258. Memorandum From Secretary of Energy Duncan to President Carter 1
SUBJECT
- Resumption of Oil Acquisition for the Strategic Petroleum Reserve
Background
The Department of Energy (DOE) suspended acquisitions for the Strategic Petroleum Reserve (SPR) last March due to tight oil market conditions caused by the reduction in Iranian production. The Tokyo Summit partners agreed in June not to resume SPR purchases as long as they would add undue pressures on the world market price and agreed to consult about decisions they will make in that regard.
Events in the Middle East are a clear reminder of our need for a substantial SPR. The present relatively comfortable world oil supply offers a good opportunity for resuming purchases. Consequently we are consulting with our Summit and selected IEA partners, and I will also consult with Saudi Arabia regarding the resumption of SPR purchases.2 I will inform you of the results of the Saudi consultation. Imports for the SPR will be included in the 8.2 million barrels per day (MMB/D) oil import ceiling for the United States that you directed in the State of the Union message.3
DOE is committed to filling the reserve in line with existing Administration policy. Total volume of the reserve currently is 91.7 million barrels; existing storage capacity is 248 million barrels. The reserve can be filled at a maximum fill rate of 500,000 B/D over the next 6 months and has a withdrawal rate of 1 MMB/D that will be increased [Page 808] in accordance with additional fill. Over the longer term, the reserve can be filled at a sustained rate of 200,000 to 300,000 B/D, with a drawdown rate of 2 to 3.5 MMB/D.
Opportunity to Resume Oil Acquisition
Oil inventories in the OECD countries are at record high levels and the outlook for 1980 oil demand is for the lowest growth since 1975. U.S. net oil imports in 1980 (50-State basis) are projected in the range of 7.4 to 8.0 MMB/D including 200,000 B/D for SPR, allowing enough leeway within the 8.2 MMB/D ceiling for resuming SPR imports. Most projections indicate some softness in the international crude oil market in the middle quarters of 1980. Spot and term prices of internationally traded crude oil already appear to be converging. However, uncertainties exist on the supply side which could make for a tight market, particularly if there are significant OPEC production cutbacks or supply interruptions.
It is the collective judgment of the interagency open market committee, which has monitored the international oil market over the last several months, that now is an opportune time to resume purchases for the SPR. This committee consists of representatives from the Departments of State and Treasury, Office of Management and Budget, Domestic Policy Staff, and the National Security Council Staff, and is chaired by the DOE Under Secretary. The committee has agreed in principle to resume purchases for SPR at a rate of up to 200,000 B/D based upon consultations with the Saudis and major energy consuming nations. Continuation of purchases after their resumption would depend upon continuing assessments of world oil market conditions.
We currently estimate that an average fill rate of 200,000 B/D might slow the expected spot market decline in 1980 by about $1 per barrel. If the spot market for crude oil accounts for 10 percent of U.S. oil imports in 1980, resumption of SPR procurement may increase our total non-SPR oil bill by some $250 million in 1980. Resumption of purchases by other industrialized nations for their smaller government stocks would increase slightly this price effect. Apparent German and Japanese purchase goals are for an additional 16 and 32 million barrels respectively for completion of their reserve programs, far less than ours. However, we do not believe the Germans have the capacity to add to their stockpile and we do not know whether Japan intends to enlarge its reserve. In any case, we do not expect that reasonable fill rates on their part would lead to official OPEC price increases.
The reaction of Saudi Arabia to resumed government oil stockpiling and Saudi willingness to maintain current production levels will be determined during my consultations with Saudi officials. Assuming that my consultations with the Saudis indicate that our SPR acquisi[Page 809]tions will not trigger a cutback in their production, I now intend to resume acquisitions at an average annual rate of up to 200,000 B/D as soon as possible after consultations with the Saudis and our Summit partners have been completed. Actual fill rates may vary above and below this average from time to time, depending on buying opportunities and delivery schedules.
Potential Sources of Acquisition
We have examined a number of domestic and international sources of oil for SPR. Possible domestic options include the Naval Petroleum Reserve (NPR) at Elk Hills, California; Alaskan State royalty oil; mandatory industry allocations; competitive solicitations among domestic producers; or Federal royalty oil from the outer continental shelf in the Gulf of Mexico. The committee has agreed in principle to an acquisition strategy involving both domestic and international purchases. The domestic oil probably would come from the NPR. The principal advantage of using domestic oil for SPR is one of perception. OPEC producers are less likely to object to resumption of SPR fill if it involves significant domestic sources even though the overall effect on world oil supplies would be the same as if all the oil were purchased on world oil markets. From a budget perspective, it may be less costly to acquire all oil for SPR on the international market, since NPR oil in the recent sale received bids of $35 to $41 a barrel. However, as you know, other oil consuming nations have expressed their concern to us that our NPR sales policies are giving signals to producing countries that their prices could be adjusted still higher.
The details of our planned acquisition strategy are summarized below:
1. We intend to acquire approximately 100,000 B/D from domestic sources, assuming that this is necessary to overcome Saudi objections to resuming SPR fill or for domestic policy purposes. At this time the preferred domestic source is NPR oil. This volume represents approximately 75 percent of the government’s share of NPR oil and could be exchanged in whole or in part for deliveries to the SPR. The remaining 25 percent, about 30,000 B/D, could be set aside for small refiners in California. Section 201(K) of the NPR Production Act of 19764 requires a Presidential order to make NPR oil available for SPR acquisition. We will be submitting such an order for your approval shortly after the consultations.
2. Potential international sources for the remaining 100,000 B/D (or more depending on Saudi reactions) include producer governments and private suppliers. Purchase prices will be in the range of the av[Page 810]erage term contract prices being paid for similar generic imported crudes. DOE will attempt to obtain long-term contracts for volumes sufficient to raise the annual fill-rate to 200,000 B/D. Other types of purchases will also be considered in accordance with the price guidelines. The fill rate would be adjusted, including halting acquisition of foreign oil if necessary, if market conditions dictate.
Budget and Organization
Over $4 billion of budget authority is currently available for oil acquisition. Your 1981 budget includes $255 million for oil acquisition outlays in fiscal year 1980 and $1,111 million in 1981 which is sufficient for a fill-rate of 100,000 B/D, assuming resumption in 1980. If we are successful in resuming purchases at the rate of 200,000 B/D, there will be sufficient budget authority on hand, irrespective of acquisition strategy. However, a 200,000 B/D purchase rate could increase the 1981 budget deficit by up to $1.2 billion either by increased outlays for oil, or from revenues foregone by the use of NPR oil.
- Source: Carter Library, National Security Affairs, Staff Material, Special Projects File, Box 14, Henry Owen, Chron, 2/1–8/80. Confidential.↩
- According to the Embassy in Jidda: “Oil Minister Zaki Yamani protested in strongest terms possible USG purchase of any oil for Strategic Petroleum Reserve. He likewise objected to diverting Elk Hills oil to reserve on grounds that both such intended actions would frustrate Saudi efforts to regain one-tier price system. He also predicted that such purchases or diversion would cause other OPEC producers to reduce production and attempt to raise prices even higher. In addition it would place substantial pressures on SAG not to continue 9.5 MBD rate after current quarter. He requested most fervently that nothing be done on purchase of oil for SPR, at least through the end of the third quarter.” (Telegram 1093 from Jidda, February 17; National Archives, RG 59, Central Foreign Policy Files, D800085–0544) Elk Hills, located in central California, is the seventh largest oil field in the Continental United States, and was part of the Federally-owned Naval Petroleum Reserve before the U.S. Government sold it to the Occidental Petroleum Corporation on February 5, 1998.↩
- See footnote 4, Document 257.↩
- See footnote 4, Document 95.↩