US oil product reserves not 'well suited' to handle supply disruptions: GAO

Federal petroleum product reserves are inadequate to address severe supply disruptions and available analysis is insufficient to determine what alternative federal action should be taken to mitigate supply risks, the US Government Accountability Office said May 25.

Neither the Department of Energy's Northeast Home Heating Oil Reserve nor its Northeast Gasoline Supply Reserve was "well suited to address the risks of supply disruptions in the Northeast," the GAO said in a report. The agency concurred with the DOE's 2020 assessment that the reserves were too expensive to maintain and too small relative to regional demand for the fuels.

The GAO asserted that operations and maintenance of the product reserves cost on an annual basis about $13/b, compared with just 30 cents/b to maintain the emergency crude supplies in the Strategic Petroleum Reserve.

Further, the 1 million barrels of fuel in each product reserve would satisfy less than two days of estimated consumption in the Northeast, the GAO said.

The GAO's report was requested by Senator Dianne Feinstein, Democrat-California, and based on an audit that began in September. Its release comes just days after reports circulated that the Biden administration was considering tapping the emergency diesel reserve to address the current supply crunch and help lower soaring diesel prices, averaging $5.57/gal nationwide, up from just $2.32/gal a year ago, and a leading contributor to escalated food prices.

The home heating oil reserve has suddenly moved into the spotlight because its ultra-low-sulfur distillate can be used as either home heating oil or diesel fuel. The heating oil reserve was used once before, after Hurricane Sandy in 2012 to fuel first responder vehicles, while the gasoline reserve has never been tapped.

Limitations

The report also noted limitations in releasing fuel from the product reserves that likely contributed to their rare use during short-term supply disruptions, including needing a presidential finding of a severe energy supply disruption and a requirement that sales go through a competitive bidding process

"Officials told us that it would generally take more than one week to release heating oil or gasoline from the product reserves — from the declaration of a severe energy disruption by the president to a competitive sale of the product on the open market," the GAO said.

By that time, supplies from other regions or countries are generally available. The GAO noted that it takes about 10 days for additional fuel from the Gulf of Mexico to arrive by ship to the New York Harbor.

And in March, DOE officials told the GAO that the Biden administration was considering whether to continue or recommend closing the two reserves. The department itself recommended closing the reserves in past years' budget proposals given the lack of effective use of the reserves.

The GAO said it could not determine "what role DOE should take going forward" because the department has not fully considered future risks to regional petroleum product supplies or potential benefits of alternatives to the existing stockpiles for mitigating supply risk.

The DOE has not examined "whether alternative structures or policies could be put in place to make product reserves more responsive during emergencies or how much such alternatives would cost," the GAO said. "Alternatives could include different reserve sizes, geographic locations, fuel composition, ownership structure, or release criteria."

Further study needed

As such, the agency reiterated a recommendation it made to the DOE in 2018 for it to study the need, costs and benefits of setting up product reserves in other regions, particularly all regions identified as vulnerable.

If fully implemented, that study could inform decisions on federal actions that could mitigate supply risks, the GAO said. But "DOE disagreed with this recommendation, and it has no plans to further study product reserves, according to DOE officials," the agency said in the report.

The DOE did not respond to a request for comment on the GAO report.

Tighter inventories and robust oil demand as Russia's invasion of Ukraine continues have created much pain at the pump.

Record high diesel prices, topping $6/gal at some US pumps, may be beginning to take their toll on demand, as distillate stockpiles rose for a second straight week, according to the Energy Information Administration

Distillate inventories were at 106.9 million barrels the week ended May 20, rising by 1.657 million barrels on top of the prior week's 1.235-million-barrel increase.