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Strategic oil reserves

Published: June 9 2008 03:00 | Last updated: June 9 2008 03:00

Not all oil is created equal – which is why Congress’s recent decision to stop adding oil to the US Strategic Petroleum Reserve, criticised by many as a sop to drivers, was the right thing to do. But does it go far enough?

More than a third of the oil that was going into the SPR is low in sulphur. This so-called “sweet” crude, which accounts for approximately half of the SPR’s total, is popular because many refineries struggle to process the “sour”, or high-sulphur, kind. In particular, light, sweet grades of oil, such as West Texas Intermediate, are good for making low-sulphur fuels, important as specifications tighten.

As Philip Verleger, an energy economist, told the Senate in December, perhaps just 5m barrels per day of light, sweet crude is actually available on the open market. On that basis, the 39,200bpd going into the SPR was less than 0.1 per cent of global oil supply overall but represented almost 1 per cent of available light, sweet crude.

Normally, that would be immaterial. But violence in Nigeria, which produces a 10th of the world’s sweet crude, puts pressure on supplies. The resulting squeeze helps raise the price of benchmark crudes such as WTI.

War is not the only eventuality for which the SPR was created. The oil-price impact of Nigeria’s difficulties, in the context of other constraints on global oil supply, clearly affects the economy – witness the crisis in the airline industry. It would not be sensible to run down the SPR and flood the market: it is not there to be used to manage day-to-day price movements. But swapping some sweet for sour crude, without reducing overall levels, could help address a critical bottleneck in the market. In turn, that could provide vital breathing space during this oil shock to allow changes in consumption patterns and refining technology to proceed – without sacrificing the wider economy.

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

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