WASHINGTON, May 23 (Reuters) - A Trump administration plan to sell off half the U.S. emergency crude oil stockpile to help balance the budget faces opposition in Congress, with lawmakers from both parties worried the proposal would undermine the drilling industry and make the country vulnerable to supply shocks.
The White House's 2018 budget proposal, sent to Congress on Tuesday, proposes raising nearly $16.6 billion by 2027 by gradually selling millions of barrels from the reserve, which now holds about 688 million barrels of oil in underground caverns in Texas and Louisiana. News of the proposal had briefly sent oil prices tumbling on concern it would oversupply the market, but prices recovered and finished slightly higher on hopes that OPEC and other countries would extend supply cuts.
"We should not be selling oil from the Strategic Petroleum Reserve now," said Senator John Hoeven, a Republican from North Dakota, a leading oil producer state. "We should use the SPR for emergencies, and selling now would disrupt the markets."
The SPR sell-off plan is part of a broader White House proposal to balance the U.S. budget that is meant as starting point to debate policy with Congress - which will ultimately pass its own version.
Whether the SPR proposal will survive the budget process could depend in part on Republican Senator Lisa Murkowski of Alaska, a member of the appropriations committee and the head of the chamber's energy panel. In 2015, when Congress was considering selling a modest amount of oil from the reserve to help fund a transportation bill, Murkowski opposed the idea, saying the reserve should not be used as an ATM.
Murkowski did not directly address the SPR plan in a statement on Tuesday, but she said "a President's budget is more of a vision than anything else." Efforts to reach Murkowski on Tuesday were not successful.
Murkowski's Democratic counterpart on the energy panel, however, raised concerns that liquidating half of the reserve would run counter to the original purpose of the facility, which Congress created in 1975 to protect against global oil disruptions that could harm the U.S. economy.
"We are not going to let Donald Trump auction off our energy security to the highest bidder," Senator Maria Cantwell of Washington said in an email.
The Arab oil embargo of the early 1970s led to chaos at U.S. filling stations and fears of long-term damage to the economy.
Much has changed since then: U.S. oil production has surged in recent years and supply from Canada has increased, displacing a large portion of the imports from some less stable Middle Eastern suppliers.
U.S. oil imports from the producer group OPEC have fallen to less than 3.2 million bpd in 2016 from more than 5.4 million barrels per day in 2008, according to the U.S. Energy Information Administration.
Richard Newell, a former head of the EIA, noted that the plan could cause the United States to break its obligation as a member of the International Energy Agency to hold 90 days’ worth of oil imports on reserve. Currently, the SPR holds about 145 days’ worth of oil imports.
"There are a number of possible scenarios under which reducing the SPR to the levels proposed would violate our IEA treaty obligations," he said.
Lawmakers from both parties also said releasing oil from the SPR could dampen crude prices and hurt drilling companies still recovering from a price crash in 2014. Trump had campaigned on a promise to revive the drilling industry.
"Putting that much oil on the market, you will see a lot of layoffs in the energy business," said Representative Gene Green, a Democrat from Texas.
Mick Mulvaney, the head of the Office of Management and Budget told reporters on Tuesday, however, there are ways to tap the SPR slowly and "telegraph it over the course of time" to avoid having a dramatic impact on prices.
Representative Pete Olson, a Texas Republican, said the SPR infrastructure needs improvement because tanks and other equipment are constantly exposed to corrosive salt air. But he did not rush to embrace a sell-off of oil, saying that the larger budget deserves careful scrutiny.
Some oil industry representatives also came out against the proposal. Randall Luthi, President of the National Ocean Industries Association said the plan to cut the SPR in half threatened national security. He added he also opposed a proposal in the budget to cut federal oil royalty payments to U.S. Gulf Coast states - funds meant to help them defend their coasts from hurricane damage. (Reporting by Timothy Gardner, additional reporting by Roberta Rampton; editing by Richard Valdmanis and David Gregorio)