Prologue
Since
the time USA setup an SPR, there have been many publications from various
federal agencies like DOE and from individual researchers to determine if there
should be an SPR and if yes, then how large.
The previous
academic publications and strategy papers have approached this topic from following
point of views:
1.
Composition
of crude oil to be kept in SPR,
2.
Impact
of growing GDP of the US and corresponding increasing fuel consumption,
3.
Refining
capacity/ capability of USA’s refineries and finally,
4.
Impact
that non-conventional technologies will have on the conventional fuel demand.
I am
a full time employed person and neither have that kind of vacation nor
inclination to delve into these factors. But, the concept of flat world has
always intrigued me and I have felt that it is a kind of misnomer.
Reputed
IT companies have built their business model on the concept of differential
cost of living and therefore outsourcing technical jobs to cheaper labor at
other part of globe. If the world were flat, I believe there would have been no
difference if a person was employed at Bhagalpur or Boston. This along with the
curiosity of applying supply-chain concepts of economic order quantity and
ideal reorder point to reduce cost of storage motivated me to pen down this
short write up on the US SPR. I approached it from the restoration of supply
chain in case of exigency leading to decline in production and reduced maritime
traffic. So, time is a factor of interest in my analysis and not much insight has
been drawn from the above mentioned 4 point of views.
If I
get an encouraging response to the part I of this series, I will take out time
to pen down the remaining two parts as well.
Introduction:
I must say that my interest into strategic management
lectures was primarily driven by inherent suspicion towards the people who can
segment world issues into a 2x2 matrix (Now, I am one of them, consultants). But,
as the sessions progressed and I went through various papers and case studies,
the concept of comparative advantage began to puzzle me. Allied concept was
that of parity across the world in business opportunities to organizations, the
concept which some associate with the statement “The World is Flat”. Professor Pankaj
Ghemawat from IESE Business School, Madrid has maintained his non-agreement to
it quoting dominance of intra-region mobile communication data as evidence of
cohesive communities leading to ‘un-flat’ world.
Considering the Indian context, I recall that US had
imposed sanctions on India after it did not sign CTBT (Comprehensive Test Ban
Treaty) and conducted successful nuclear experiments at Pokharan in Rajasthan. Consequent,
delay in technology transfer and denial of US entry visa to Indian scientists
impeded growth in R&D activity. The USA, by itself, is no stranger to
‘un-flat’ness of the world after an embargo led to energy crisis in early
1970s. Learning from the experience, USA created underground SPR (Strategic
Petroleum Reserves) at Baton Rouge (Louisiana) and Texas. BBC reports that the
US plans to spend USD 200 mn in annual expenses this year to keep 90 days’
worth of fuel in SPR. While the strategic interests can easily discount any
rationality of unfavorable pricing, therefore it is meaningless to justify or
nullify any benefit beforehand. So, I decided to go about creating scenarios
when these strategic reserves will hold the US in good stead while it
reestablishes its lines of supply.
To get busy with numbers, I pulled together OPEC
annual production data along with their major oil export ports and then used a
website to get the average oil tanker sailing time from those ports to
Louisiana/ Texas ports. The results are as under:
Sl. No.
|
Countries
|
Production
|
Port
|
Distance
|
TTA
|
1
|
Iraq
|
3265
|
Basra, Khor Al Zubair
|
11333
|
29
|
2
|
Kuwait
|
2774
|
Mina al Ahmadi
|
11275
|
29
|
3
|
Iran, I.R.
|
2766
|
Kharg
|
11145
|
29
|
4
|
Qatar
|
716
|
Ras Laffan
|
11019
|
29
|
5
|
UAE
|
2761
|
Fujairah
|
10654
|
28
|
6
|
Saudi Arabia
|
9683
|
Jeddah
|
8281
|
21
|
7
|
Angola
|
1660
|
Luanda
|
7500
|
19
|
8
|
Nigeria
|
1911
|
Harcourt
|
6937
|
18
|
9
|
Libya
|
473
|
Sidra
|
6798
|
18
|
10
|
Algeria
|
1151
|
Bejaia
|
5853
|
15
|
11
|
Venezuela
|
2373
|
Jose
|
2302
|
6
|
12
|
Ecuador
|
542
|
Balao, Esmeraldas
|
2259
|
6
|
Legend:
Oil production numbers are in thousands of barrels per
day for the year 2014.
TTA is the Travel Time to America in days for oil
tankers from ports of these countries.
Distance is in miles.
I have tried to look into the figures of oil tanker
traffic whenever USA was under attack, most prominently during World War II,
but couldn’t find much data. Therefore, I began with creating hypothetical scenarios
of oil scarcity during an exigency at USA so that I could foresee a probable
course of action.
Scenario I: No disruption in countries providing oil supply to the
USA
Scenario 1I:
Simultaneous exigency at strategic allies of the USA in Middle East
An exigency
at oil suppliers can lead to impaired production (New Production = 50% of
normal production) and maritime traffic delays can lead to longer transit times
from Middle East to mainland America (Revised TTA = 200% of normal travel time).
Look how African
nations catch up with or surpass prominent middle eastern OPEC countries.
Scenario III: Use of Canadian Oil Sands as a backup
This scenario is new
and evolving and requires study of US refineries and their crude processing
capabilities. Also, the TransCanada’s pipeline network could be a game changer.
COMING
UP IN PART-11
HOW
MUCH SPR IS TOO MUCH SPR?
My consulting partner is often keen to point out that
I am not a person with much knowledge of oil and gas industry. Yet, I would try
to define an SPR loosely as an underground oil bunker. So, how quick could
countries send oil to the USA if there were no SPR? A classic supply chain model with zero buffer?
I will sprinkle some
economics and supply chain in the article as well.
Here are how the
shipping times to USA fare across the OPEC producers:
Clearly, the minimum
buffer stock that the USA has to maintain is of 4 weeks’ duration. Any stocks
with longer duration require a bit of analysis. Currently, USA holds 90 days’
worth of SPR. Canada is next door neighbour as well for any short run elasticity
issues. Oil is inelastic substance, due to which its short run demand curve is
vertical and any supply side shock will lead to rationing and overpricing.
&
IN PART-III
INDIA’S
TRYST WITH SPR
A take on what should
India’s SPR be and what should be the composition of crude oil. The write up
will take up the issue of increasing fuel consumption with growing GDP of
India, refining capacity/ availability of Indian refineries and then will see
the impact that non-conventional technologies will have on the conventional
fuel requirements.
References:
1.
OPEC MOMR
November 2015
2.
US DOE
archives
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