of the 30 million barrels would be turned into heating oil. Refineries generally converted half of a barrel of crude into gasoline; 25 percent into distillate (heating oil and diesel fuel); 10 percent to jet fuel; and the rest to a variety of petroleum products, from lubricating oils to asphalt to floor wax. See David Ivanovich and Patty Reinert, “U.S. unveils plan to draft oil reserves,” Houston Chronicle, September 23, 2000, A-18; Matthew L. Wald, “Clinton refines oil measures,” NYT, appearing in Houston Chronicle, September 24, A-1, 26; Cathy Landry, “Some refiners to stop heating oil exports,” Platt’s Oilgram News, October 16, 2000, 1, 4. 82. David E. Sanger, “Release result of ‘price shock’ rather than actual energy crisis,” NYT, September 24, 2000. 83. “Clinton authorized tapping oil reserve-U.S. sources,” Reuters, September 22, 2000; “U.S. to Tap Oil Reserve to Curb Energy Prices,” Reuters, September 22, 2; Ivanovich and Reinert, “U.S. unveils plan to draft oil reserves,” Houston Chronicle, September 23, 2000, A-18; Ivanovich, “GOP criticizes plan to tap reserve,” Houston Chronicle, September 27, 2000. 84. Barton’s congressional allies reportedly included U.S. Representatives

Notes to pages 212–215

295

Kevin Brady (R-TX), Bill Archer (R-TX), Don Young (R-Ark.), Billy Tauzin (R-La.), as well as U.S. Senators Frank Murkowski (R-Ark.) and Don Nickels (R-Okla.). See “Lawmakers Won’t Sue to Block Emergency Oil Release,” Reuters, September 28, 2000, 1; Lira Behrens and Cathy Landry, “Senate, House panels to probe U.S. SPR swap,” Platt’s Oilgram News, October 16, 2000, 1, 4; Landry, “U.S. lawmakers consider options to block SPR release,” Platt’s Oilgram News, September 28, 2000; Landry, “Group backs off plan to block SPR swap,” Platt’s Oilgram News, September 29, 2000. 85. Paul Greenburg, “Oil and cheap political ploys don’t mix,” Houston Chronicle, September 26, 2000, A-20; Sobieraj, “Gore, Bush Tangle Over Releasing Oil,” Associated Press, September 22, 2000, 1; David E. Sanger, “Release result of ‘price shock’ rather than actual energy crisis,” NYT, September 24, 2000. 86. “Oil steadies as EU debates emergency stocks release,” Reuters, September 26, 2000, 1–2; Hughes Belin, “Consensus sought on EU stocks release,” Platt’s Oilgram News, September 27, 2000. 87. “Oil steadies . . . ,” 2; Hughes Belin, Richard Swann, Jacinta Moran, and Starr Spencer, “EU, majors discuss use of european oil stocks,” Platt’s Oilgram News, September 26, 2000. 88. Hughes Belin, et al., “EU, majors discuss . . . ,” Platt’s Oilgram News, September 26, 2000. 89. Nelson Antosh, “Oil from reserve in high demand,” Houston Chronicle, October 5, 2000, C-1 (“good transaction”), 9. 90. H. Josef Hebert, “Deals on Gov’t Reserve Oil Reached,” Associated Press, October 14, 2000, 1; DOE website, “Clinton orders use of strategic reserves to boost oil supplies,” n.d. [http: // www.fe.doe.gov / spr / exchange / index .shtml]; DOE press release, “First SPR Exchange Crude Oil Shipment Underway; Northeast Heating Oil Reserve Now Full,” October 14, 2000, 1–2; DOE press release, “Final Contracts Awarded in Strategic Reserve Oil Exchange,” October 24, 2000, 1. According to the DOE’s annual energy review for 2000, the agency placed 33.35 million barrels onto the market in the fall of 2000, which “include[d] 30 million barrels released to increase heating oil stocks in exchange for a like quantity plus a bonus percentage to be returned in 2001–2002, as well as additional barrels to create a Northeast Home Heating Oil Reserve.” This suggests that the DOE ultimately exchanged 3.35 million barrels of SPR crude to create the 2-million barrel home heating oil reserve. See EIA / DOE, Annual Energy Review 2000 (Washington, D.C.: EIA / DOE, 2001), 155, note 7. 91. Nelson Antosh, “Oil from reserve in high demand,” Houston Chronicle, October 5, 2000, C-1 (“good transaction”), 9; Davis, “Debate rages above . . . ,” Houston Chronicle, September 21, 2000, D-3 (“blip on the screen”). 92. “Gore Defends Release of U.S. Oil Reserve,” Reuters, September 25, 2000, 1; David Ivanovich and Michael Davis, “Oil reserve plan sends prices south,” Houston Chronicle, September 26, 2000, A-1, 10; Katherine Spector and Andrew Ware, “SPR Announcement Sends Crude Price Down,” Oil Daily, October 6, 2000, 1. 93. The oil release: How much good will it really do?,” October 2, 2000 [http: // www.bergen.com / editorials / oi120001002.htm]; Janet Kidd Stewart, “Investors consider multiple factors on oil prices,” Chicago Tribune, appearing in Houston Chronicle, October 1, 2000, D-10; Nelson Antosh, “Oil from

296

Notes to pages 215–231

reserve in high demand,” Houston Chronicle, October 5, 2000, C-1, 9; “Spector and Ware, “SPR Announcement Sends Crude Price Down,” Oil Daily, October 6, 2000, 1. 94. Laurie Kellman, “Bush, Gore Fight Over Energy Policy,” Reuters, September 29, 2000, 2; Bennet Roth and R. G. Ratcliffe, “Political risk high for both Gore, Bush,” Houston Chronicle, September 23, 2000, A-18; “Gore Defends Release of U.S. Oil Reserve,” Reuters, September 25, 2000, 2.

CHAPTER SEVEN 1. Author’s interview with C. Curtis Johnson, (former) SPR Project Manager, New Orleans, Louisiana, October 28, 1996. 2. Fuel switching and increased indigenous production measures played even less of a role, at 2.57 percent, and .64 percent, respectively. See IEA, The History of the International Energy Agency, Volume III: Principal Documents, 154–55. In a prepared statement to the Senate Committee on Energy and Natural Resources in May 1997, John Pierce Ferriter, IEA Deputy Executive Director, commenting on the recent budget-related SPR drawdowns, said that “the U.S. government intends to use the SPR . . . [as] permitted by the IEP Agreement—as a substitute for full implementation of the treaty’s demand restraint obligations.” See U.S. Senate, Miscellaneous Energy Policy and Conservation Act Bills, May 13, 1997, 50. 3. On May 13, 1998, the DOE issued a statement of policy on the SPR. On the “Use of the Reserve,” the DOE said that “During a severe oil supply disruption the U.S. will ordinarily supplement supply by the early drawdown of the Reserve in large volumes, in coordination with our IEA allies and will rely on market forces to distribute supply. “The statement is contained in DOE, SPR Annual Report, 1998, 6–8. 4. Energy Security Analysis, Inc. (ESAI), “How and When to Use Strategic Reserves,” January 2003, 6, 7. 5. ESAI argues that “Strategic reserves represent a blunt instrument whose use may spawn unintended and unwanted consequences even as they lower benchmark prices,” and adds that “. . . strategic oil reserves may be used to replace lost supplies and lower prices, but then the price mechanism may be short-circuited in a manner that prevents or delays the most efficient allocation of resources, leaving pockets of high prices at the end of the supply chain.” See ESAI, “How and When to Use Strategic Reserves,” January 2003, 2. 6. Ibid., 1–2. 7. In November 2005, the Cato Institute published a lengthy critique of the SPR by Jerry Taylor and Peter Van Doren, “The Case against the Strategic Petroleum Reserve,” under the heading Policy Analysis (No. 555, November 2005) which called for the federal government to “sell the oil within the SPR and terminate the program.” 8. EIA, DOE, Annual Energy Review 2000 (Washington, D.C.: EIA / DOE, 2001), 128–29. 9. Susan Ager, “Americans are becoming too dependent upon their cars,” Houston Chronicle, November 5, 1997, D-2. According to another estimate, between 1970 and 1999, in the United States, the number of vehicles on the road doubled to more than 207 million, and total miles driven per year rose to

Notes to pages 232–240

297

3 trillion; S. William Becker, “Can’t Allow Grinches to steal our gift of cleaner air,” Houston Chronicle, December 21, 1999; EIA, DOE, Annual Energy Review 2000, 34, 42. 10. EIA, DOE, Annual Energy Review 2000, 144–45. 11. One loophole in the legislation allowed lower fuel-efficient cars such as the sports utility vehicle to be classified as a “truck,” and thus have a lower average gas mileage standard to meet. In addition, the automobile manufacturers were able to obtain fuel efficiency standard credits that enabled them to avoid penalties, for a time, if certain vehicles failed to meet their mandated gas mileage standard. 12. In 2000, the world’s twelve leading crude oil producers, from top down, were Saudi Arabia, Russia, the United States, Iran, China, Norway, Mexico, Venezuela, Iraq, the United Kingdom, the United Arab Emirates, and Nigeria; see EIA, DOE, Annual Energy Review 2000, 284. 13. In an interesting corallary to this point, in December 1990 Energy Secretary Watkins also noted the interdependence of the modern international oil market, commenting that “It is immaterial how much oil we import from whichever sources. Any oil imported by our allies and friends is, in a strategic sense, imported by us. Similarly, any oil produced by our allies and friends is produced, in a strategic sense, for us.” See Watkins, “U.S. Energy Policy and the Persian Gulf Crisis,” December 7, 1990, Subject File Strategic Petroleum Reserve [2] [OA 7239], Bush Presidential Records, Judy Smith Files, Press Office / White House Collection, Box 18, George Bush Presidential Library. 14. In 2001, the Centre for Global Energy Studies noted that crude oil prices rose 46 percent in 2000, the third largest increase since 1973. U.S. Federal Reserve Chairman Alan Greenspan estimated that the oil price increases of 2000 were the equivalent of a “consumer tax for the U.S.” of $100 billion. While the direct negative impact on U.S. economic growth was judged to be small, the indirect effects were more damaging: higher inflation which reduced buying power; and rising interest rates which inhibited investment, slowed consumer spending, and reduced asset values. Higher oil prices also hurt company profits, since in competitive markets, companies could not pass along higher input costs to consumers and still retain market share. See “Industry trends,” O&G Journal, July 2, 2001, 7. 15. In the field of oil economics, the debate of whether oil was “just another commodity” has been ongoing for decades. Oil consultant Paul Frankel, who died in 1992, was the leading theorist of the “oil-is-different” school. MIT economist Morris Adelman, now retired, led the ranks of those who contended that “no, it’s just another commodity subject to the laws of supply and demand.” See “So this is what has become of OPEC,” Fortune.com, January 10, 2002. 16. In November 2000, Saudi Arabia led the adoption of a pledge by OPEC and other major oil exporters that oil would not be used as a political weapon. And in March 2002, OPEC secretary general Ali Rodriguez commented that an oil embargo would run counter to the organization’s goal of promoting secure oil supply and stable prices. See Sameer Yacoub, “Iraq announces cut in oil exports,” Associated Press, April 8, 2002. 17. Grant Smith, “IEA Chief: OPEC Spare Capacity Only 1–1.5 Mln b / d,” FWN Financial News, September 20, 2005; Joe Duarte, “Saudi Arabia Oil Produc-

298

Notes to pages 243–250

tion Tapped Out,” October 28, 2005. [http: // www.financialsense.com / editorials / duarte / 2005 / 1028.html]. 18. A 1998 Greenpeace report charged that government funding of the SPR acts as a subsidy to the oil industry. “By protecting consumers and refiners from oil market disruptions,” the report noted, [the] “SPR reduces both the need for private sector entities to establish their own inventories[,] and the incentives for oil consumers to increase their ability to shift fuels in times of oil shortages.” Further, the report said that by enhancing supply security, the SPR, along with U.S. military policing of the Persian Gulf, reduces the risk premium in oil prices. This keeps oil prices artificially low, thereby hindering the development of alternative energies. See Douglas Koplow and Aaron Martin, Fueling Global Warming: Federal Subsidies to Oil in the United States, A Report for Greenpeace (Washington, D.C.: Greenpeace, June 1998), 2, 11, and chapter 4, pages 1, 17 (report quote), 25.

EPILOGUE 1. As of September 2004, Iraqi oil output had not yet recovered to pre-war levels. EIA / DOE, “Global Oil Supply Disruptions Since 1951,” [http: // www .eia.doe.gov / security / distable.html]; Michelle Billig, “Issue Brief: Energy,” Council on Foreign Relations, January 2004. 2. In August 2004, Vice President Dick Cheney defined a severe energy supply disruption as the loss of 5 to 6 million barrels a day in U.S. imports; see “Oil reserves course, hits $49,” Reuters, September 23, 2004. 3. “Senate votes to halt filling reserve,” Houston Chronicle, March 13, 2004; “Gas prices hit record again,” Reuters, March 24, 2004; “Abraham: U.S. to Continue Filling Strategic Oil Reserve,” AFX News Limited, May 13, 2004; “High Oil Prices Re-ignite Calls to Tap Reserve,” Knight Ridder / Tribune News Service, July 21, 2005. 4. “NYMEX keeps gains, U.S. continuing SPR shipments,” Reuters, March 23, 2004; “U.S. Govt Remains Opposed to Selling Oil from Strategic Reserve,” Xinhua News Agency, March 30, 2004; “SPR Stockpiling Seen Having Negligible Impact,” Standard & Poor, March 31, 2004; “White House Says U.S. Has No Plans to Tap Strategic Oil Reserve,” Xinhua News Agency, August 20, 2004. 5. “OPEC asks U.S. to tap emergency reserves,” Houston Chronicle, October 27, 2004; Lynn J. Cook, “Here’s a switch: U.S. rejects OPEC’s plea to tame prices,” Houston Chronicle, October 28, 2004. 6. “Williams to receive 300,000 bbl of SPR crude at Memphis,” Platts, October 3, 2002; DOE, “Statement by Assistant Secretary Smith On Use of the Strategic Petroleum Reserve In Advance of Hurricane Lili,” October 7, 2002. 7. Tom Fowler, “Refiners to borrow from reserve,” Houston Chronicle, September 24, 2004; “Gulf Pipeline Disaster Revealed; SPR Tap Possible,” Rigzone article [www.rigzone.com], October 27, 2004; DOE, “DOE Announces Negotiations for Loan of Oil from the Strategic Petroleum Reserve,” November 8, 2004. 8. Lawrence Kumins and Robert Bamberger, Congressional Research Service, Library of Congress, “Oil and Gas Disruption from Hurricanes Katrina and Rita,” October 21, 2005, pp. 4, 1–5.

Notes to page 250

299

9. “Philippines to raise oil inventories to 40 days,” Platts, February 10, 2002; “EU to call for bigger stockpiles,” Gulf News Online, June 11, 2002; “U.S. to help Russia create oil reserve,” Dow Jones, July 31, 2002; “China to speed up stockpiling of strategic oil reserves,” People’s Daily Online, September 25, 2002; “India to establish 3–4 months of strategic oil reserves,” PTI, September 30, 2002; “Asian countries should consider building energy stockpile,” Associated Press, October 8, 2002; “Malaysia must press ahead to find way to stockpile oil,” October 10, 2002; “Creation of strategic reserves crucial to China’s future development,” United Press International, October 14, 2002; “Nigeria Targets 40 Billion Barrels of Crude Oil Reserve by 2007,” Xinhua News Agency, October 29, 2004.

SOURCES AND BIBLIOGRAPHY ARCHIVES AND COLLECTIONS Jimmy Carter Library, Atlanta, Georgia President’s Files Staff Offices Files White Burkett Miller Center Jimmy Carter Oral History Project White House Central Files Carlton Neville Collection Dyn-McDermott Technical Library, New Orleans, Louisiana Strategic Petroleum Reserve Annual Reports DOE News Esprit (publication of Boeing Petroleum Services, Inc.) Dwight D. Eisenhower Library, Abilene, Kansas Eisenhower Presidential Papers, Ann Whitman File Gerald R. Ford Library, University of Michigan, Ann Arbor, Michigan Frank G. Zarb Papers John O. Marsh Files Glenn R. Schleede Files Henry A. Kissinger and Brent Scowcroft Temporary Parallel File L. William Seidman Files Michael Raoul-Duval Papers Presidential Handwriting File Ron Nessen Files Ron Nessen Papers William E. Simon Papers U.S. Energy Resources Council Records U.S. Council of Economic Advisers Records Franklin D. Roosevelt Library, Hyde Park, New York Roosevelt Presidential Press and Radio Conference transcript Howard-Tilton Memorial Library, Tulane University, New Orleans, Louisiana Lyndy Boggs Papers Library of Congress, Washington, D.C., Harold Ickes Diary National Archives I, Washington, D.C. RG 80, Records of the Navy’s General Board National Archives II, College Park, Maryland Records of the Department of Interior (Records of the Petroleum Reserves Corporation) (RG 48) Records of the Bureau of Mines (RG 70) Records of the Petroleum Administration for War (RG 253) Records of the Office of Civil and Defense Mobilization (RG 304) Records of the Office of Secretary of Defense (RG 330) Records of the Department of Energy (RG 434) Perry-Castaneda Library, University of Texas at Austin, Texas Organisation of Arab Petroleum Exporting Countries News Bulletin (OAPEC News Bulletin)

302

Bibliography

Ronald Reagan Library, Simi Valley, California White House Office of Records Management Subject Files Harry S. Truman Library, Independence, Missouri Oscar Chapman Papers

GOVERNMENT DOCUMENTS Comptroller General. U.S. Government Accounting Office. Analysis of the Energy and Economic Effects of the Iranian Oil Shortfall. EMD79–38, March 5, 1979. Washington, D.C.: GAO, 1979. ———. “Capability of the Naval Petroleum and Oil Shale Reserves to Meet Emergency Oil Needs: Report to the Congress by the Comptroller General of the United States,” contained in U.S. Congress, Senate, Committee on Interior and Insular Affairs, Oil and Gas Imports Issues, Part 3, 93rd Cong., 1st Sess., January 10, 11, and 22, 1973. Washington, D.C.: GPO, 1973. ———. Factors Influencing the Size of the U.S. Strategic Petroleum Reserve, ID-79–8, June 15, 1979. Washington, D.C.: GAO, 1979. ———. Issues Needing Attention in Developing the Strategic Petroleum Reserve. EMD-77–20, February 16, 1977. Washington, D.C.: GAO, 1977. ———. Need to Minimize Risks of Using Salt Caverns for the Strategic Petroleum Reserve. January 9, 1978. Washington, D.C.: GAO, 1978. ———. Questionable Suitability of Certain Salt Caverns And Mines For The Strategic Petroleum Reserve, EMD-78–65, August 14, 1978. Washington, D.C.: GAO, 1978. Interagency Working Group, “Strategic Petroleum Reserve: Analysis of Size Options,” February 1990. Washington, D.C.: DOE, 1990. U.S. Cabinet Task Force on Oil Import Control. The Oil Import Question: A Report on the Relationship of Oil Imports to the National Security. Washington, D.C.: GPO, 1970. U.S. Congress. The Persian Gulf Crisis. Joint Hearings Before the Subcommittee on Arms Control, International Security and Science, Europe and the Middle East, and on International Operations of the Committee on Foreign Affairs and the Joint Economic Committee, 101st Cong., 2nd Sess., August 8, September 18 and 25, October 17, November 28, and December 11, 1990. Washington, D.C.: GPO, 1991. U.S. Congress, House of Representatives. Amendment No. 1 to the Strategic Petroleum Reserve Plan. Hearing Before the Subcommittee on Energy Production and Supply, Committee on Energy and Natural Resources, 95th Cong., 1st Sess., June 9, 1977. Washington, D.C.: GPO, 1977. ———. Crisis in the Persian Gulf. Hearings and Markup Before the Committee on Foreign Affairs. 101st Cong, 2nd Sess., September 4 and 27, October 18, 1990. Washington, D.C.: GPO, 1990. ———. Crisis in the Persian Gulf: Sanctions, Diplomacy and War. Hearings Before the Committee on Armed Services. 101st Cong, 2nd Sess., December 4, 5, 6, 12, 13, 14, 17, 19, and 20, 1990. Washington, D.C.: GPO, 1991. ———. Department of Energy Authorization-Fiscal Year 1979. Hearings

Bibliography

———.

———.

———.

———.

———.

———.

———.

———.

———.

———.

———.

303

Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce. 95th Cong., 2nd Sess., February 16, 17, and 23, 1978. Washington, D.C.: GPO, 1978. Department of Energy’s Participation in the International Energy Agency’s Recent Worldwide Oil-Sharing Test (Allocation Systems Test-AST-4). Hearing Before a Subcommittee of the Committee on Government Operations, 98th Cong., 1st Sess., September 22, 1983. Washington, D.C.: GPO: 1984. Economic Impact of the Persian Gulf Crisis. Hearings Before the Subcommittee on Economic Stabilization of the Committee on Banking, Finance, and Urban Affairs. 101st Cong., 2nd Sess., November 27 and 28, 1990. Washington, D.C.: GPO, 1991. Energy Action DOE No. 5 (An Amendment to the Strategic Petroleum Reserve Plan). Hearing Before the Subcommittee on Energy and Power, November 9, 1979. 96th Cong., 1st Sess. Washington, D.C.: GPO, 1980. Energy Emergency Preparedness. Hearings before the Subcommittee on Fossil and Synthetic Fuels of the Committee on Energy and Commerce, 98th Cong., 2nd Sess., February 1, 2, and 21, 1984. Washington, D.C.: GPO, 1984. Energy Emergency Preparedness: The Unspoken Agenda. A Briefing Paper Prepared by the Congressional Research Service for the Use of the Committee on Energy and Commerce, 98th Cong., 2nd Sess., February 1984. Washington, D.C.: GPO, 1984. Energy Impact of the Persian Gulf Crisis. Joint Hearings Before the Subcommittee on Energy and Power and the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, 101st Cong., 2nd Sess., August 7, September 10, and 27, 1990. Washington, D.C.: GPO, 1991. Energy Impact of the Persian Gulf Crisis. Hearing Before the Committee on Energy and Commerce. 102nd Cong., 1st Sess., January 9, 1991. Washington, D.C.: GPO, 1991. Energy Policy Implications (Economic and Budgetary) of the Middle East Oil Crisis. Hearing Before the Task Force on Community Development and Natural Resources of the Committee on the Budget. 101st Cong., 2nd Sess., October 24, 1990. Washington, D.C.: GPO, 1990. Filling the Strategic Petroleum Reserve: Oversight Series; and H.R 7252: Use of the Naval Petroleum Reserve. Hearings Before the Committee on Interstate and Foreign Commerce, Subcommittee on Energy and Power. 96th Cong., 2nd Sess., April 25, May 21, and September 15, 1980. Washington, D.C.: GPO, 1980. Fiscal Year 1981 Authorization for the Department of Energy and the Federal Regulatory Commission. Hearings Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce. 96th Cong., 2nd Sess., February 8, 11, 12, 13, 20, and 29, 1980. Washington, D.C.: GPO, 1980. Foreign Policy Implications of the Energy Crisis. Washington, D.C.: GPO, 1972.

304

Bibliography

———. Fuel Price Increases. Hearing Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce. 101st Cong., 2nd Sess., January 9, 1990. Washington, D.C.: GPO, 1990. ———. The Future of the Strategic Petroleum Reserve. Hearing Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce. 104th Cong., 2nd Sess., May 8, 1996. Washington, D.C.: GPO, 1996. ———. National Energy Strategy (Part 5). Hearings Before the Subcommittee on Energy and Power of the Committee on Interstate and Foreign Commerce. 102nd Cong., 1st Sess., May 16, 1991. Washington, D.C.: GPO, 1991. ———. Oil Import Fee: Its Energy Policy Implications and Consumer Impacts. Hearing Before a Subcommittee of the Committee on Government Operations. 97th Cong., 2nd Sess., April 27, 1982. Washington, D.C.: Committee Print / GPO, 1982. ———. The Persian Gulf Crisis: Relevant Documents, Correspondence, Reports. Report Prepared by the Subcommitee on Arms Control, International Security and Science of the Committee on Foreign Affairs. 102nd Cong., 1st Sess., June 1991. Washington, D.C.: GPO, 1991. ———. Petroleum Investigation—Petroleum Supplies for Military and Civilian Needs. Special Subcommittee on Petroleum Investigation of the Committee on Interstate and Foreign Commerce. Report No. 663, 78th Cong., July 3, 1943. Washington, D.C.: GPO, 1943. ———. Review of DOE’s Response to the Committee Report on Emergency Preparedness. Hearing Before a Subcommittee of the Committee on Government Operations. 98th Cong., 2nd Sess., September 13, 1984. Washington, D.C.: GPO, 1985. ———. Review of Emergency Preparedness and Strategic Petroleum Reserve Policies. Hearing Before a Subcommittee of the Committee on Government Operations. 98th Cong., 2nd Sess., October 15, 1984. Washington, D.C.: Committee Print / GPO, 1985. ———. Strategic Petroleum Reserve. Hearing Before the Subcommittee on Energy and Power, Committee in Interstate and Foreign Commerce. 95th Cong., 1st Sess., February 16, 1977. Washington, D.C.: GPO, 1977. ———. Strategic Petroleum Reserve. Hearing Before the Subcommittee on Energy and Power, Committee in Interstate and Foreign Commerce. 101st Cong., 2nd Sess., May 16, 1990. Washington, D.C.: GPO, 1990. ———. Strategic Petroleum Reserve Amendments of 1990: Conference Report. September 13, 1990, 101st Cong., 2nd Sess., Report 101–698. Washington, D.C.: GPO, 1990. ———. Strategic Petroleum Reserve Amendments of 1990: Report. July 16, 1990, 101st Cong., 2nd Sess., Report 101–604. Washington, D.C.: GPO, 1990. ———. Strategic Petroleum Reserve Financing. Hearings Before the Subcommittee on Fossil and Synthetic Fuels of the Committee on Energy and Commerce. 97th Cong., 1st Sess., March 18, April 28, and May 11, 1981. Washington, D.C.: GPO, 1981.

Bibliography

305

———. Strategic Petroleum Reserve Issues. Hearings Before the Subcommittee on Fossil and Synthetic Fuels of the Committee on Energy and Commerce. 97th Cong., 2nd Sess., March 2 and August 2, 1982. Washington, D.C.: GPO, 1982. ———. Strategic Petroleum Reserve: Oil Supply and Construction Problems. Hearing Before the Subcommittee on Energy and Power. 96th Cong., 1st Sess., September, 10, 1979. Washington, D.C.: GPO, 1980. ———. Strategic Petroleum Reserve: Reprogramming of Funds. Hearing Before the Subcommittee on Energy and Power. 95th Cong., 2nd Sess., December 18, 1978. Washington, D.C.: GPO, 1979. ———. Update on the Situation in the Persian Gulf. Hearings Before the Committee on Foreign Affairs and the Subcommittee on Arms Control, International Security and Science, Europe and the Middle East. 101st Cong., 2nd Sess., September 26 and December 6, 1990. Washington, D.C.: GPO, 1991. ———. U.S. Economic and Energy Security Interests in the Persian Gulf. Hearing Before the Subcommittee on Economic Stabilization of the Committee on Banking, Finance, and Urban Affairs. 101st Cong., 2nd Sess., August 7, 1990. Washington, D.C.: GPO, 1990. ———. The U.S. Oil Shortage and the Arab-Israeli Conflict. Committee on Foreign Affairs. Report of a Study Mission to the Middle East From October 22 to November 3, 1973. Washington, D.C.: GPO, 1973. U.S. Congress, Senate. Consumer Energy Price Increases. Hearing Before the Subcommittee on the Consumer of the Committee on Commerce, Science, and Transportation. 101st Cong., 2nd Sess., August 7, 1990. Washington, D.C.: GPO, 1990. ———. Amendment No. 1 to the Strategic Petroleum Reserve Plan. Hearing Before the Subcommittee on Energy Resources and Materials Production of the Committee on Energy and Natural Resources, June 9, 1977. 95th Cong., 1st Sess. Washington, D.C.: GPO, 1977. ———. Current Condition of the Strategic Petroleum Reserve. Hearings Before the Senate Subcommittee on Energy and Mineral Resources. 97th Cong., 2nd Sess., March 16 and 25, 1982. Washington, D.C.: GPO, 1982. ———. Energy Emergency Preparedness: International and Domestic Issues. Hearing Before the Committee on Energy and Natural Resources. 97th Cong., 2nd Sess., May 6, 1982. Washington, D.C.: GPO, 1982. ———. Energy Policy and Conservation Act Amendments of 1985. Hearing Before the Committee on Energy and Natural Resources, May 1, 1985. 99th Cong., 1st Sess. Washington, D.C.: GPO, 1985. ———. Energy Policy and Conservation Act Amendments of 1990. Hearing Before the Committee on Energy and Natural Resources, March 20, 1990. 101st Cong., 2nd Sess. Washington, D.C.: GPO, 1990. ———. Implications of the Middle Eastern Crisis for Near-Term and MidTerm Oil Supply. Hearing Before the Committee on Energy and Natural Resources, September 13, 1990. 101st Cong., 2nd Sess. Washington, D.C.: GPO, 1990. ———. Miscellaneous Energy Policy and Conservation Act Bills. Hear-

306

———.

———.

———.

———.

———.

———.

———.

———.

———.

———.

———.

———.

———. ———.

Bibliography ing Before the Committee on Energy and Natural Resources. 105th Cong., 1st Sess., May 13, 1997. Washington, D.C., GPO: 1997. Review of the Strategic Petroleum Reserve Plan. Hearing Before the Committee on Interior and Insular Affairs. 95th Cong., 1st Sess., February 4, 1977. Washington, D.C.: GPO, 1977. Strategic Petroleum Reserve Amendments Act of 1981: Report. Hearing Before the Committee on Energy and Natural Resources. 97th Cong., 1st Sess., May 15, 1981. Washington, D.C.: GPO, Committee Print, 1981. Strategic Petroleum Reserve-DOE Energy Action No. 1. Hearing Before the Subcommittee on Energy Production and Supply of the Committee on Energy and Natural Resources. 95th Cong., 2nd Sess., April 10, 1978. Washington, D.C.: GPO, 1978. U.S. Policy in the Persian Gulf, Part 1 and 2. Hearings Before the Committee on Foreign Relations. 101st Cong., 2nd Sess., December 4, 5, 6, 12, and 13, 1990. Washington, D.C.: GPO, 1991. World Oil Outlook. Hearing Before the Committee on Energy and Natural Resources. March 26, 1990. 101st Cong., 2nd Sess. Washington, D.C.: GPO, 1990. World Petroleum Outlook—1984. Hearing Before the Committee on Energy and Natural Resources. January 30, 1984. 98th Cong., 2nd Sess. Washington, D.C.: GPO, 1984. Posture of the Strategic Petroleum Reserve. Hearings Before the Subcommittee on Energy Resources and Materials Production of the Committee on Energy and Natural Resources, March 26, 1979. 96th Cong., 1st Sess. Washington, D.C.: GPO, 1979. The Strategic Petroleum Reserve and the Naval Petroleum Reserve. Hearings Before the Subcommittee on Energy Resources and Materials Production of the Committee on Energy and Natural Resources, April 18, 1980. 96th Cong., 2nd Sess. Washington, D.C.: GPO, 1980. Committee on Foreign Relations. Subcommittee on Multinational Corporations. A Documentary History of the Petroleum Reserves Corporation. 93rd Congress, 2nd Session, Washington, D.C.: GPO, 1974. Committee on Foreign Relations. Subcommittee on Multinational Corporations. The International Petroleum Cartel, the Iranian Consortium and U.S. National Security. 93rd Congress, 2nd Session, Washington, D.C.: GPO, 1974. U.S. Companies and the Arab Oil Embargo: The International Allocation of Constricted Supply. Committee Print. Washington, D.C.: GPO, 1975. Review of the Strategic Petroleum Reserve Plan. Hearing Before the Committee on Interior and Insular Affairs. 95th Congress, 1st Session, February 4, 1977. Strategic Petroleum Reserves. 93rd Congress, 1st Sess., May 30 and July 26, 1973. Washington, D.C.: GPO, 1973. Market Performance and Competition in the U.S. Petroleum Industry. 93rd Cong., 1st Sess. Committee Print, 1973.

Bibliography

307

———. The Structure of the U.S. Petroleum Industry: A Summary of Survey Data. 94th Cong., 2nd Sess. Committee Print, 1976. ———. Current Energy Shortages Oversight Series: The Major Oil Companies, Part 2. Hearing Before the Permanent Subcommittee on Investigations of the Committee on Government Operations. January 21, 1974. 93rd Cong., 1st and 2nd Sess., Washington, D.C.: GPO, 1974. ———. U.S. Congress, Senate, Committee on Interior and Insular Affairs. Fuel Shortages, Part 1, February 1, 1973, and Fuel Shortages, Part 2, February 22, 1973. 93rd Cong., 1st Sess. Washington, D.C.: GPO, 1973. ———. A Study of the Relationships Between the Government and the Petroleum Industry in Selected Foreign Countries, The Federal Republic of Germany, The Netherlands, Italy, France, The United Kingdom, prepared by the Congressional Research Service. Washington, D.C.: GPO, 1975. ———. Agreement on an International Energy Program. Washington, D.C.: GPO, 1974. ———. Committee on the Judiciary. Subcommittee on Antitrust and Monopoly. Petroleum, the Antitrust Laws and Government Policies. 85th Cong., 1st Sess., Washington, D.C.: GPO, 1957. ———. Interfuel Competition. 94th Cong., 1st Sess., Washington, D.C.: GPO: 1975. ———. The Petroleum Industry. 94th Cong., 1st Sess., Washington, D.C.: GPO: 1976. ———. Select Committee on Small Business. Subcommittee on Monopoly. The International Petroleum Cartel: Staff Report to the Federal Trade Commission. 82d Cong., 1st Sess., Washington D.C.: GPO, 1952. (FTC, International Petroleum Cartel). ———. Special Committee Investigating Petroleum Resources. Investigation of Petroleum Resources. 79th Cong., 1st and 2nd Sess., Washington D.C.: GPO, 1946. ———. Special Committee Investigating Petroleum Resources, Investigation of Petroleum Resources in Relation to the National Defense: Final Report. Senate Report No. 9, 80th Cong., 1st Sess. Washington, D.C.: GPO, 1947. ———. Special Committee Investigating the National Defense Program. Petroleum Arrangements with Saudi Arabia: Investigation of the National Defense Program, Part 41, 1947–1948. 80th Cong., 1st Sess. Washington, D.C.: GPO, 1948. ———. Subcommittee on Multinational Corporations of the Committee on Foreign Relations. Report: Multinational Oil Corporations and U.S. Foreign Policy, 93rd Congress, 2nd Sess., January 2, 1975. Washington, D.C.: GPO, 1975. (Multinational Hearings) U.S. Department of Energy. A Report to the Congress: Strategic Petroleum Reserve Drawdown Plan, Amendment No. 4. December 1, 1982. Washington, D.C.: DOE, 1982. ———. Report on the Explosion, Fire, and Oil Spill Resulting in One Fatality and Injury on September 21, 1978, at Well 6 of Cavern 6 at the

308

Bibliography

West Hackberry, Louisiana Oil Storage Site of the Strategic Petroleum Reserve. DOE / EV-0032, November 1978. Washington, D.C.: GPO, 1978. ———. United States Strategic Petroleum Reserve: Energy Security For America, DOE / FE-0341, October 1995. Washington, D.C.: DOE, 1995. ———. Assistant Secretary Fossil Energy, Deputy Assistant Secretary, Strategic Petroleum Reserve. Report to Congress on the Feasibility of Establishing a Heating Oil Component to the Strategic Petroleum Reserve, June 1998, 2 vols. Washington, D.C.: DOE, 1998. ———. Assistant Secretary for Fossil Energy. Strategic Petroleum Reserve Distribution Systems. October 1993. Washington, D.C.: DOE, 1993. ———. Assistant Secretary for Resource Applications. Strategic Petroleum Reserve Plan Amendment No. 3: Distribution Plan for the Strategic Petroleum Reserve, Energy Action DOE No. 5. October 31, 1979. Washington, D.C.: GPO., 1979. ———. Energy Information Administration. 25th Anniversary of the 1973 Oil Embargo: Energy Trends Since the First Major Energy Crisis, DOE / EIA-0624, August 1998. Washington, D.C.: DOE / EIA, 1998. ———. Office of the Executive Secretary. Holl, Jack, Chief Historian, History Division. The United States Department of Energy: A History. DOE / ES-004, November 1982. Washington, D.C.: GPO, 1982. ———. Office of Fossil Energy. The Strategic Petroleum Reserve: America’s Energy Insurance. DOE / FE-0214P, January 1991. Washington, D.C.: DOE, 1991. ———. Office of the Secretary, Historian’s Office. Anders, Roger M. The Federal Energy Administration. DOE / OSE-005, November, 1980. Washington, D.C.: GPO, 1980. ———. Office of the Secretary, Historian’s Office. Buck, Alice L. The Office of Oil and Natural Gas Supply Development. DOE / OSE-002, November, 1978. Washington, D.C.: GPO, 1980. U.S. Department of the Interior. An Analysis of the Economic and Security Aspects of the Trans-Alaskan Pipeline. Washington, D.C.: GPO, 1971. U.S. Department of Justice. Anti-Trust Division. Report of the Justice Department to the President Concerning the Gasoline Shortage of 1979. Washington, D.C.: GPO, 1980. U.S. Department of State. Department of State Bulletin. Vol. 81, No. 2052, July 1981. Washington, D.C.: GPO, 1981. U.S. Federal Energy Administration. Project Independence Report, Parts 1 and 2. Washington, D.C.: GPO, 1974. Office of International Energy Affairs, Federal Energy Administration. U.S. Oil Companies and the Arab Oil Embargo: The International Allocation of Constricted Supplies, prepared for the Subcommittee on Multinational Corporations of the Committee on Foreign Relations, U.S. Senate, January 27, 1975. Washington, D.C.: GPO, 1975. Strategic Petroleum Reserve Office, Department of Energy. Strategic Petroleum Reserve, Texoma Group Salt Domes: West Hackberry Expansion, Black Bayou, Vinton, Big Hill: Cameron and Calcasieu

Bibliography

309

Parishes, Louisiana and Jefferson County, Texas: Final Environmental Impact Statement. Springfield, Va.: DOE, 1978. Strategic Petroleum Reserve Office, Federal Energy Administration. Early Storage Reserve Plan. Washington, D.C.: GPO, 1976. ———. Strategic Petroleum Reserve Plan. December 15, 1976. Washington, D.C.: FEA / SPR Office, 1976. ———. Strategic Petroleum Reserve Plan Amendment No. 1: Acceleration of the Development Schedule, Energy Action No. 12, May 25, 1977. Washington, D.C.: GPO, 1977. ———. Strategic Petroleum Reserve Plan: Expansion of the Strategic Petroleum Reserve Amendment No. 2, Energy Action DOE No. 1, March 1978. Washington, D.C.: GPO, 1978. ———. Strategic Petroleum Reserve Plan: Expansion of the Strategic Petroleum Reserve Amendment No. 2, Energy Action DOE No. 2, June 1978. Washington, D.C.: GPO, 1978. U.S. Federal Energy Administration / Department of Energy, The Role of Foreign Governments in the Energy Industries. Washington, D.C.: GPO, October 1977. U.S. Federal Trade Commission. Factors Influencing the Size of the U.S. Strategic Petroleum Reserve. ID-79–8, June 15, 1979. Washington, D.C.: GPO, 1979. U.S. Federal Trade Commission, Staff Report. Concentration Levels and Trends in the Energy Sector of the U.S. Economy. Washington, D.C.: GPO, 1974. U.S. Petroleum Administration for War. Petroleum in War and Peace. Washington, D.C.: PAW, 1945. U.S. President. Public Papers of the Presidents of the United States: Richard M. Nixon, 1973. Washington, D.C.: GPO, 1975. U.S. President. Public Papers of the Presidents of the United States: Gerald R. Ford, 1975. Washington, D.C.: GPO, 1977. U.S. President. Public Papers of the Presidents of the United States: Jimmy Carter, 1977. Washington, D.C.: GPO, 1977. U.S. President. Public Papers of the Presidents of the United States: Jimmy Carter, 1979. Washington, D.C.: GPO, 1980. U.S. President. Public Papers of the Presidents of the United States: Ronald Reagan, 1981. Washington, D.C.: GPO, 1982. U.S. President. Public Papers of the Presidents of the United States: Ronald Reagan, 1982. Washington, D.C.: GPO, 1983. U.S. President. Public Papers of the Presidents of the United States: George Bush, 1990. Washington, D.C.: GPO, 1991. U.S. President’s Materials Policy Commission. Resources for Freedom. 5 vols. Washington, D.C.: GPO, 1952.

BOOKS AND DISSERTATIONS Adelman, M. A. The World Petroleum Market. Baltimore: Johns Hopkins University Press, 1972. Allen, Loring. OPEC Oil. Cambridge, Mass: Oelgschlager, Gunn & Hain, 1979.

310

Bibliography

Allen, Peter. The Yom Kippur War. New York: Charles Scribner’s Sons, 1982. Alm, Alvin L., and Robert J. Weiner, eds. Oil Shock: Policy Response and Implementation. Cambridge, Mass.: Ballinger Publishing Co., 1984. ———. Two Energy Futures: A National Choice for the 80s. Washington, D.C.: API, 1980. American Petroleum Institute. Witnesses for Oil: The Case Against Dismemberment. Washington, D.C.: API, 1976. Anders, Roger M. Institutional Origins of the Department of Energy: The Federal Energy Administration. Washington, D.C.: DOE, 1980. Anderson, Irvine H. Aramco, the United States, and Saudi Arabia: A Study of the Dynamics of Foreign Oil Policy, 1933–1950. Princeton: Princeton University Press, 1981. Anderson, Robert O. Fundamentals of the Petroleum Industry. Norman: University of Oklahoma Press, 1984. Arthur Andersen & Co. and Cambridge Energy Research Associates. The Future of Oil Prices: The Perils of Prophecy. Houston: Arthur Andersen & Co., 1984. Asher, Norman J., and Wendy West. Use of Tankers for Stockpiling Petroleum. Institute for Defense Analyses Paper, No. 1241. Washington, D.C., January 1977. Axelrod, Regina S., ed. Environment, Energy, Public Policy: Toward a Rational Future. Lexington, Mass.: Lexington Books, 1981. Bakhash, Shaul. The Politics of Oil and Revolution in Iran: A Staff Paper. Washington, D.C.: Brookings Institution, 1982. Blair, John M. The Control of Oil. New York: Pantheon Books, 1976. Bloch, Carolyn C. Federal Energy Information Sources and Data Bases. Park Ridge, N.J.: Noyes Data Corporation, 1979. Bohi, Douglas R., and Milton Russell. U.S. Energy Politics: Alternatives for Security. Baltimore: Johns Hopkins University Press, 1975. Bradley, Robert L., Jr. The Mirage of Oil Protection. New York: University Press of America, 1989. Bremner, Robert H., Gary W. Reichard, and Richard J. Hopkins, eds. American Choices: Social Dilemmas and Public Policy Since 1960s. Columbus: Ohio State University Press, 1986. Bromley, Simon. American Hegemony and World Oil: The Industry, the State System and the World Economy. University Park: Pennsylvania State University Press, 1991. Buck, Alice L. Institutional Origins of the Department of Energy: The Office of Oil and Natural Gas Supply Development. Washington, D.C.: DOE, 1980. Bucknell, Howard. Energy and the National Defense. Lexington, Ky.: The University Press of Kentucky, 1981. ———. Energy Policy and Naval Strategy. Beverly Hills, Calif.: Sage Publications, 1975. Bullis, L. Harold, and James E. Mielke. Strategic and Critical Materials. Boulder, Colo.: Westview Press, 1985. Cambridge Energy Research Associates. Energy and Environment: The New Landscape of Public Opinion. Cambridge, Mass.: Cambridge Energy Research Associates, 1990.

Bibliography

311

Al-Chalibi, Fadhil J. OPEC and the International Oil Industry: A Changing Structure. Oxford: Oxford University Press, 1980. ———. OPEC at the Crossroads. Oxford: Pergamon, 1989. Chester, Edward W. United States Oil Policy and Diplomacy: A Twentieth Century Overview. Westport, Conn.: Greenwood Press, 1983. Churchill, Winston S. L. The World Crisis. 4 Vols. New York: Charles Scribner’s Sons, 1923–29. Clark, John G. Energy and the Federal Government: Fossil Fuel Policies, 1900–1946. Urbana and Chicago: University of Illinois Press, 1987. Cordesman, Anthony H. The Arab-Israeli Military Balance and the Art of Operations: An Analysis of Military Lessons and Trends and Implications for Future Conflicts. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1987. ———. The Gulf and the Search for Strategic Stability: Saudi Arabia, the Military Balance in the Gulf, and Trends in the Arab-Israeli Military Balance. Boulder, Colo.: Westview Press, 1984. ———. The Gulf and the West: Strategic Relations and Military Realities. Boulder, Colo.: Westview Press, 1988. Cowhey, Peter F. The Problems of Plenty: Energy Policy and International Politics. Berkeley: University of California Press, 1985. Cottam, Richard W. Iran and the United States: A Cold War Case Study. Pittsburgh: University of Pittsburgh Press, 1988. Daniels, George H., and Mark H. Rose, eds. Energy and Transport: Historical Perspectives on Policy Issues. Beverly Hills: Sage Publications, 1982. Daniels, Josephus. The Wilson Era, 2 Vols. Chapel Hill: University of North Carolina Press, 1946. Davenport, E. H., and Sidney Russell Cooke. The Oil Trusts & AngloAmerican Relations. London: MacMillan and Co., 1923. Davis, David Howard. Energy Politics. New York: St. Martin’s Press, 1982. Dean, Prentice C. Energy History Chronology from World War II to Present. Washington, D.C.: DOE, 1982. Dedmon, Emmett. Challenge and Response: A Modern History of Standard Oil Company-Indiana. Chicago: The Mobium Press, 1984. Deese, David, and Joseph. S. Nye, eds. Energy and Security: A Report of Harvard’s Energy and Security Research Project. Cambridge, Mass.: Ballinger Publishing Company, 1981. Ebinger, Charles K. The Critical Link: Energy and National Security in the 1980s. Cambridge: Ballinger Publishing Co., 1982. Eckes, Alfred Jr. The United States and the Global Struggle for Minerals. Austin, Tex.: University of Texas Press, 1979. Eden, Richard, Michael Posner, Richard Bending, Edmund Crouch, and Joseph Stanislaw. Energy Economics: Growth, Resources, and Politics. New York: Cambridge University Press, 1981. Eklof, Dennis. “The Strategic Petroleum Reserve: An Operational Perspective.” Council on Foreign Relations Paper, Cambridge Energy Associates Report, April 16, 1990. Engler, Robert. The Brotherhood of Oil: Energy Policy and the Public Interest. University of Chicago Press, 1977.

312

Bibliography

———. The Politics of Oil: A Study of Private Power and Democratic Directions. New York: MacMillan Press, 1961. Esposito, John L., ed. The Iranian Revolution: Its Global Impact. Miami: Florida International University Press, 1990. ———. Petroleum and American Foreign Policy. Stanford: Food Research Institute, 1944. Feis, Herbert. Seen from E.A.: Three International Episodes. New York: Knopf, 1947. Feldman, Robert A. The Impact of Oil Import Prices Shocks on Domestic Prices. Boulder, Colo.: Westview Press, 1982. Ferrier, R. W. The History of the British Petroleum Company, Vol. 1: The Developing Years, 1901–1932. New York: Cambridge University Press, 1982. Fesharaki, Fereidun, and David T. Isaak. OPEC, the Gulf, and the World Petroleum Market: A Study in Government Policy and Downstream Operations. Boulder, Colo.: Westview Press, 1983. Fisher, John C. Energy Crises in Perspective. New York: A Wiley-Interscience Publication, 1974. Frances, John G. The Politics of Regulation: A Comparative Perspective. Cambridge, Mass.: Blackwell Press, 1993. Frey, John W., and H. Chandler Ide. A History of the Petroleum Administration for War, 1941–1945. Washington D.C.: GPO, 1946. Fried, Edward R., and Charles L. Schultze, eds. Higher Oil Prices and the World Economy: The Adjustment Problem. Washington., D.C.: The Brookings Institution, 1975. Galambos, Louis, and Joseph A. Pratt. The Rise of the Corporate Commonwealth: United States Business and Public Policy in the 20th Century. New York: Basic Books, 1988. Ghods, M. Reza. Iran in the Twentieth Century: A Political History. Boulder: L. Rienner Publishers, 1989. Ghosh, Arabinda. OPEC, the Petroleum Industry, and United States Energy Policy. Westport, Conn.: Quorum Books, 1983. Gibb, George Sweet, and Evelyn H. Knowlton. History of Standard Oil Company (New Jersey), Vol. 2, The Resurgent Years, 1911–1927. New York: Harper & Brothers, 1956. Gielbelhaus, August W. Business and Government in the Oil Industry: A Case Study of Sun Oil, 1876–1945. Greenwich, Conn.: JAI Press, 1980. Gisselquist, David. Oil Prices and Trade Deficits: U.S. Conflicts with Japan and West Germany. New York: Praeger Publishers, 1979. Glasner, David. Politics, Prices, and Petroleum: The Political Economy of Energy. Cambridge: Ballinger Publishing Co., 1985. Goodwin, Craufurd D. Energy Policy in Perspective: Today’s Problems, Yesterday’s Solutions. Washington, D.C.: The Brookings Institution, 1981. Hager, Dorsey. Fundamentals of the Petroleum Industry. New York: McGrawHill Book Company, 1939. Halbouty, Michel T. Salt Domes: Gulf Region, United States, and Mexico. Houston: Gulf Publishing Company, 1979, c. 1967.

Bibliography

313

Herzog, Chaim. The Arab Israeli Wars: War and Peace in the Middle East, From the War of Independence Through Lebanon. New York: Random House, 1982. Hodel, Donald Paul, and Robert Deitz. Crisis in the Oil Patch: How America’s Energy Industry Is Being Destroyed and What Must Be Done to Save It. Washington, D.C.: Regnery Publishing, Inc., 1994. Horwich, George, and Edward J. Mitchell, eds. Policies for Coping with Oil-Supply Disruptions. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1982. Horwich, George, and David Leo Weimer. Oil Price Shocks, Market Response, and Contingency Planning. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1984. Horwich, George, and David Leo Weimer, eds. Responding to International Oil Crises. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1988. ———. The Autobiography of a Curmudgeon. New York: Reynal & Hitchcock, 1943. International Energy Agency. The History of the International Energy Agency, Volume I: Origins and Structure of the IEA. Paris: OECD / IEA, 1994. ———. Fightin’ Oil. New York: Alfred Knopf, 1943. Ickes, Harold L. The Secret Diary of Harold L. Ickes. 3 vols. New York: Simon and Schuster, 1953–1954. ———. The History of the International Energy Agency, Volume II: Major Policies and Actions. Paris: OECD / IEA, 1995. ———. The History of the International Energy Agency, Volume III: Principal Documents. Paris: OECD / IEA, 1995. ———. Oil Supply Security: The Emergency Response Potential of IEA Countries. Paris: OECD / IEA, 1995. ———. The Role of IEA Governments in Energy. Paris: OECD / IEA, 1996. ———. Stockdraw and Emergency Response Policies and Management. Paris: OECD / IEA, 1995. Ise, John. The United States Oil Policy. New Haven: Yale University Press, 1926. Jacoby, Neil H. Multinational Oil: A Study in Industrial Dynamics. New York: MacMillan Publishing Co., Inc., 1974. Johany, Ali D. The Myth of the OPEC Cartel: The Role of Saudi Arabia. New York: J. Wiley, 1980. Johany, Ali D., Michel Berne, and J. Wilson Mixon Jr. The Saudi Arabian Economy. Baltimore: Johns Hopkins University Press 1986. Johnson, Arthur M. The Challenge of Change: The Sun Oil Company, 1945– 1977. Columbus: Ohio State University Press, 1983. Johnson, William A., and the Energy Policy Research Project. Competition in the Oil Industry. Washington, D.C.: Energy Policy Research Project, George Washington University, 1976. Jones, Geoffrey. The State and the Emergence of the British Oil Industry. London, MacMillan, 1981. JRB Associates, Inc. Final Report: Feasibility Study for Requiring Storage of Crude Oil, Residual Fuel Oil, and / or Refined Petroleum Products by Industry. McLean, Va., 1976.

314

Bibliography

Kahn, Alfred E., and M. DeChazeau. Integration and Concentration in the Petroleum Industry. New Haven: Yale University Press, 1959. Kaufman, Burton M. The Oil Cartel Case: A Documentary Study of Antitrust Activity in the Cold War Era. Westport, Conn.: Greenwood Press, 1981. Kent, Marian. Oil and Empire: British Policy and Mesopotamian Oil, 1900– 1920. London: MacMillan Press, 1976. Koplow, Douglas, and Aaron Martin. Fueling Global Warming: Federal Subsidies to Oil in the United States, A Report for Greenpeace. Washington, D.C.: Greenpeace, 1998. Krapels, Edward N., ed. International Oil Supplies and Stockpiling. London: Economist Intelligence Unit, 1982. Krapels, Edward N. Oil Crisis Management: Strategic Stockpiling for International Security. Baltimore: Johns Hopkins University Press, 1980. Krueger, Robert B. The United States and International Oil: A Report for the Federal Energy Administration on U.S. Firms and Government Policy. New York: Praeger Publishers, Inc., 1975. Larson, Henrietta M., and Kenneth Wiggins Porter. History of the Humble Oil and Refining Company: A Study in Industrial Growth. New York: Harper & Bros., 1959. Lear, Linda. Harold L. Ickes: The Aggressive Progressive, 1874–1933. New York: Garland Publications, 1981. Levy, Walter. Oil Strategy and Politics, 1941–1981. Boulder, Colo.: Westview Press, 1982. Maachou, Abdelkader. OAPEC: An International Organization for Economic Cooperation and an Instrument for Regional Integration, translated by Antony Melville. New York: St. Martin’s Press, 1982. MacAvoy, Paul W., ed. Federal Energy Administration Regulation: A Report of the Presidential Task Force. American Enterprise Institute for Public Policy Research. Washington, D.C., 1977. Marquez, Jaime R. Oil Price Effects and OPEC’s Pricing Policy. Lexington, Mass.: Lexington Books, 1984. McDonald, Stephen L. Petroleum Conservation in the United States: An Economic Analysis. Baltimore: Johns Hopkins Press, 1971. ———. The Leasing of Federal Lands for Fossil Fuels Production. Baltimore: Johns Hopkins University Press, 1979. McNaugher, Thomas L. Arms and Oil: U.S. Military Strategy and the Persian Gulf. Washington, D.C.: Brookings Institution, 1985. Melosi, Martin V. Coping With Abundance: Energy and Environment in Industrial America. Philadelphia: Temple University Press, 1985. Menderhausen, Horst. Coping With The Oil Crisis: The French and German Experiences. Baltimore: Johns Hopkins University Press, 1976. Mikesell, Raymond. Stockpiling Strategic Minerals: An Evaluation of the National Program. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1986. Milani, Mohsen M. The Making of Iran’s Islamic Revolution: From Monarchy to Islamic Republic. Boulder: Westview Press, 1988. Miller, Aaron David. Search For Security: Saudi Arabian Oil and American Foreign Policy, 1939–1949. Chapel Hill, N.C.: University of North Carolina Press, 1980.

Bibliography

315

Mohaddessin, Mohammad. Islamic Fundamentalism: The New Global Threat. Washington, D.C.: Seven Locks Press, 1993. Mork, Knut Anton. Energy Prices, Inflation, and Economic Activity. Cambridge, Mass.: Ballinger Publishing Company, 1981. Nash, Gerald D. United States Oil Policy, 1890–1964: Business and Government in Twentieth Century America. Pittsburgh: University of Pittsburgh Press, 1968. National Industrial Conference Board, Inc. Oil Conservation and Fuel Oil Supply. New York: National Industrial Conference Board, 1930. National Petroleum Council, Committee on Emergency Preparedness. Emergency Preparedness for Interruption of Petroleum Imports Into the United States: Report of the National Petroleum Council. Washington, D.C.: NPC, 1974. ———. Emergency Preparedness for Interruption of Petroleum Imports Into the United States: Report of the National Petroleum Council. Washington, D.C.: NPC, 1981. ———. Factors Affecting U.S. Oil and Gas Outlook: A Report of the National Petroleum Council. Washington, D.C.: NPC, 1987. ———. Future Issues: A View of U.S. Oil & Gas to 2020. Washington, D.C.: NPC, 1995. ———. Industry Assistance to Government . . . Methods for Providing Petroleum Industry Expertise During Emergencies. Washington, D.C.: NPC, 1991. ———. Petroleum Storage for National Security. Washington, D.C.: NPC, 1975. ———. Short-Term Petroleum Outlook . . . An Examination of Issues and Projections. Washington, D.C.: NPC, 1991. National Petroleum Council, Committee on Future Issues. Future Issues: A View of U.S. Oil and Natural Gas to 2020. Washington, D.C.: NPC, 1995. National Petroleum Council, Committee on the Strategic Petroleum Reserve. The Strategic Petroleum Reserve: A Report on the Capability to Distribute SPR Oil. Washington, D.C.: NPC, 1984. National Petroleum Council, Committee on Underground Storage. Underground Storage for Petroleum. Washington, D.C.: NPC, 1952. National Petroleum Council, Committee on U.S. Oil and Gas Outlook. Factors Affecting U.S. Oil and Gas Outlook. Washington, D.C.: NPC, 1987. Nivola, Pietro S. The Politics of Energy Conservation. Washington, D.C.: Brookings Institution, 1986. Noggle, Burl. Teapot Dome: Oil and Politics in the 1920s. Alexandria: Louisiana State University Press, 1962. Odell, Peter R. Oil and World Power: Background of the Oil Crisis. 7th ed. New York: Penguin Books, 1983. Odell, Peter R., and Kenneth E. Rosing. The Future of Oil: A Simulation Study of the Inter-Relationships of Resources, Reserves, and Use, 1980– 2080. New York: Nichols Publishing Company, 1980. Oppenheimer, Ernest J. A Realistic Approach to U.S. Energy Independence. New York: Pen and Podium Productions, 1980. Painter, David S. Oil and the American Century: The Political Economy of

316

Bibliography

U.S. Foreign Policy, 1941–1954. Baltimore: Johns Hopkins University Press, 1986. Pearce, Joan, ed. The Third Oil Shock: The Effects of Lower Oil Prices. Boston, Mass.: Routledge & Kegan, 1983. Plummer, James L., ed. Energy Vulnerability. Cambridge: Ballinger Publishing Co., 1982. Pratt, Joseph A. The Growth of a Refining Region. Greenwood, Conn.: JAI Press, 1980. Prindle, David F. Petroleum Politics and the Texas Railroad Commission. Austin: University of Texas Press, 1981. Ragland, Reginald Watson. A History of the Naval Petroleum Reserves and of the Development of the Present National Policy Toward Them. Los Angeles: Printer Unknown (From the Office of Albert Thomas), 1944. Ramey, Todd Kennith. Oil Supply Shocks and Their Effects on Inflation and Interest Rates. Senior Honors Thesis, University of Houston, 1994. Randall, Stephen J. United States Foreign Oil Policy, 1919–1948: For Profits and Security. Kingston: McGill-Queen’s University Press, 1985. Ravage, Marcus E. The Story of Teapot Dome. New York: Republic Publishing Co., 1924. reprint, New York: Ben Franklin Publishing Co., 1974. Rezun, Miron, ed. Iran at the Crossroads: Global Relations in a Turbulent Decade. Boulder: Westview Press, 1990. Robinson, Jeffrey. Yamani: The Inside Story. New York: A Morgan Entrekin Book, The Atlantic Monthly Press, 1988. Rostow, Eugene. A National Policy for the Oil Industry. New Haven: Yale University Press, 1948. Rostow, Walt Whitman. The World Economy: History and Prospect. Austin: University of Texas Press, 1978. Sampson, Anthony. The Seven Sisters: The Great Oil Companies and the World They Made. New York: The Viking Press, 1975. ———. America at Century’s End. New York: Columbia University Press, 1989. Schlesinger, James R. The Political Economy of National Security: A Study of the Economic Aspects of the Contemporary Power Struggle. New York: Prager Publishers, 1960. ———. “Special Congress Address to the 15th World Energy Council Congress, 1992, at Madrid, Spain.” Schneider, Steve A. The Oil Price Revolution. Baltimore: Johns Hopkins University Press, 1983. Seymour, Ian. OPEC: Instrument of Change. New York: St, Martin’s Press, 1981. Share, Jeffrey, ed. The Oil Makers: Insiders Look at the Petroleum Industry. Houston: Rice University Press, 1995. Sherrill, Robert. The Oil Follies of 1970–1980: How the Petroleum Industry Stole the Show (and Much More Besides). New York: Anchor Press, 1983. Shwadran, Benjamin. The Middle East, Oil, and the Great Powers. New York: Halsted Press / John Wiley & Sons, 3rd ed., 1973, c. 1959. Snyder, Glenn H. Stockpiling Strategic Critical Materials: Politics and Na-

Bibliography

317

tional Defense. San Francisco, Calif.: Chandler Publishing Company, 1966. Stobaugh, George, and Yergin, Daniel, eds. Energy Future: Report of the Energy Project at the Harvard Business School. New York: Vintage, 1983. Stobaugh, Robert, and Daniel Yergin, eds. Energy Future: Report of the Energy Project at the Harvard Business School. New York Vintage, 1980. Stoff, Michael B. Oil, War, and American Security: The Search for a National Policy on Foreign Oil, 1941–1947. New Haven: Yale University Press, 1980. Szyliowicz, Joseph S., and Bard E. O’Neill, eds. The Energy Crisis and U.S. Foreign Policy. New York: Praeger, 1975. Tarbell, Ida. The History of Standard Oil Company. New York: McClure, Phillips, and Co., 1904. Tietenberg, Thomas H. Energy Planning and Policy: The Political Economy of Project Independence. Lexington, Mass.: Lexington Books, 1976. Treverton, Gregory, ed. Energy and Security. Montclair, N.J.: International Institute for Strategic Studies by Gower and Allanheld, Osmun, 1980. Tugwell, Franklin. The Energy Crisis and the American Political Economy: Politics and Markets in the Management of Natural Resources. Stanford, Calif.: Stanford University Press, 1988. U.S. Council of Economic Advisers, National Commission on Supplies and Shortages, “The History of Strategic Stockpiling by the United States Government,” n.d. Vance, Cyrus R. Hard Choices: Critical Years in America’s Foreign Policy. New York: Simon and Schuster, 1983. Verleger, Philip K., Jr. Adjusting to Volatile Energy Prices. Washington, D.C.: Institute for International Economics, 1994. ———. Oil Markets in Turmoil: An Economic Analysis. Cambridge, Mass.: Ballinger Publishing Company, 1982. Vernon, Raymond, ed. The Oil Crisis in Perspective. New York: Norton, 1976. Vietor, Richard H. Energy Policy in America Since 1945: A Study of BusinessGovernment Relations. Cambridge: Cambridge University Press, 1984. Wall, Bennet H. Growth in a Changing Environment: A History of Standard Oil (New Jersey) 1950–1972, and Exxon Corporation, 1972–1975. New York: McGraw-Hill, 1988. Warkov, Seymour, ed. Energy Policy in the United States: Social and Behavioral Dimensions. New York: Prager Publishers, 1978. Watkins, T. H. Righteous Pilgrim: The Life and Times of Harold L. Ickes, 1874–1952. New York: H. Holt, 1990. Weimer, David Leo. The Strategic Petroleum Reserve: Planning, Implementation, and Analysis. Westport, Conn.: Greenwood Press, 1982. Werner, M. R., and John Starr. The Teapot Dome Scandal. New York: Viking Press, 1959. Wildavsky, Aaron, and Ellen Tennebaum. The Politics of Mistrust: Estimating American Oil and Gas Resources. Beverly Hills, Calif.: Sage Publications, 1981. Wilkins, Mira. The Maturing of a Multinational Enterprise: American Busi-

318

Bibliography

ness Abroad from 1914 to 1970. Cambridge, Mass.: Harvard University Press, 1974. Williamson, Harold F., Ralph L. Andreano, Arnold R. Daum, and Gilbert C. Klose. The American Petroleum Industry, 1899–1959: The Age of Energy. Evanston: Northwestern University Press, 1963. Wyant, Frank. The United States, OPEC, and Multinational Oil. Lexington, Mass.: Lexington Books, 1977. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, & Power. New York: Touchstone / Simon & Schuster, 1992. Yergin, Daniel, and Martin Hillenbrand, eds. Global Insecurity: A Strategy for Energy and Economic Renewal. Boston: Houghton Mifflin Company, 1982. Yergin, Daniel, and Barbara Kates-Garnick, eds. Turmoil or Transition: The Reshaping of the Oil and Gas Industry. Cambridge, Mass.: Cambridge Energy Research Associates, 1984. Yergin, Daniel, and Joseph Stanislaw. “The U.S. Strategic Petroleum Reserve and U.S. Energy Security.” Council on Foreign Relations Paper, Cambridge Energy Associates Report, April 16, 1990. Zimmerman, Erich W. Conservation in the Production of Petroleum: A Study in Industrial Control. New Haven: Yale University Press, 1957.

ARTICLES Adelman, M. A. “Is the Oil Shortage Real? Oil Companies as OPEC Tax Collectors.” Foreign Policy (Winter 1972–73): 69–108. ———. “The 1990 Oil Shock is Like the Others.” The Energy Journal, Vol. 11, No. 4 (1990): 1–13. Addis, Karen K. “Black Gold: The Nation’s Security Blanket.” Security Management (September 1990): 101–104. Akins, James E. “The Oil Crisis: This Time the Wolf is Here.” Foreign Affairs, Vol. 51, No. 3 (April 1973): 462–90. Amuzegar, Jahangir. “The Oil Story: Facts, Fiction and Fair Play.” Foreign Affairs, Vol. 51, No. 4 (July 1973): 676–89. Avant, Russell J. “Fundamentals of Salt Dome Value.” Real Estate Issues (Fall / Winter 1990): 42–47. Beatty, Jack. “Who Speaks for the Middle Class?” The Atlantic Monthly, Vol. 273, No. 5 (May 1994): 65–78. Belcher, Jack. “Independents Take to the Floor,” Oil and Gas World (July 1997): 46–47. Berry, John M. “Large Problems Still Loom Over National Energy Policy.” Financier, Vol. 13, No. 9 (September 1989): 6–10. Bley, Louis. “OPEC’s Best Friend.” Euromoney (June / July 1990): 49–50. Boland, Michael J. P. “The Consumer is in Charge.” Environment, Vol. 25, No. 2 (March 1983): 10–15, 35–37. Brown, John. “A National Oil Policy for the United States.” U.S. Congress, Senate, Committee on Foreign Relations, A Documentary History of the Petroleum Reserves Corporation. (Wash., D.C.: GPO, 1974): 71–78.

Bibliography

319

Crow, Patrick. “SPR: A growing cushion against shock of lost U.S. crude imports.” Oil and Gas Journal (June 4, 1984): 25–30. ———. “SPR raids signaling demise of U.S. emergency stockpile?” Oil and Gas Journal (January 13, 1997): 20–24. DeNovo, John A. “Petroleum and the United States Navy Before World War I.” Mississippi Valley Historical Review, XLI (March 1955): 641–56. Gordon, Richard L. “Energy Intervention After Desert Storm: Some Unfinished Tasks.” The Energy Journal, Vol. 13, No. 4 (1992): 1–15. Hall, Darwin C. “Oil and National Security.” Energy Policy, Vol. 20, No. 11 (November, 1990): 1089–96. Harmon, M. Judd. “Some Contributions of Harold Ickes.” Western Political Quarterly, Vol. VII (June 1954): 238–52. Helkie, William L. “The Impact of an Oil Market Disruption on the Price of Oil: A Sensitivity Analysis.” The Energy Journal, Vol. 12, No. 4 (1991): 105–16. Hill, George A. “U.S. Foreign Oil Policy and the Petroleum Reserves Corporation: An Analysis of the Effect of the Proposed Saudi Arabian Pipeline,” Prepared for the Independent Petroleum Association of America, published by the Petroleum Industry War Council. Ickes, Harold L. “We’re Running Out of Oil.” American Magazine (January 1944): 26–27, 84–85. Kaufman, Burton M. “Oil and Antitrust: The Oil Cartel Case and the Cold War.” Business History Review, Vol. 51 (Spring 1977): 35–56. Kennedy, Edward M. “Big Oil’s Ominous Energy Monopoly.” Business and Society Review, No. 26 (Summer 1978): 16–20. Levy, Walter J. “Oil Power.” Foreign Affairs, Vol. 49, No. 4 (July 1971): 652–68. Madison, Christopher. “How Can We Build an Oil Reserve Without Offending the Saudis?” National Journal (June 28, 1980): 1044–49. Mead, Walter J., and Phillip E. Sorensen. “A National Defense Petroleum Reserve Alternative to Oil Import Quotas.” Land Economics, Vol. 47, No. 3 (August 1971): 211–24. Miller, George “U.S. Foreign Policy for Oil.” Mining and Metallurgy (March 1944): 151–54. Moroney, John. “Fossil Fuels are vital to U.S. productivity,” World Oil (April 1999): 147–52. O’Donnell, J. P. “Diplomatic Support Held Preferable to Government Ownership of Foreign Oil.” Oil and Gas Journal (December 9, 1943): 28. “Oil in the Bank.” 60 Minutes (CBS Documentary), Vol. XII, No. 2, September 23, 1979. Okogu, Bright E. “What Use the IEA Emergency Stockpiles? A Price-Based Model of Oil Stock Management.” The Energy Journal, Vol. 13, No. 1 (1992): 79–96. Pratt, Joseph A. “The Petroleum Industry in Transition: Antitrust and the Decline of Monopoly Control of Oil.” Journal of Economic History, Vol. XL, No. 4, (December 1980): 815–37. Pratt, Joseph A., and Mark E. Steiner. “An Intent to Terrify: State Antitrust in the Formative Years of the Modern Oil Industry.” Washburn Law Journal, Vol. 29, No. 2, 1990.

320

Bibliography

Pratt, Wallace E. “Finding the World’s Oil: A Task for U.S. Enterprise.” The Lamp, Vol. 26, No. 1 (December 1943): 7. Ralph, Henry D. “PIWC Calls for Explanation on Government’s Foreign Oil Policy.” Oil and Gas Journal (December 16, 1943): 26–28. Randall, Stephen J. “Harold Ickes and the United States Foreign Petroleum Policy Planning, 1939–1945.” Business History Review, Vol. LVII, No. 3 (Autumn, 1983): 367–87. Rodgers, W. S. S. “The Past Three Months and the Years Ahead.” The Texaco Star, Vol. XXXI (Spring 1944): 5–6. Romm, Joseph J., and Charles B. Curtis. “Mideast Oil Forever?” The Atlantic Monthly (April 1996): 57–65. Schlesinger, James R. “Inherent Difficulties in Producer-Consumer Cooperation.” The Energy Journal, Vol. 12, No. 2 (1991): 9–15. ———. “Oil Euphoria Obscures Potential Political Problems.” Financier, Vol. 10, No. 4 (April 1986): 16–18. Tatom, John A. “Are There Useful Lessons from the 1990–91 Oil Shock?” The Energy Journal, Vol. 14, No. 4 (1993): 129–50. Tiesberg, Thomas J. “A Dynamic Programming Model of the U.S. Strategic Petroleum Reserve.” Bell Journal of Economics, Vol. 12, No. 2 (Autumn 1981): 526–46. Tonelson, Alan. “The Persian Gulf: Still Mired.” The Atlantic Monthly, Vol. 271, No. 6 (June 1993): 48–52. Verleger, Philip K., Jr. “Understanding the 1990 Oil Crisis.” The Energy Journal, Vol. 11, No. 4 (1990): 15–33. Weiner, Robert J. “Is the World Oil Market ‘One Great Pool’?” The Energy Journal, Vol. 12, No. 3 (1991): 105–107. Wilson, Carroll L. “A Plan for Energy Independence.” Foreign Affairs, Vol. 51, No. 4 (July 1973): 657–75. Yamani, Ahmad Zaki. “The Gulf Crisis: Oil Fundamentals, Market Perceptions and Political Realities.” The Energy Journal, Vol. 12, No. 2 (1991): 1–8. Yergin, Daniel. “Energy Security in the 1990s.” Foreign Affairs, Vol. 67, No. 1 (Fall 1988): 110–32. Yocum, Herbert. “Senators Demand Congress Dissolve PRC.” National Petroleum News. (January 26, 1944): 2, 10.

INTERVIEWS James E. Akins, White House Energy Advisor, U.S. Ambassador to Saudi Arabia John W. Bartholomew, Assistant Secretary for the SPR Nicholas F. Brady, Secretary of Treasury Wayne Cuttrell, Director of Oil Acquisitions, SPR Office, FEA, and SPR-PMO William E. Dorsey, Assistant SPR Project Manager for Procurement; Director of Planning, Energy Information Administration Charles W. Duncan, Jr., Secretary of Energy James B. Edwards, Secretary of Energy Jan Nichols Fletcher, Chief of Administration, SPR Project Management Office

Bibliography

321

Richard D. Furiga, Deputy Assistant Secretary for Strategic Petroleum Reserves John Gavin, U.S. Ambassador to Mexico Robert H. Gentile, Assistant Secretary of Energy for Fossil Fuel William C. Gibson, Jr., SPR Project Manager Michael Grillot, International Energy Statistics Team, Energy Information Administration John H. Guy, Deputy Executive Director, National Petroleum Council Donald P. Hodel, Secretary of Energy C. Curtis Johnson, SPR Project Manager, President, DynMcDermott Petroleum Operations Company Harry A. Jones, Deputy Assistant Secretary for Strategic Petroleum Reserves Edward N. Krapels, president, Energy Security Analysis Incorporated Joe Lastelic, spokesman, American Petroleum Institute John H. Lichtblau, chairman, Petroleum Industry Research Foundation Komma Murthy, Resident Engineer, SPR Big Hill site Andy Oliver, Committee Coordinator, National Petroleum Council Robert C. Porter, DOE Spokesman Roger Porter, Assistant to President for Economic and Domestic Policy John Scango, Assistant SPR Project Manager for Engineering James R. Schlesinger, Secretary of Energy John Shages, Director of Resource Planning for the SPR Ted Siomporas, Director of Procurement, SPR Project Management Office Frank Snyder, DOE technical assistant / geologist C. Raymond Somerlock, SPR Project Manager Vito Stagliano, DOE Senior Energy Policy Analyst Philip K. Verleger, Jr., Senior Consultant, Charles River Associates Thomas Welch, spokesman, Department of Energy Bill Wicker, spokesman, Department of Energy Ray Wood, Deputy Site Manager, Big Hill site Frank Zarb, Administrator, Federal Energy Administration

INDEX Italicized page numbers indicate photographs, tables or graphs Abraham, Spencer, 115, 204 Akins, James E., 11, 101 Allied Chemical Company, 57, 76 alternative energy sources: funding for, under Ronald Reagan, 117; solar energy, 80; SPR program and, 146 Amerada Hess Corporation, 203–204 American Petroleum Institute (API), 9, 15, 177–78, 200, 203, 205, 210 Amoco, 173 Anderson, Irvine H., 2 API. See American Petroleum Institute Arab oil embargo. See embargoes, oil ARCO, 189–91, 195, 217 Astra Oil, 248 Atomic Energy Commission, 79 Attiga, Ali, 100 Austria, 27 Aziz, Fahd Bin Abdul (Crown Prince), 101 Aziz, Khaled Bin Abdul (King), 101 Aznar, Jose Maria, 212

Bradley, Bill, 100, 154, 207; Energy Security Act and, 106 Bradley, Frank W., 50 Brady, Nicholas F., 156 Brill, Jay R., 85, 90 brine disposal, 30; through leaching process, 72, 74 British Petroleum Amoco (BP Amoco), 118, 173, 193 The Brotherhood of Oil (Engler), 23 Bryan Mound, Texas (oil storage site), 57, 59, 113 Bumpers, Dale, 187 Burns, Robert, 210 Burns, Tom, 172 Bush, George H.W.: drawdowns under, 154–61, 172–79, 183–89; EPCA Amendments Act under, 161–68; SPR program under, 151, 161–68 Bush, George W., 204–11; drawdown policies under, 246–48, 250; oil industry production during, 247

“backwardation,” 156 el-Badri, Abdullah, 213 Balanced Budget Downpayment Act, U.S. (1996), 183 Bartholomew, John, 68, 148, 167 Barton, Joe, 212 Bayou Choctaw, Louisiana (oil storage site), 57–59, 76, 112 Belgium, 27 Big Hill, Texas (oil storage site), 59, 134 Blair, John C., 5 “blanket oil,” 62 Boehlert, Sherwood, 199 Boggs, Danny J., 135 Boggs, Lindy, 132 Boston Oil Consumers Alliance, 199 BP Amoco. See British Petroleum Amoco

CAFE standards. See Corporate Automobile Fuel Efficiency standards Caldwell, Karen K., 190 Canada, 27 Capline pipeline, 53, 59, 190, 248 Carlson, Jack W., 29 Carter, James Earl, Jr. (Jimmy), 81–82; “Desert One” operation under, 105; DOE under, 83–86, 108; Energy Security Corporation under, 97; NEP and, 79–80, 109; SPR program under, 79–83, 108–109 Carter, Jared G., 25 Cato Institute, 229 Cavaney, Red, 200 CEI. See Competitive Enterprise Institute

324

Index

CERM. See coordinated emergency response measures Chayes, Abram, 105–106 Chicago Sun-Times, 103 Chipperfield, Geoffrey, 170 Chirac, Jacques, 212 Chisolm, Phillip R., 152 Chretien, Larry, 199 CITGO Petroleum, 191, 196, 217 Citizens Energy Corp., 196, 198 Clean Air Act, U.S. (1970), 96 Clinton, Hilary Rodham, 200, 205 Clinton, William J. (Bill): Consumers Federation of America and, 206–207; drawdowns under, 211–16; sell-off under, 182–83, 185–86; SPR program under, 181–218 Collins, Susan, 199 Competitive Enterprise Institute (CEI), 203 Conant, Melvin A., 109 Conoco-Phillips, 57, 173, 191, 217, 248 consumer price index, in U.S. (1962–82), 10; energy crisis and, 10, 95 Consumers Federation of America, 204; Bill Clinton and, 206–207 contractor fraud, 67–69 Cooper, Kyle, 214 coordinated emergency response measures (CERM), 51–52, 143, 227 Corporate Automobile Fuel Efficiency (CAFE) standards, 35, 232 crude oil, 174; during drawdowns, 175–79; imports, U.S., (1973– 93), 150; NPC storage policies for, 14; production, U.S., (1967–77), 9; production, U.S., (1985–90), 150; types, in SPR program, 173 Cuttrell, Wayne, 48 Daniel, Josephus, 3 Darman, Richard G., 156 Davies, Robert, 28, 41, 84

Davis, Ruth, 104 Defense Fuels Supply Center (DFSC), 47; U.K. oil supplies, purchase of, and, 48 Defense Production Act, U.S. (1950), 33 DeLuca, Joseph R., 72, 78; “turnkey initiative” and, 87–90 Denmark, 25; International Energy Agreement and, 27 DEO. See Department of Energy, U.S. Department of Energy Act, U.S. (1977), 83 Department of Energy (DOE), U.S.: Department of Energy Act and, 83; under Jimmy Carter, 83–86, 108; leaching process under, 62–63; oil acquisition suspended by, 98; Pemex and, 131; pilot programs, for oil storage, and, 163; under Ronald Reagan, 116; RPR under, 193–204; SPR program and, 52, 67, 189–92 Department of Interior (DOI), U.S., 192 Derr, K.T., 50 “Desert One,” 105 “Desert Shield,” 151 Desert Storm. See Operation Desert Storm Deutch, John M., 85 DFSC. See Defense Fuels Supply Center DiBona, Charles J., 187 Dingell, John, 87, 166 Dodd, Christopher, 194 Dodge, Philip L., 176 DOE. See Department of Energy DOI. See Department of Interior, U.S. Dole, Robert, 159; Energy Security Act and, 106 Dow Chemical, 20 drawdown policies: automatic “trigger” mechanisms for, 51; crude oil during, 175–79; of E.U., 212–13; under George W. Bush, 247–48; oil market specula-

Index tion as result of, 156–57; “rainy day,” 247; under SPR program, 51–53, 134–37, 211–16 drawdowns, SPR, 51–53, 134, 136– 37; 1985, 142–45; 1990, 154–61; 1991, 172–79; 1996, 183–89; 2000, 211–16; 2004, 246–47; 2005, 250; tests for, 135 Duncan, Charles W., 101–102 Early Storage Reserve (ESR) program, 36 Easton, John, 155 Economic Regulatory Administration (ERA), 83 The Economist, 160 Edwards, Edwin, 61, 75 Edwards, James B., 118, 123 EEPA. See Energy Emergency Preparedness Act, U.S. Eizenstat, Stuart, 96 Elk Hills Petroleum Reserve, 14, 32; royalty oil from, 55; in SPR program, 46–47 embargoes, economic, 151 embargoes, of oil, 240. See also oil shocks; as economic threat, 238 Emergency Petroleum Allocation Act (EPAA), U.S. (1973): “Buy / Sell List” program as part of, 18; goals of, 18; price controls under, 18–19; SPR program and, 52 Emergency Preparedness for Interruption of Petroleum Imports into the United States (NPC), 12, 20, 29, 37, 44, 139 energy conservation programs, 117. See also alternative energy sources energy crisis, in U.S., 4–6, 9, 13–15, 35. See also Project Independence Report; consumer price index increase and, 10, 95; energy consumption increase as factor in, 8, 10; EPAA and, 18–19; IEA reserves system during, 25–28; industry manipulation, in media, of, 23–25;

325

OAPEC role in, 17; oils shocks as factor in, 16–19; oil stockpiling during, 11–12; OPEC role in, 16–17; petroleum storage, for national security, during, 29–34; price controls during, 10– 11; Project Independence Report and, 19–22, 28–29; SPR establishment as result of, 36–40; stagflation during, 22–23; Yom Kippur War and, 16 Energy Emergency Preparedness Act (EEPA), U.S. (1982), 133 Energy Independence Act, U.S. (1975), 28; EPCA and, 34–36 Energy Policy Act, U.S. (1992), 187, 216; SPR provisions in, 186, 225 Energy Policy and Conservation Act (EPCA), U.S. (1975), 7; consumer protections under, 35; drawdown policies under, 223–27; Energy Independence Act v., 34; energy supply shortage definitions under, 161; EPCA Amendments Act (1985) and, 145; EPCA Amendments Act (1990) and, 161–68, 180; EPCA Amendments Act (2000) and, 204; FEA under, 39; fuel efficiency standards under, 35; under Gerald Ford, 1; RPR establishment under, 37; SPR program and, 1, 36–40, 52, 223–27 Energy Research and Development Administration (ERDA), 83 Energy Security Act, U.S. (1980), 108; Bill Bradley and, 106; Robert Dole and, 106; Synthetic Fuels Corporation under, 106–107 Energy Security Analysis Inc. (market analysis firm), 178 Energy Security Corporation, 97 Energy Security Fund, 124 Engler, Robert, 5, 23 Environment, 25 environmentalism, 74–77, 79; SPR assessments and, 54–55, 78

326

Index

Environmental Protection Agency (EPA), 76–77 EPA. See Environmental Protection Agency EPAA. See Emergency Petroleum Allocation Act, U.S. EPCA. See Energy Policy and Conservation Act, U.S. EPCA Amendments Act, U.S. (1985), 145 EPCA Amendments Act, U.S. (1990), 161–68, 180; RPR under, 193–95 EPCA Amendments Act, U.S. (2000), 204 Equiva Trading Company, 204 ERA. See Economic Regulatory Administration Erb, Richard, 103 ERDA. See Energy Research and Development Administration ESR program. See Early Storage Reserve program E.U. See European Union European Union (E.U.). See also Austria; Belgium; Denmark; France; Germany, Federal Republic of; Ireland; Italy; Luxembourg; The Netherlands; Spain; Sweden; Switzerland; United Kingdom: drawdowns by, of oil stockpiles, 212–13 exchange authority, 1 Exxon, 24, 57, 173, 193; Valdez, 161–62 FEA. See Federal Energy Administration Federal Energy Administration (FEA). See also Strategic Petroleum Reserve program: environmental assessments, of SPR program, by, 54–55; under EPCA, 39; ERA and, 83; on IPR effectiveness, 49–50; Project Independence Report and, 19–22, 44; SPR Plan for, 39, 41 Federal Financing Bank (FFB), 125

Federal Republic of Germany. See Germany, Federal Republic of Fenix and Scisson (scientific firm), 69 Fernandez, Jose Andreas De Oteyza, 128 Ferrante, Michael, 204 FFB. See Federal Financing Bank Fitzwater, Marlin, 175 Forbes, 129 Forbes, Michael, 201 Ford, Gerald, 19, 111; Energy Independence Act under, 28; Energy Policy and Conservation Act under, 1; Project Independence Report under, 28–29 Ford, Wendell, 104 Foreign Affairs, 11–12 France, 25 fuel efficiency standards, 35 Furiga, Richard D., 109, 127–28, 138, 178, 188 Gavin, John, 128–29 Gephardt, Richard, 166 Germany, Federal Republic of: in IEA, 25, 27; International Energy Agreement and, 27; oil stockpiling by, 20–21; oil storage sites for, 71–72; U.S. drawdown agreements with, 166 Gibson, William C., 178 Giuliani, Rudolph, 200 Goldstein, Lawrence J., 122, 172 Gore, Albert, Jr. (Al), 205–206, 211. See also 2000 election, presidential; on SPR program, 207–10 Gramm, Phil, 106, 124 Gramm-Rudman-Hollings Act, U.S. (1985), 126, 147 Gray, William H., 166 Greenburg, Paul, 212 Greider, William, 103 Gulf Coast Fishermen’s Environmental Defense Fund, 77 Gulf Coast, U.S.: oil stockpiling along, 41–42; salt-dome caverns

Index in, 14, 21; weather-related production disruptions in, 248, 250 Gulf Oil, 20 Guy, John, 145 Harkin, Tom, 183 Haussman, Helmut, 168 Heal, Geoff, 210 heating oil, 196, 198–99; Northeast Home Heating Oil Reserve for, 202–204, 214, 217; supply shortages of, in U.S., 194–95 Heritage Foundation, 121, 229 Herzog, Jesús Silva, 129 History of Standard Oil (Tarbell), 23 Hodel, Donald P., 139 Horwich, George, 2 Huggins, Peter, 157 hurricanes, oil disruptions during, 248, 250 Hussein, Saddam, 151, 157, 159 Hystad, Carlyle, 83–84 Ickes, Harold, 3, 7, 40 IEA. See International Energy Agency IEP. See International Emergency Program IMF. See International Monetary Fund import tariffs, oil, 146–47, 241–42 Independent Gasoline Marketers Council, 140 Industrial Oil Consumers Group (IOCG), 122 industrial petroleum reserve (IPR), 38, 48, 51; FEA on, 49–50 inflation / stagflation, 22 interfuel substitution, 12–13 Interior Department and Related Agencies Appropriations Act, U.S. (1980), 107 International Emergency Program (IEP), 27–28; oil-sharing under, 95; U.S. participation in, 36 International Energy Agency (IEA), 26; CERM under, 51–52, 143, 227; emergency response

327

programs for, 51–52, 223, 226; IEP under, 27–28; International Energy Agreement from, 27; members of, 25, 27; oil shortage predictions by, during Persian Gulf War, 157–58 International Energy Agreement, 27 International Energy Exposition, 117 International Monetary Fund (IMF), 103 International Petroleum Exchange (IPE), 122 IOCG. See Industrial Oil Consumers Group IPE. See International Petroleum Exchange IPR. See industrial petroleum reserve Iran, 16. See also Organization of Petroleum Exporting Countries; “Desert One” operation in, 105; invasion by Iraq, 121; in Iran-Iraq War, 121, 132–33, 149; oil production in, 94–95; revolution in, 94; U.S. hostages in, 105 Iran-Iraq War, 132, 149; Persian Gulf oil production during, 121, 133, 137, 141 Iraq, 16. See also Organization of Petroleum Exporting Countries; economic embargoes against, by U.S., 151; invasion of Iran by, 121; in Iran-Iraq War, 121, 132–33, 149; in Persian Gulf War, 151 Ireland, 27 Israel: as U.S. ally, 12; in Yom Kippur War, 16 Italy, 25; International Energy Agreement and, 27 Jacinth (oil tanker), 113 Jackson, Henry M., 14; Petroleum Reserves and Import Policy Act and, 15, 38; Strategic Energy Reserves Act and, 34 Jaffe, Anne Myers, 206

328

Index

Japan, 25; International Energy Agreement and, 27; oil supply protections of, 26; U.S. drawdown agreements with, 166 Jefferson, William J., 115 John, Chris, 115 Johnson, C. Curtis, 118, 177 Johnston, J. Bennett, 154, 187 Jones, Harry A., 76, 128 Juncker, Claude, 212 Kassebaum, Nancy, 120 Kavernen-Bau-Betriebs (KBB) (engineering firm), 72 KBB. See Kavernen-Bau-Betriebs Kelly, Sue, 199 Kennedy, Edward M., 38, 55, 194, 196 Kennedy, Joseph P., 194, 196, 199 Khelil, Chakib, 213 Krapels, Edward N., 2, 26, 143, 178 Kuwait, 16. See also Organization of Petroleum Exporting Countries; in Persian Gulf War, 151 Lastelic, Joe, 177 leaching process: “blanket oil” in, 62; brine disposal rates in, 72, 74; under DOE, 62–63; environmental impact of, 54; salt creep and, 61; in salt-dome caverns, 21–22, 54–55, 61–63, 63; stages of, 64 Leahy, Patrick, 194 Lehane, Chris, 208 Lichtblau, John H., 15, 56, 178 Lieberman, Joseph, 153, 194 localism, 74–79; heating oil issues and, 194–96, 198–99 Lumden, G. Quincey, 169 Luxembourg, 27 Manning, Robert A., 206 Markey, Edward J., 154 Marshall Plan, 26 Massachusetts Oilheat Council, 204 maximum efficient rates (MERs), 12 McClure, James A., 121

Melosi, Martin V., 5 MERs. See maximum efficient rates Mexico: John Gavin and, 128–29; Pemex and, 118, 127–31, 130; SPR program and, 127–31; U.S. loans, for oil, to, 129 Michel, Ann, 138 Miller, David Aaron, 2 Miller, Kenneth, 214 Mineral Management Service (MMS), 192 MMS. See Mineral Management Service Mobile Supply, Trading and Transportation, 193 Mobil Oil, 15 Moffet, Anthony, 105–106 MOIP. See Mandatory Oil Import Program Moore, Henson, 132 Moore, Thomas J., 103 Morgan Stanley Capital Group, 204 Morton, Rogers C.B., 12 Morton Salt Company, 20, 58, 70 Mosbacher, Robert A., 143 NASA. See National Aeronautics and Space Administration National Aeronautics and Space Administration (NASA), 89 National Association of Manufacturers, 138 National Council of Farmer Cooperatives, 140 National Energy Plan (NEP), 79–80; Jimmy Carter and, 109 National Environmental Policy Act, U.S. (1969), 79 National Fuels and Energy Policy Study, 15 National Journal, 103 National Oceanic and Atmospheric Administration, 77 National Petroleum Council (NPC), 21, 40, 119, 147, 170, 243; crude oil storage under, 14; Emergency Preparedness for Interruption of Petroleum Imports

Index into the United States and, 12, 20, 29, 37, 44, 139; energy disruption alternatives under, 13; interfuel substitution under, 12–13; MERs under, 12; on Persian Gulf War effects, oil prices, 179; Petroleum Storage for National Security, 30–31, 34, 37–38, 44–45, 50, 139–40; petroleum storage, for national security, under, 29–34; SPR studies of, 2; The Strategic Petroleum Reserve: A Report on the Capability to Distribute Oil, 143–44 National Petroleum Refiners Association, 121 National Wildlife Federation, 55 Nau, Henry R., 135 Naval Petroleum Reserves, 3, 75, 243; Alaskan North Slope, 14; California-Elk Hills, 14; creation of, 40; oil production from, 12–13; in salt-dome caverns, 13; in Santa Barbara channel, 14; sell-off, proposed, of, 182–83 NEP. See National Energy Plan The Netherlands, 25; International Energy Agreement and, 27 New England Federal Regional Council, 55 New England Fuel Institute, 55 New England Regional Council, 55 Newsweek, 23 The New Republic, 23 New York Heating Oil Association, 199 New York Mercantile Exchange (NYMEX), 122 New York Times, 159, 168, 207 Nixon, Richard: energy price controls under, 10–11; “Project Independence” under, 18, 234 Noel, Thomas E., 55–56, 84 Northeast Home Heating Oil Reserve, 202–204, 214, 217 North Slope Petroleum Reserve, 14

329

NPC. See National Petroleum Council NYMEX. See New York Mercantile Exchange OAPEC. See Organization of Arab Petroleum Exporting Countries OECD. See Organization for Economic Cooperation and Development oil. See “blanket oil”; crude oil; embargoes, oil; heating oil; oil bonds; oil industry, in U.S.; oil production; oil reserves; oil shocks; oil stockpiling, international; oil stockpiling, in U.S.; oil storage sites; “oil weapon”; salt-dome cavern storage, for oil Oil and Gas Journal, 97, 103 oil bonds, 229; development of, 123–24; future markets for, 236–37; on IPE, 122; on NYMEX, 122; SPR program funding by, 122–27 Oil Crisis Management (Krapels), 26 Oil Daily, 215 oil industry, in U.S.: diversity of, 26; under George W. Bush, 247; political power of, 26; profit increases, during energy crisis, within, 23–24; weather-related production disruptions for, 248, 250 oil production: industry manipulation of, in media, 23–25; in Iran, 94–95; national security implications of, 2–3; “panic buying” and, 205; “panic demand” for, 152; in Persian Gulf, Iran-Iraq War effects on, 121, 133, 137, 141; price controls for, in U.S., 5–6; prorationing of, in U.S., 11; reserve depletion, in U.S., of, 4–6; stockpiling, in U.S., of, 11–12; U.S. naval reserves for, 12–13; as “weapon,” 4, 12; worldwide changes in, 230–36

330

Index

oil reserves: depletion of, 4–6; naval, 12–13; salt-dome cavern storage for, 13 oil shocks, 18, 22, 95–97; Iranian revolution effect on, 94; Jimmy Carter response to, 109; OAPEC role in, 17; OPEC role in, 16–17, 224; from Persian Gulf War, 151; supply disruptions as (1951–91), 239; transportation industry effects from, 17 oil stockpiling, international, 20–21 oil stockpiling, U.S., 11–12; along Gulf Coast, 41–42; congressional consideration of, 14–15; under SPR program, size targets for, 42 oil storage sites (for SPR). See also salt-dome cavern storage, for oil: accidents at, 73–74; Bayou Choctaw, 57–59, 76, 112; Big Hill, 59, 134; Bryan Mound, 57, 59, 113; capacity losses in, 70–71; St. James terminal, 58, 112, 114; Sulphur Mines, 58–59; Weeks Island, 58–59, 70, 110; West Hackberry, 57, 59, 76, 114 oil storage sites, international, 71–72 “oil weapon,” 4, 12, 220 O’Leary, Hazel, 183 O’Leary, John F., 47, 75 Olin Corporation, 76 Oliver, J.L., 198 Omnibus Budget Reconciliation Act, U.S. (1981), 126 OPEC. See Organization of Petroleum Exporting Countries (OPEC) Operation Desert Storm, 172 Organization for Economic Cooperation and Development (OECD), 26; emergency response programs for, 171, 174 Organization of Arab Petroleum Exporting Countries (OAPEC): oil shocks and, 17; OPEC v., 16–17; production rate de-

creases of, 17; SPR program and, 42, 99–101 Organization of Petroleum Exporting Countries (OPEC): OAPEC v., 16–17; oil shocks and, 16–17, 224; “OPEC tax,” 22; quota system within, 149 Pahlavi, Mohammed Reza, 94 Painter, David S., 2 Pallone, Frank, 188 Panetta, Leon, 166 “panic buying,” 205 “panic demand,” 152 Parsons-Gilbane (contractors), 67, 73 Peña, Frederico, 188 Persian Gulf: oil production in, Iran-Iraq War effects on, 121, 133, 137, 141; “tanker wars” in, 137, 141 Persian Gulf War, 149, 154; “Desert Shield” in, 151; Hussein and, 151, 157, 159; NPC on effects of, for oil prices, 179; oil price control debate during, 152–53; oil shock as result of, 151; oil shortage predictions during, 157–58; Operation Desert Storm during, 172; SPR program influence by, 172–79; U.N. resolutions during, 151, 169–70 Petroleos Mexicanos (Pemex), 118, 127–30; DOE and, 131 Petroleum Industry Research Foundation (PIRINC), 15, 56, 122, 172, 203 Petroleum Marketers Association of America, 152, 173 petroleum products. See also oil: national security implications of, 2–3; non-fuel, 219 Petroleum Reserves and Import Policy Act, U.S. (1973), 15, 38 Petroleum Reserves Corporation (PRC), 75, 243; Harold Ickes and, 3, 7, 40 Petroleum Storage for National

Index Security (NPC), 30–31, 34, 37–38, 44–45, 50, 139–40 PIRINC. See Petroleum Industry Research Foundation Placid Refining, 248 PRC. See Petroleum Reserves Corporation Premcor, 248 price controls, energy: effects, in U.S., of, 221; during energy crisis, 10–11; under EPAA, 18–19; for oil, in U.S., 5–7; Persian Gulf War debate regarding, 152–53; under Richard Nixon, 10–11; under Ronald Reagan, 117; under SPR program, 52 Private Equity Petroleum Reserve Act, U.S. (1981), 124 “Project Independence,” 18, 234 Project Independence Report: FEA and, 19–22, 44; under Gerald Ford, 28–29; residual fuel oil and, 45; salt-dome storage considerations and, 20–21 Qatar, 16. See also Organization of Petroleum Exporting Countries Randall, Stephen J., 2 Reagan, Ronald: alternative energy source funding under, 117; DOE under, 116; drawdowns under, 142–45; energy conservation programs under, 117; oil price controls under, 117; SPR Plan under, 136–37; SPR program under, 116–48; Synthetic Fuels Corporation expiration under, 118 refined product reserve (RPR), 196–97; creation of, 198–204; under EPCA Amendments Act (1990), 193–95 Regan, Donald T., 125 Richardson, Bill, 115, 191 RIK. See royalty-in-kind program Rodriguez, Ali, 213 royalty-in-kind (RIK) program, 246–47

331

royalty oil, 47; from Elk Hills Petroleum Reserve, 55 RPR. See refined product reserve salt-dome cavern storage, for oil. See also leaching process: in Gulf Coast, 14, 21, 30; leaching in, 21–22, 54–55, 61–63, 63; national security and, 29–34; off U.S. Gulf Coast, 14, 21; oil reserve storage and, 13; Petroleum Storage for National Security report, 30–31; Project Independence Report and, 20–21; size comparisons in, 64; under SPR program, 45–46 Sampson, Anthony, 5, 23 Sanders, Bernard, 201 Sandia National Laboratories, 69 Sanger, David, 207 Saucer, John, 186 Saudi Arabia, 16. See also Organization of Petroleum Exporting Countries; SPR program and, 98–104 Scango, John, 70, 72 Schirmer, Katherine P., 100 Schlesinger, James R., 60, 79 Schumer, Charles, 191 Scowcroft, Brent, 43, 169 Seidman, L. William, 50 The Seven Sisters (Sampson), 23 Shah of Iran. See Pahlavi, Mohammed Reza Sharp, Philip R., 120, 140, 154, 165, 167 Shell Oil, 57, 193 Shell Trading, 248 Sherrill, Robert, 5 Sieminski, Adam, 210 “signaling,” 6, 227 Siomporas, Ted, 66 60 Minutes, 86 Smith, George David, 210 Smith, Lamar, 192 solar energy, 80 solution mining. See leaching process

332

Index

Somerlock, C. Raymond, 146 Spain, 27 Spectre, Arlen, 183 SPR. See Strategic Petroleum Reserve program SPR Plan. See Strategic Petroleum Reserve Plan SPR-PMO. See SPR-Project Management Office SPR-Project Management Office (SPR-PMO), 66, 74; establishment of, 84 stagflation, 23; inflation v., 22; “OPEC tax” and, 22 Stagliano, Vito, 155, 177 Stanislaw, Joseph, 153 Sternfels, Urvan R., 121 Stiffel, Arnold G., 167 St. James terminal, Louisiana (oil storage site), 58, 112, 114 Stobaugh, Robert, 95 Stockman, David, 107, 117, 123 Stoff, Michael B., 2 Strategic Energy Reserves Act, U.S. (1975), 34 Strategic Petroleum Reserve Plan (SPR) (1976), 39, 41, 44, 52–53, 91–92, 133; amendments to, 81–82, 136–37 Strategic Petroleum Reserve (SPR) program. See also Naval Petroleum Reserves; oil storage sites; Petroleum Reserves Corporation: Al Gore on, 207–10; alternative fuel programs and, 146; amendments to, 119–22, 126; under Bill Clinton, 181–218; consumption taxes and, 146; contractor fraud within, 67–69; criticisms of, 86–87, 229–30; crude oil types for, 173; deficit reduction and, 181–83; development of, 1, 6–7, 44–45, 56–57; DFSC and, 47; disruption scenarios under, 42; DOE and, 52, 67, 189–92; drawdown policies under, 51–53, 134–37, 142–45, 154–61, 211–16; early years of, 90–92; Elk Hills Naval Petro-

leum Reserve as part of, 46–47; emergency response strategies within, 168–70, 172; Energy Policy Act provisions under, 186, 225; Energy Security Act and, 106–108; environmentalism and, 54–55, 74–79; EPAA and, 52; EPCA and, 1, 36–40, 52, 223–27; ESR program within, 36; estimated costs of, 31, 46; exchanges / sales under (1985– 2005), 161–68, 249; fee rates for, 120; fill issues within, 101–104; fill rates under, 82, 108, 130, 131–32; financing of, 119; functionality of, 241–44; under George H.W. Bush, 151, 161–68; goals of, 33, 53; GrammRudman-Hollings Act and, 126, 147; import tariffs and, 146–47, 241–42; Interior Department and Related Agencies Appropriations Act and, 107; inventory requirements within, 32, 48–51; IOCG and, 122; IPR within, 38, 48–51; under Jimmy Carter, 79–83, 108–109; localism and, 74–79; Mexican oil and, 127–31; national security as factor for, 28–34; National Wildlife Federation and, 55; net import protection under, number of days per annum (1977–97), 164; NPC studies on, 2; OAPEC and, 42, 99–101; objections to, 55–56; oil acquisition under, 46–48, 192–93; oil bonds as funding source for, 122–27; oil distribution under, 52–53; open market purchases under, 47; Persian Gulf War effects on, 172–79; Phase II for, 132–34; Phase III for, 134–35; pipeline distribution systems for, 59–60; political pressures against, 66–67; pricing under, 52; private industry role in, 39; regional storage issues under, 55–56; RIK program and, 246–47; under

Index Ronald Reagan, 116–48; royalty oil under, 47; RPR and, 193– 204; Saudi Arabia and, 98–104; sell-off, under Bill Clinton, of, 182–83, 185–86; “signaling” under, 6, 227; size exemptions for, 120; SPR Plan, 39, 41, 44, 52–53, 91–92, 133; SPR-PMO within, 66, 74; stockpiling size targets under, 42, 163; storage sites, general, under, 57–61, 58; storage sites, salt domes, under, 45–46; supply-side energy policies and, 221–22; testing for, 145–46; “turnkey initiative” as part of, 87–90; 2000 election and, 205–11; U.S. energy policy influence and, 244–45 The Strategic Petroleum Reserve: A Report on the Capability to Distribute Oil (NPC), 143–44 The Strategic Petroleum Reserve: Planning, Implementation, and Analysis (Weimer), 2 Sulphur Mines, Louisiana (oil storage site), 58–59 Summers, Lawrence, 207 Sununu, John H., 169 Swearingen, John E., 29 Sweden, 27 Switzerland, 27 Synar, Mike, 140 Synthetic Fuels Corporation, 106–107; expiration of, under Ronald Reagan, 118 Taft, William, 3 “tanker wars,” 137, 141 Tarbell, Ida, 23 Tashnek, Warren, 215 Tauzin, Wilbert, 167 Teapot Dome scandal, 3 Templeton, Bonner H., 15 Texas A&M Research Institute, 78 Texas Environmental Coalition, 77 Thornberry, Mac, 192 Time, 23 Treen, David C., 132 “trigger” mechanisms, 51

333

Turkey, 27 “turnkey initiative,” 87–90 20–20, 68, 86 2000 election, presidential (U.S.), 205–11 U.K. See United Kingdom U.N. See United Nations Underground Storage for Petroleum report, 29 United Arab Emirates, 16. See also Organization of Petroleum Exporting Countries United Kingdom (U.K.): DFSC and oil purchases by, 48; International Energy Agreement and, 27 United Nations (U.N.), resolutions by, 151, 169–70 United States (U.S.). See also Department of Energy, U.S.: Balanced Budget Downpayment Act in, 183; CAFE standards in, 35, 232; Clean Air Act in, 96; consumer price index in (1962– 82), 10; crude oil imports into (1973–93), 150; crude oil production in (1967–77), 9; crude oil production in (1985–90), 150; Defense Production Act in, 33; Department of Energy Act in, 83; “Desert Shield” and, 151; DOE in, 52; DOI in, 192; economic growth v. energy prices in (1973–2000), 236; EEPA in, 133; energy consumption increase in, 8, 10, 137–38, 231, 231–36, 232, 233; energy crisis in, 4–6, 8–40; Energy Independence Act in, 28, 34; energy policies, SPR program as influence, and, 244–45; Energy Policy Act in, 186; Energy Security Act in, 106; EPAA in, 18–19, 52; EPCA Amendments Act (1985) in, 145; EPCA Amendments Act (1990) in, 161–68, 180, 193–95; EPCA Amendments Act (2000) in, 204; EPCA in, 1,

334

Index

United States (U.S.). (cont.) 7, 34–40, 39, 52, 145, 161–68, 180, 204, 223–27; Germany and, drawdown agreements with, 166; Gramm-Rudman-Hollings Act in, 126, 147; heating oil supply shortages in, 194–95; in IEA, 25–28; in IEP, 36; Interior Department and Related Agencies Appropriations Act in, 107; International Energy Agreement and, 27; Iranian hostage crisis for, 105; Iraq and economic embargoes by, 151; Israel as ally of, 12; Japan drawdown agreements and, 166; loans to Mexico by, 129; Mexican oil production for, 127–31; NASA in, 89; National Environmental Policy Act in, 79; net petroleum imports into (1967–77), 9; net petroleum imports into (1973–2000), 234–35; oil price controls in, 5–6; oil prorationing in, 11; oil reserve depletion in, 4–6; oil reserves, naval, in, 12–13; “oil weapon” against, 4, 12, 220; Omnibus Budget Reconciliation Act in, 126; petroleum consumption / import patterns in (1967–77), 11; Petroleum Reserves and Import Policy Act in, 15, 38; Private Equity Petroleum Reserve Act in, 124; proved reserves in

(1967–77), 9; stagflation in, 22–23; Strategic Energy Reserves Act in, 34; Windfall Profits Tax Act in, 124, 185 Valdez oil spill, 161–62 Valero Energy Corporation, 214 Verleger, Philip K., 121, 159, 177 Vietor, Richard H.K., 5 Wall Street Journal, 121, 177, 194 Warner, John, 124 wars: Iran-Iraq, 121, 132–33; Persian Gulf, 149, 151–54; Yom Kippur, 16 Washington Post, 23, 103 Watkins, James D., 155, 161, 167, 169, 172–173, 177 Weeks Island, Louisiana (oil storage site), 58–59, 110; capacity losses in, 70 Weimer, David Leo, 2 West Hackberry, Louisiana (oil storage site), 57, 59, 76, 114 Wilner, Michael, 167 Wilson, Woodrow, 3 Windfall Profits Tax Act, U.S. (1980), 124, 185 Yamani, Sheik Ahmed Zaki, 98, 101 Yergin, Daniel, 95, 153, 159 Yom Kippur War, 16 Yusgiantoro, Purnomo, 248 Zarb, Frank, 38, 56, 99–100