In 1975, after the tense days of the Middle Eastern oil embargo, Congress passed the Energy Policy and Conservation Act.  One part of this act was to create a Strategic Petroleum Reserve–a massive quantity of crude oil owned by the government and stored on U.S. soil–that could be used to alleviate shortages and depress prices in the event of a major disruption of foreign oil supplies.

Schematic drawing of a salt cave storage reservoir for the SPR

The Strategic Petroleum Reserve (SPR) exists in the form of several salt caves located near the Gulf coasts of Texas and Louisiana.  The reserve is intended to hold a maximum of 1 billion barrels of crude oil, and currently holds 702 million barrels (97% of its 727 million barrel capacity).  Based on current oil consumption levels in the U.S (21 million barrels a day), the reserve holds a roughly 33-day supply of oil.  However, estimates put the maximum withdrawal capability at 4.4 million barrels a day (Wikipedia)–a rate which has never been tested–so the actual availability of the oil in the SPR is highly questionable.  According to the Energy Policy and Conservation Act, oil may be released from the reserve to prevent an “economic dislocation” similar to the economic crunch caused by the 1973-1974 embargo–although the specific requirements for release are unclear, as the term “dislocation” is not clearly defined in the text of the bill.

Photo of empty SPR salt cave storage reservoir

As oil prices began to skyrocket last Spring Congress, believing the purchase of expensive oil to be an inefficient use of government funds, hastily passed a bill halting purchase of new oil for the SPR until the end of the 2008 calendar year.  After initially opposing it, President signed the bill into law on May 19, 2008.

The SPR re-entered the news last Friday, when the Department of Energy announced, following the expiration of the congressionally-imposed moratorium, that it would resume purchasing oil for the reserve.  Although the existence of and use of oil contained in the SPR are not major hot-button issues, they are somewhat controversial.  The DOE’s recent announcement elicited commentary from two prestigious oil experts on opposite sides of the political spectrum:

Eric Bolling, a former commodities trader and member of the NYMEX board of Directors and current co-host of the conservative news show “FOX Business Happy Hour,” applauds the DOE’s decision in an opinion piece on Foxnews.com.  Bolling argues that current rock-bottom prices (the lowest in five years) for crude oil are a “gift” that our government should take advantage of by filling the SPR to the brim.  He asserts that filling the SPR will help assure affordable gasoline and other crude products in the near future.  Bolling warns that the three anti-American “thugs” that are heads of state in oil-producing nations (President Chavez of Venezuela, President Ahmadinejad of Iran, and Prime Minister Putin of Russia) will do anything to drive up the price of oil, and is certain that an SPR full of cheap oil would protect against any drastic action the “thugs” might take.  He cites the Russian government’s (under then-president Putin) dissolution of the Russian oil giant Yukos en route to creating the national oil and gas monopoly Gazprom as an example of Russian action that resulted in a spike in oil prices.  President Obama should not tax oil companies, Bolling advises, and should continue to purchase oil for the SPR–an important investment in our country’s short-term economic stability.

Former commodities trader and author of Over a Barrel: Breaking Oil’s Grip on Our Future Raymond J. Learsy expresses an opposite view in a blog posted on the liberal news site HuffingtonPost.com.  He makes his case with pointed language, making the argument that, “in essence, the SPR has become a welfare program for the oil industry.”  Learsy opines that the DOE’s recent announcement is one more development in the Bush Administration’s history of offering direct and indirect support to the oil industry that has helped consistently inflate oil corporations’ profits.  He argues that rumors of the DOE’s decision and it’s official announcement last Friday were direct causes of the sudden rise in oil prices at the end of 2008–the largest one-week (December 29th to January 2nd) price increase since 1986.  As a previous example, Learsy notes that in January of 2007, oil prices were on the decline and turned around only after President Bush called for a doubling of the size of the SPR in his State of the Union Address.  During these dire economic times, Learsy argues, federal funds should not be used to further boost profits of oil companies, and the partisan decision-makers in the Department of Energy should be given the boot.

Crude and heating oil rose late in the day to pare earlier losses and close just slightly beflow their opening prices. Crude oil, which briefly touched below the $44 mark today, recovered in the afternoon, closing 3% from its opening position at $46.28 a barrel. Heating oil, which was down by almost 5% earlier today, closed at less than 1% below its opening price.

The state of the “big three” U.S. auto makers continued to dominate the markets today, with a bailout bill’s failure in the senate driving prices down this morning. This afternoon, the announcement by President Bush’s Treasury Department that it would intervene to prevent the collapse of the auto manufacturers if necessary lifted stock and commodities markets across the board.

Friday capped an extremely volatile week for stocks and commodities, leading oil analyst Stephen Schork to comment, “This is a market that is trading on any headline out there,” in an Associated Press article.

HEAT USA Price Experts noted that heating oil closed near its opening price and therefore announced no change in Monday’s retail prices.

HEAT USA Price Report
Evening projection (for Monday’s average retail heating oil price per gallon): NO CHANGE

Oil shale rock in Utah. Image: ostseis.anl.gov.

As levels of crude in conventional wells around the world continue to drop, governments and oil companies alike are searching for the “next generation” of petroleum resources.  Perhaps the most promising non-conventional petroleum resource is tar sands, examined and discussed here at the Zone in last Tuesday’s post.  Another source of petroleum that could become increasingly important over the next ten years, especially in the United States, is oil shale.

Oil shale is in the news today, as the New York Times, the Wall Street Journal, and other prominent news outlets reported on the Bush Administration’s finalizing of guidelines to allow for oil shale excavation in the Western U.S.  Yesterday, the U.S. Bureau of Land Management announced the official opening of almost 3 million acres of public land, located in Utah, Colorado, and Wyoming, to future oil shale mining.  The opening of the lands follows a two-year government ban on oil shale excavation that Congress allowed to expire two months ago along with the ban on offshore oil drilling.

The term “oil shale” refers to sedimentary rocks that contain deposits of kerogen, a fossil fuel that can be processed to make synthetic crude oil or “shale oil.”  Oil shales are usually removed from the surface or dug up from underground, crushed into smaller pieces, and put through process called retorting, in which the rock is heated to extremely high temperatures (650-700ºF), to separate the kerogen from other materials in the rock in liquid form.  The kerogen, in the form of shale oil, is then refined into other petroleum products.

Although today’s announcement about opening oil shale lands is just a preliminary step, environmental groups have already raised objection.  Their first objection appears to be the sudden announcement of the new guidelines that eliminated any opportunity for public debate or opposition.  From the New York Times:

“The Bush administration is maintaining an unlawful position by amending these resource management plans without providing the public with an opportunity to have their decisions administratively appealed,” said Melissa Thrailkill, a staff attorney for the Center for Biological Diversity. “We are considering all our options. That includes legal action in federal court.”

Environmental activists also oppose oil shale mining because of the environmentally destructive nature of oil shale processing.  The tremendous heat used to separate the petroleum in the shale from other minerals requires huge amounts of energy.  Large quantities of water are also required for processing shale (several barrels of water are needed to produce one barrel of shale oil), and water is in short supply in the arid region designated by the Bureau of Land Management’s announcement.  Furthermore, the production of shale oil emits large amounts of carbon dioxide, a greenhouse gas–several times more than does the processing of conventional crude oil.

The Green River Formation oil shale deposits. Image:ostseis.anl.gov

For now, the relatively high expense and difficult processing of oil shale keeps it from becoming a major source of commercially-produced oil.  In the U.S., the mining and processing of oil shales has slowed to a crawl, thanks to the current deep dive in oil prices.  When the current global recession ends and oil prices shoot back up, however, the search for new sources of oil (especially in the U.S.) will resume with increased vigor.  According to the government website ostseis.anl.gov, the three-state Green River Formation contains 800 billion barrels of recoverable crude oil in the form of oil shale deposits.  With that enormous potential resource, an emergence of oil shale as the dominant domestic source of oil in the U.S. could very well take place in the next decade.

Yesterday afternoon’s post encouraged heating oil consumers who may need help paying their energy bills to apply to the government assistance program (LIHEAP).  The post also mentioned pending legislation that would double LIHEAP’s funding.

Today, Heat Zone is happy to report that the pending legislation has passed both houses of congress as part of a budget bill for the 2009 financial year.  Even though the country is in the midst of a financial crisis and the federal government is running an enormous deficit, congressional leaders recognized the crucial importance of LIHEAP, and made the doubling of its funding a priority.  President Bush’s budget plan included a $500 million cut in LIHEAP funding, but the increased funding written in by legislators ($5.1 billion in total funds) managed to double funding over last year.  In an article on crainsnewyork.com, Sen. Charles Schumer (D-NY) said he expected President Bush to sign the bill despite his previous plan to cut LIHEAP funding.

The increased funding is great news, but some state officials (like Maine Housing Director Dale McCormick, as quoted on fosters.com) are saying that it will still fall short of what is needed to provide help to every family that needs it.  So if you think you might need assistance, call 1-866-674-6327 (1-866-NRG-NEAR) today.

HEAT President Andrew Heaney feels the increases might be too little, too late: “The real need began last winter–Congress just completely missed it, and a lot of people got badly hurt. And even though prices have come down significantly, they are still enormously high by historical standards; the need is still tremendous. Still, it needs to be recognized that it is very good news that Congress has increased funding and ignored President Bush’s plan to cut funds. I urge all HEAT USA members to investigate if they are eligible, and make sure to apply as early as possible- the funds are dispersed on a first-come, first-served basis.”

Some approximate breakdowns of total increased LIHEAP funds, by state:
New York: $500 million
New Hampshire: $34 million
Maine: $47 million
Connecticut: $95 million
Pennsylvania: $194 million