U.S. energy crisis throws spotlight on sea of oil

By Erwin Seba

FREEPORT, Texas (Reuters) - Armed guards, some with machine guns, watch over a patch of earth near the Texas Gulf Coast, a site unremarkable except for a few gray metal wellheads poking up through the surface.

Beneath the ground sits an ocean of crude oil representing more than a third of the U.S. Strategic Petroleum Reserve -- a secured stash designed to pull the U.S. economy through an energy shock as severe as the Arab oil embargo in the 1970s.

"The primary goal (of the reserve) is to make sure what happened in 1973 will never happen again," said Peter Zeihan, vice president of analysis for Stratfor Inc, an Austin, Texas, political and economic analysis firm.

A doubling in oil prices since last year which has threatened U.S. economic growth has thrown the 700 million-barrel SPR into the national spotlight once again, with politicians and pundits debating whether to release supply to fight the current energy spike.

Under pressure from lawmakers, U.S. President George W. Bush this month signed a law suspending new buying to expand the reserve until oil prices fall to $75 a barrel from current levels around $130 a barrel -- a measure designed to keep about 70,000 barrels per day of oil, which would otherwise have gone into the vast salt domes, on the open market.

But the administration has strongly opposed proposals to withdraw crude from the stockpiles, saying the conditions for such a release have not been met.

SUPPLY SHOCK

The United States has been putting crude oil in Gulf Coast salt dome caverns since 1976, three years after Arab OPEC members declared an embargo against the United States and its allies for support of Israel in the Yom Kippur War.

During the embargo, refiners saw the prices they paid for crude oil double and U.S. drivers were buying gasoline on odd- or even-numbered days based on the last digit of their automobile license plates.

Gasoline prices are now higher in inflation-adjusted terms, having cracked $4 a gallon in many parts of the country, but the spike is blamed on rising demand not a shock to supply.

Since it began, the SPR has been tapped during emergencies, such as happened in 2005 when hurricanes Katrina and Rita shut down U.S. Gulf of Mexico oil production representing 25 percent of domestic output.

The largest sale was in 1991, when the administration of President George H.W. Bush ordered up to 21 million barrels released to assure world oil supplies when a U.S.-led coalition began a war to end the Iraqi occupation of Kuwait.

The SPR is made up of four sites along the Gulf Coast in Texas and Louisiana that take advantage of rare underground salt domes, which provide climate-controlled storage and greatly reduced risk of environmental damage.

The lack of salt domes is one reason why there is no SPR site in the nation's largest motor fuel market of California, said David Hackett of Stillwater Associates, a California-based energy consultancy.

"We don't have one on the West Coast because there is no inexpensive place to put it," Hackett said.  Continued...