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TheStreet Open House

Oil Storage Capacity and Safety Remain the Industry's Achilles Heel

Stocks in this article: KMI

NEW YORK (TheStreet) -- Everyone knows that the coal business is a disaster. U.S. mines are still being closed. Mine owners are pointing their supporters to social media in a move to maintain employment.

Could such a thing happen in the oil patch? It did happen in the 1980s, when the price of a barrel of oil plunged to a low of $20.

Read More: Warren Buffett's Top 10 Dividend Stocks

Could it happen again? A lot depends on whether the industry can effectively store the product when times are good, as they are now.

Right now the U.S. is consuming about 19 million barrels of oil per day and producing about 12 million, according to the Energy Information Administration, which expects production to rise to 14 million barrels per day next year. The U.S. should by then be the world's largest oil producer.

Moving and storing that oil, a business called the "midstream," is becoming an increasingly important business, which is why Kinder Morgan (KMI) decided to fold its limited partnerships into the main company and begin investing in new infrastructure again.

New investment should solve the problems of oil transportation and storage over the course of several years. But current prices are based on short-term estimates for supply and demand, and those are on a knife edge. Crude prices have been falling for a month, and the U.S. benchmark, West Texas Intermediate, opened for trade Tuesday at $96.41 a barrel. 

The supply situation sounds great, but each move toward international peace -- whether in Iraq, Ukraine, or North Africa -- sends prices down because there is a limit to storage. (If there were no limit, producers could store oil when prices fall and then bring it to market when prices surge.)

The U.S. Strategic Petroleum Reserve, for instance, which has a capacity of 727 million barrels, mostly in salt domes under Texas and Louisiana, currently holds 691 million barrels, meaning it's 96% full. There's another 609 million barrels of private storage capacity, 55% full at the end of March, according to the EIA. 

Read More: Kinder Morgan: Why Now May Be a Good Time to Sell

The next EIA report on storage, due in November, should show more oil in storage. But how secure is that storage? Not as secure as you may think. Oil "banked" as money in storage can leak.

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