The Strategic Petroleum Reserve: History, Perspectives, and Issues

The Strategic Petroleum Reserve:

History, Perspectives, and Issues

(name redacted)

Specialist in Energy Policy

December 28, 2009

Congressional Research Service

7-....

www.crs.gov

RL33341

CRS Report for Congress

Prepared for Members and Committees of Congress

The Strategic Petroleum Reserve: History, Perspectives, and Issues

Summary

Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy Policy and

Conservation Act (EPCA, P.L. 94-163) to help prevent a repetition of the economic dislocation

caused by the 1973-1974 Arab oil embargo. The program is managed by the Department of

Energy (DOE). The capacity of the SPR is 727 million barrels, and by the end of 2009, was

virtually filled to its capacity at 726 million barrels of crude oil. In addition, a Northeast Heating

Oil Reserve (NHOR) holds 2 million barrels of heating oil in above-ground storage.

The SPR comprises five underground storage facilities, hollowed out from naturally occurring

salt domes in Texas and Louisiana. EPCA authorized drawdown of the Reserve upon a finding by

the President that there is a “severe energy supply interruption.” Congress enacted additional

authority in 1990 (Energy Policy and Conservation Act Amendments of 1990, P.L. 101-383), to

permit use of the SPR for short periods to resolve supply interruptions stemming from situations

internal to the United States. The meaning of a “severe energy supply interruption” has been

controversial. EPCA intended use of the SPR only to ameliorate discernible physical shortages of

crude oil. However, the American Clean Energy Leadership Act of 2009 (S. 1462), reported in the

Senate, would require that the SPR include 30 million barrels of refined product; would transfer

authority for a drawdown from the President to the Secretary of Energy; and would amend the

drawdown authority to permit drawdown and sale in the event of a “severe energy market supply

interruption” that has caused, or is expected to cause, “a severe increase” in prices. This language

is a significant departure from existing authorities which predicate drawdown disruptions in

supply, and discourages use of the SPR to address high prices, per se.

Beginning in 2000, additions to the SPR were made with royalty-in-kind (RIK) oil acquired by

the Department of Energy in lieu of cash royalties paid on production from federal offshore

leases. In May 2008, Congress passed legislation (P.L. 110-232) ordering DOE to suspend RIK

fill for the balance of the calendar year unless the price of crude oil dropped below $75/barrel.

However, the sharp decline in crude oil prices since spiking to $147/barrel in the summer of 2008

brought about a resumption of fill of the SPR. On January 2, 2009, the Bush Administration

announced plans that included the purchase of nearly 10.7 million barrels for the SPR to replace

oil that was sold after Hurricanes Katrina and Rita in 2005. In May 2009, RIK fill was resumed at

an average volume of 26,000 barrels per day, totaling over 6.1 million barrels to be delivered by

January 2010. These activities have brought the SPR essentially to capacity. The government has

not purchased oil for the SPR since 1994.

The Energy Policy Act of 2005 (EPACT) required expansion of the SPR to its authorized

maximum of 1 billion barrels. Congress approved $205 million for FY2009, including $31.5

million to continue expansion activities. A site in Richton, MS, has been evaluated as a possible

location for an additional 160 million barrels of capacity. Although expansion activity appears to

have been set aside, the FY2010 budget enacted in the FY2010 Energy and Water Appropriations

Act (P.L. 111-85), which provides $243.8 million for the entire SPR program, includes $25

million for expansion activities and $43.5 million for purchase of a cavern at Bayou Choctaw to

replace a cavern posing environmental risks. An amendment agreed to in the Senate, and included

in the final bill, prohibits SPR appropriations expended to anyone engaged in providing refined

product to Iran, or assisting Iran in developing additional internal capacity to refine oil.

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The Strategic Petroleum Reserve: History, Perspectives, and Issues

Contents

History of the SPR ......................................................................................................................1

Establishment of the SPR ......................................................................................................1

The Drawdown Authorities .........................................................................................................3

Proposals in the 111th Congress to Amend the Authorities......................................................4

Acquisition of Crude Oil for the SPR ..........................................................................................5

Resumption of Fill (2009) .....................................................................................................5

Royalty-in-Kind Acquisition .................................................................................................6

When Should the SPR Be Used?: The Debate Over the Years ......................................................7

Use of the SPR in the Persian Gulf War (1990)................................................................8

Hurricanes and Changes in the Market Dynamics (2005-2008)........................................9

The Call for an SPR Drawdown: Summer 2008............................................................. 10

Establishment of a Regional Home Heating Oil Reserve............................................................ 12

Contacts

Author Contact Information ...................................................................................................... 13

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The Strategic Petroleum Reserve: History, Perspectives, and Issues

History of the SPR

Establishment of the SPR

From the mid-1970s until 2007, world markets have had to absorb roughly five significant spikes

in the price of crude oil and petroleum products.1 Whether driven by disruptions in the physical

supply of crude or refined fuels, or by uncertainties owing to international conflicts and

instabilities, these price increases have consequences for the United States. Elevated petroleum

prices affect the balance of trade and, owing to the relative inelasticity of demand for gasoline at

prices less than $4.00 per gallon, siphon away disposable income that might be spent to support

spending, investment, or savings.

The origin of the U.S. Strategic Petroleum Reserve (SPR) stems from the 1973 Arab-Israeli War.

In response to the United States’ support for Israel, the Organization of Arab Exporting Countries

(OAPEC) imposed an oil embargo on the United States, the Netherlands, and Canada, and

reduced production. While some Arab crude did reach the United States, the price of imported

crude oil rose from roughly $4/barrel (bbl) during the last quarter of 1973 to an average price of

$12.50/bbl in 1974. While no amount of strategic stocks can insulate any oil-consuming nation

from paying the market price for oil in a supply emergency, the availability of strategic stocks can

help blunt the magnitude of the market’s reaction to a crisis. One of the original perceptions of the

value of a strategic stockpile was also that its very existence would discourage the use of oil as a

political weapon. The embargo imposed by the Arab producers was intended to create a very

discernible physical disruption. This explains, in part, why the genesis of the SPR was focused

especially on deliberate and dramatic physical disruptions of oil flow, and on blunting the

significant economic impacts of a shortage stemming from international events.

In response to the experience of the embargo, Congress authorized the Strategic Petroleum

Reserve in the Energy Policy and Conservation Act (EPCA, P.L. 94-163) to help prevent a

repetition of the economic dislocation caused by the Arab oil embargo. In the event of an

interruption, introduction into the market of oil from the Reserve was expected to help calm

markets, mitigate sharp price spikes, and reduce the economic dislocation that had accompanied

the 1973 disruption. In so doing, the Reserve would also buy time for the crisis to sort itself out or

for diplomacy to seek some resolution before a potentially severe oil shortage escalated the crisis

beyond diplomacy. The SPR was to contain enough crude oil to replace imports for 90 days, with

a goal initially of 500 million barrels in storage. In May 1978, plans for a 750-million-barrel

Reserve were implemented. The SPR is currently authorized for expansion to 1 billion barrels.

The George W. Bush Administration was unsuccessful in persuading Congress to raise the

authorized size further to 1.5 billion barrels.

1

These have included the Arab oil embargo (1973-1974), the deposing of the Shah of Iran, followed by the Iranian

revolution (1979-1980), the first Gulf War (1990), and OPEC production cuts and a resurgence in world oil demand

(early 1999 into the fall of 2000). Since 2003, crude oil and product prices have risen to new nominal highs—and, very

briefly, a new high in real dollars—owing to a blend of many factors, including international tensions and armed

conflicts, as well as worldwide demand. Some of the dynamics behind recent and sustained increases in price owe to

factors internal to the United States, including seasonal formulations of gasoline to help meet clean air standards, and

strains on U.S. refining capacity. Natural events, such as Hurricanes Rita, Katrina, and Gustav can also create havoc

and alarm in domestic and world markets.

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The program is managed by the Department of Energy (DOE). Physically, the SPR comprises

five underground storage facilities, hollowed out from naturally occurring salt domes, located in

Texas and Louisiana. The caverns were finished by injecting water and removing the brine.

Similarly, oil is removed by displacing it with water injection. For this reason, crude stored in the

SPR remains undisturbed, except in the event of a sale or exchange. Multiple injections of water,

over time, will compromise the structural integrity of the caverns.2 By 2005, the capacity of the

SPR reached 727 million barrels. Its inventory reached nearly 700 million barrels before

Hurricanes Katrina and Rita in 2005. Following the storms, some crude was loaned to refiners

and some was sold. Loans of SPR oil are “paid” by the return of larger amounts of oil than were

borrowed. By the end of 2009, was virtually filled to its capacity at 726 million barrels of crude

oil. 3

SPR oil is sold competitively. A Notice of Sale is issued, including the volume, characteristics,

and location of the petroleum for sale; delivery dates and procedures for submitting offers; as

well as measures for assuring performance and financial responsibility. Bids are reviewed by

DOE and awards offered. The Department of Energy estimates that oil could enter the market

roughly two weeks after the appearance of a notice of sale.4

The SPR could be drawn down initially at a rate of roughly 4.4 mbd for up to 90 days; thereafter,

the rate would begin to decline. Although fears were expressed periodically during the 1980s

about whether the facilities for withdrawing oil from the Reserve were in proper readiness, the

absence of problems during the first real drawdown in early 1991 (the Persian Gulf War)

appeared to allay much of that concern. However, some SPR facilities and infrastructure were

beginning to reach the end of their operational life. A Life Extension Program, initiated in 1993,

upgraded or replaced all major systems to ensure the SPR’s readiness to 2025.

The Arab oil embargo also fostered the establishment of the International Energy Agency (IEA)

to develop plans and measures for emergency responses to energy crises. Strategic stocks are one

of the policies included in the agency’s International Energy Program (IEP). Signatories to the

IEA5 are committed to maintaining emergency reserves representing 90 days of net imports,

developing programs for demand restraint in the event of emergencies, and agreeing to participate

in allocation of oil deliveries among the signatory nations to balance a shortage among IEA

members. The calculation of net imports for measuring compliance with the IEA requirement

includes private stocks. By that measure, the United States has more than 100 days’ cushion.

However, it is likely that less than 20% of the privately held stocks would technically be available

in an emergency, because most of that inventory supports movement of product through the

2

Oil stored at one SPR site, Weeks Island, was transferred after problems with the structural integrity of the cavern—

unrelated to drawdown activity—were discovered in the mid-1990s.

3

Details and current levels of SPR inventory are updated regularly at http://www2.spr.doe.gov/DIR/SilverStream/

Pages/pgDailyInventoryReportViewDOE_new.html.

4

See http://www.fe.doe.gov/programs/reserves/spr/spr-facts.html. For more detail on the sales procedure, see U.S.

Federal Register, Department of Energy, Price Competitive Sale of Strategic Petroleum Reserve Petroleum; Standard

Sales Provisions: Final Rule, July 27, 2005, pp. 39363-39382; available at http://www.fe.doe.gov/programs/reserves/

spr/spr_rule_070705.pdf. The Department of Energy has a history of SPR drawdowns, sales, and exchanges on the web

at http://www.fe.doe.gov/programs/reserves/spr/spr-drawdown.html.

5

IEA member countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France,

Germany, Greece, Hungary, Ireland, Italy, Japan, Republic of Korea, Luxembourg, the Netherlands, New Zealand,

Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. See

http://www.iea.org/ Textbase/about/membercountries.asp.

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delivery infrastructure. At full capacity, the SPR might afford the United States roughly 70 days

or more of net import protection, depending upon the pace of recovery of the domestic economy.

These measures of days’ protection assume a total cessation of oil supply to importing nations, a

scenario that is highly unlikely. This would be especially true for the United States, given that

Canada is currently the nation’s principal source for crude oil.

Some IEA member nations require a level of stocks to be held by the private sector or by both the

public and private sectors. Including the U.S. SPR, roughly two-thirds of IEA stocks are held by

the oil industry, whereas one-third is held by governments and supervisory agencies.6

The Energy Policy Act of 2005 (EPACT) requires, “as expeditiously as practicable,” expansion of

the SPR to its authorized maximum of 1 billion barrels. Advocates for expansion argue that the

SPR will need to be larger if the United States is to be able to maintain stocks equivalent to 90

days of net imports. Congress approved $25 million in the FY2008 budget for expansion

activities. A site in Richton, MS, has been evaluated for the addition of 160 million barrels of

capacity. The FY2010 budget, at $229 million, includes $43.5 million for purchase of a cavern at

Bayou Choctaw to replace a cavern posing environmental risks, as well as $25 million for

expansion activities. However, it is not apparent that expansion remains a high priority.

The conferees accepted language in the Senate version of the bill that prohibits SPR

appropriations expended to anyone engaged in providing refined products to Iran or contributing

in any way to expansion of refining capacity in Iran. Firms providing, or insuring tankers

carrying, refined product to Iran would also be included in the prohibition.

The Drawdown Authorities

The Energy Policy and Conservation Act (EPCA, P.L. 94-163) authorized drawdown of the

Reserve upon a finding by the President that there is a “severe energy supply interruption.” This

was deemed by the statute to exist if three conditions were joined: If “(a) an emergency situation

exists and there is a significant reduction in supply which is of significant scope and duration; (b)

a severe increase in the price of petroleum products has resulted from such emergency situation;

and (c) such price increase is likely to cause a major adverse impact on the national economy.”

Congress enacted additional drawdown authority in 1990 (Energy Policy and Conservation Act

Amendments of 1990, P.L. 101-383) after the Exxon Valdez oil spill, which interrupted the

shipment of Alaskan oil, triggering spot shortages and price increases. The intention was to

provide for an SPR drawdown under a less rigorous finding than that mandated by EPCA. This

section, 42 U.S.C. § 6241(h), has allowed the President to use the SPR for a short period without

having to declare the existence of a “severe energy supply interruption” or the need to meet

obligations of the United States under the international energy program. As noted previously, the

Energy Policy Act of 2005 made the SPR authorities permanent. These authorities also provided

for U.S. participation in emergency-sharing activities of the International Energy Agency without

risking violation of antitrust law and regulation.

Under the additional authorities authorized in P.L. 101-383, a drawdown may be initiated in the

event of a circumstance that “constitutes, or is likely to become, a domestic or international

6

See http://www.iea.org/Textbase/subjectqueries/keyresult.asp?KEYWORD_ID=4103.

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energy supply shortage of significant scope or duration” and where “action taken ... would assist

directly and significantly in preventing or reducing the adverse impact of such shortage.” This

authority allows for a limited use of the SPR. No more than 30 million barrels may be sold over a

maximum period of 60 days, and this limited authority may not be exercised at all if the level of

the SPR is below 500 million barrels. This was the authority behind the Bush Administration’s

offer of 30 million barrels of SPR oil on September 2, 2005, which was part of the coordinated

drawdown called for by the International Energy Agency. The same authority may have been the

model for a swap ordered by President Clinton on September 22, 2000.

Proposals in the 111th Congress to Amend the Authorities

Legislation has been reported in the Senate that would alter significantly the authorities governing

drawdown and sale from the SPR. The American Clean Energy Leadership Act of 2009 (S. 1462)

would require that the SPR include 30 million barrels of refined product (distinct from the 2

million barrels of home heating oil held in the Northeast Heating Oil Reserve); would transfer

authority for a drawdown from the President to the Secretary of Energy; and would amend the

drawdown authority to permit drawdown and sale in the event of a “severe energy market supply

interruption” that has caused, or is expected to cause “a severe increase” in prices. This language

is a significant departure from existing authorities which predicate drawdown disruptions in

supply, and discourages use of the SPR to address high prices, per se.

The refined product reserves that would be established by S. 1462 could be drawn down if the

Secretary of Energy determines that “a sale of refined products will mitigate the impacts of

weather-related events or other acts of nature that have resulted in a severe energy market supply

disruption.” However, the proposed language would amend the broader authorities to allow

drawdown in the event of a “severe energy market disruption,” deemed to exist if “a severe

increase in the price of petroleum products has resulted or is likely to result from the emergency

situation” and that the increase in price “is likely to cause a major adverse impact” on the

economy.

Historically, use of the SPR is premised on a physical shortage of supply—which normally will

manifest itself, in part, in an increase in price. However, price was deliberately kept out of the

authorities as grounds for a drawdown because it invited the question: at what price? A concern

was that, if there were any hint of a price threshold that would trigger a drawdown, it could

influence private sector and industry inventory practices.

Behind this also lies the assumption and expectation that refined product prices are driven, in

large measure, by crude supply and price. However this dynamic was severed in recent years.

During 2008, for example, with the exception of supply uncertainties caused by Hurricanes

Gustav and Ike, high prices were not associated with shortages, but with significantly higher

prices for crude that reflected international anxiety about the sufficiency of supply in the future.

Though some policymakers urged the Bush Administration to release crude from the SPR, a

drawdown would have been unlikely to significantly affect price. High prices were softened when

slumping demand in the face of those prices, and pessimistic economic forecasts, triggered a

plummeting in the price of crude oil that was eventually reflected in product prices.

If enacted, the legislation would require a report to Congress within 180 days describing what

refined products would be acquired for the Reserve and how they would be acquired at minimal

cost or disruption of markets. The report would be required to assess storage options (which

would need to be above-ground) and “the anticipated location of existing or new facilities.”

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Presumably, some analysis would need to be undertaken to identify regions that might be likeliest

affected by incapacitation of normal product distribution, as well as seasonal differences in the

refined product itself. The report would be directed to assess the option of exchanging crude oil in

the SPR for refined products.

Arguments in favor of establishing a refined product reserve are that U.S. oil imports include

refined products and that it could be more efficient and calming to markets if it were not

necessary to first draw down SPR crude and then refine it into needed products. The effect that

SPR crude might have on moderating price increases could also be offset if refineries themselves

or oil pipelines carrying crude to refineries were compromised. The availability of refined product

reserves would address that scenario. Having a regional product reserve would also lessen the

likelihood that delivery of crude or product from the stocks of IEA signatories might overwhelm

U.S. port facilities; this happened in the wake of the European response that followed Hurricanes

Rita and Katrina.

Arguments against a product reserve include the prospect that the availability of supplemental

supplies of gasoline from abroad may increase as European demand for diesel vehicles displaces

gasoline consumption there. Additionally, storage of refined product is more expensive than for

crude. Storage of crude in salt caverns is estimated to cost roughly $3.50/barrel while aboveground storage of product in tanks might cost $15-$18/barrel. Refined product will also

deteriorate and would need to be periodically sold and replaced to assure the quality of the

product held in the product reserve. Many states also use different gasoline blends, adding to the

complexity of identifying which blends should be stored where, and in what volume. It would be

simpler to hold conventional gasoline in a product reserve with the expectation that the

Environmental Protection Agency (EPA) would waive Clean Air Act (CAA) requirements during

an emergency.7

Acquisition of Crude Oil for the SPR

Resumption of Fill (2009)

As already noted, legislation (P.L. 110-232) enacted in May 2008 forbade DOE from initiating

any new activities to acquire royalty-in-kind (RIK) oil for the SPR during the balance of 2008.

The sharp decline in crude oil prices since spiking to $147/barrel in the summer of 2008 has

spurred interest in resuming fill of the SPR. On January 2, 2009, the Bush Administration

announced plans to purchase oil for the SPR, and to reschedule deferred deliveries. There are four

components in the resumption of fill: (1) a purchase announced on January 16, 2009, of nearly

10.7 million barrels to replace oil that was sold after Hurricanes Katrina and Rita in 2005; (2) the

return of roughly 5.4 million barrels of oil borrowed by refiners after Hurricane Gustav in 2008;

(3) delivery of roughly 2.2 million barrels of RIK oil that had been deferred; and (4) resumption

of RIK fill in May 2009 at a volume of 26,000 barrels per day, totaling over 6.1 million barrels to

be delivered over a period from May 2009 to January 2010. These activities are intended to fill

the SPR to its current capacity of 727 million barrels by early 2010. The government has not

7

See testimony of Rusco, Frank. Director, Natural Resources and Environment, Government Accountability Office,

appearing in U.S. Congress. Committee on Energy and Natural Resources. Strategic Petroleum Reserve. S.Hrg. 111-67.

May 9, 2009, p. 8-17.

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acquired oil for the SPR by outright purchase since 1994, when oil purchases ended. The SPR

held 592 million barrels.

Royalty-in-Kind Acquisition

From 1995 until the latter part of 1998, sales of SPR oil, not acquisition, were at the center of

debate. However, the subsequent reduction and brief elimination of the annual federal budget

deficit—as well as a precipitous drop in crude oil prices into early 1999—generated new interest

in replenishing the SPR, either to further energy security objectives or as a means of providing

price support to domestic producers who were struggling to keep higher-cost, marginal

production in service. As an initiative to help domestic producers, Secretary of Energy Bill

Richardson requested that the Office of Management and Budget (OMB) include $100 million in

the FY2000 budget request for oil purchases. The proposal was rejected.

As an alternative to appropriations for the purchase of SPR oil, DOE proposed that a portion of

the royalties paid to the government from oil leases in the Gulf of Mexico be accepted “in kind”

(in the form of oil) rather than as revenues. The Department of the Interior (DOI) was reported to

be unfavorably disposed to the royalty-in-kind (RIK) proposal, but a plan to proceed with such an

arrangement was announced on February 11, 1999. (Legislation had also been introduced [H.R.

498] in the 106th Congress to direct the Minerals Management Service to accept royalty-in-kind

oil.) Producers were supportive, maintaining that the system for valuation of oil at the wellhead is

complex and flawed. While acquiring oil for the SPR by RIK avoids the necessity for Congress to

make outlays to finance direct purchase of oil, it also means a loss of revenues in so far as the

royalties are settled in wet barrels rather than paid to the U.S. Treasury in cash. Final details were

worked out during the late winter of 1999.

In mid-November of 2001, President Bush ordered fill of the SPR to 700 million barrels,

principally through oil acquired as royalty-in-kind (RIK). At its inception, the RIK plan was

generally greeted as a well-intended first step toward filling the SPR to its capacity of 727 million

barrels.8 However, it became controversial when crude prices began to rise sharply in 2002. Some

policymakers and studies asserted that diverting RIK oil to the SPR instead of selling it in the

open market was putting additional pressure on crude prices. A number of industry analysts

argued that the quantity of SPR fill was not enough to have driven the market. The Administration

strongly disagreed with claims that RIK fill bore responsibility for the continuing spike in prices.

Legislative attempts to suspend RIK fill began in 2004, during the 108th Congress. The Energy

Policy Act of 2005 (P.L. 109-58), enacted in the summer of 2005, required the Secretary of

Energy to develop and publish for comment procedures for filling the SPR that take into

consideration a number of factors. Among these are the loss of revenue to the Treasury from

accepting royalties in the form of crude oil, how the resumed fill might affect prices of both crude

and products, and whether additional fill would be justified by national security. On November 8,

2006, DOE issued its final rule, “Procedures for the Acquisition of Petroleum for the Strategic

Petroleum Reserve.” The rule essentially indicated that DOE would take into account all the

parameters required by P.L. 109-58 to be taken into consideration before moving ahead with any

8

The SPR estimated capacity of 727 million barrels followed a reevaluation of the cavern formations and other work.

Water injections into caverns when oil has been moved have added capacity, as did completion of a project to remove

excess gas from stored petroleum.

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acquisition strategy. DOE rejected tying decisions to acquire oil to any specific, measurable

differentials in current and historic oil prices.

In the summer of 2007, DOE resumed RIK fill of the SPR. On May 19, 2008, with gasoline

prices exceeding, on average, $3.60 gallon, and approaching $4.00/gallon in some regions,

Congress passed P.L. 110-232. However, a few days earlier, on May 16, DOE announced it would

not accept bids for an additional 13 million barrels of RIK oil that had been intended for delivery

during the second half of 2008.

Through FY2007, royalty-in-kind deliveries to the SPR totaled roughly 140 million barrels and

forgone receipts to the Department of Interior an estimated $4.6 billion. DOE had estimated

deliveries of 19.1 million barrels of RIK oil during FY2008 and $1.170 billion in forgone

revenues.9

Opponents of RIK fill in the 110th Congress were not necessarily opposed to the concept of an

SPR. When the price of crude was much less of an issue, objections to RIK fill were also

ideological. Opponents of RIK fill in principle contended that a government-owned strategic

stock of petroleum is inappropriate under any circumstance—that it essentially saddled the public

sector with the expense of acquiring and holding stocks, the cost for which might have otherwise

been borne by the private sector. The existence of the SPR, this argument goes, has blunted the

level of stocks held in the private sector.10 As already noted, RIK fill resumed in 2009 and will

end in early 2010, pending establishment of additional storage. As has been noted, a site in

Richton, MS, has been evaluated as a possible site for expansion of the SPR. However, while $25

million for expansion activities was included in the FY2010 budget, it is not apparent that

expansion is a high priority.

When Should the SPR Be Used?: The Debate Over

the Years

The history of the SPR traces differences of opinion over what could be deemed a “severe energy

supply interruption.” As has been noted, the original intention of the SPR was to create a reserve

of crude oil stocks that could be tapped in the event of an interruption in crude supply. However,

in the last few years, there have been increases in the price of products independent of crude

prices, as well as increases in crude prices that correlate to “tight” markets, but not to measurable

shortages in crude supply.11 Legislation introduced in the 111th Congress to amend the authorities

for drawdown of both the SPR and the Northeast Heating Oil Reserve (S. 967, S. 283) would

allow a drawdown under such a set of circumstances, which would have been seen as anomalous

in the past.

9

Owing to suspension of RIK fill after the passage of legislation in May 2008, these figures will be significantly lower.

Annual figures for RIK deliveries through FY2006 may be found in the Strategic Petroleum Reserve Annual Report for

FY2006, p. 39: http://www.fossil.energy.gov/programs/reserves/publications/Pubs-SPR/spr_annual_rpt_06.pdf.

Estimates for FY2008 furnished in a communication from DOE.

10

See, for example, Taylor, Jerry and Van Doren, Peter, “The Case Against the Strategic Petroleum Reserve,” Policy

Analysis, No. 555, November 21, 2005.

11

One article in the trade press describes the oil market as driven by “tight fundamentals.” See Little Relief Seen from

Tight Fundamentals, Oil Daily, November 1, 2007: p. 1-2.

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Authorizing a drawdown of the SPR and the NHOR in the event of a “severe energy supply

disruption,” both bills have language that includes a price component in the definition of what

constitutes such a “disruption”—either an observed price increase, or the likelihood of one.

A debate during the 1980s over when, and for what purpose, to initiate a drawdown of SPR oil

reflected the significant shifts that were taking place in the operation of oil markets after the

experiences of the 1970s, and deregulation of oil price and supply. Sales of SPR oil authorized by

the 104th Congress—and in committee in the 105th—renewed the debate for a time. 12 The rise in

oil prices from 2005-2008 renewed interest in the debate over the appropriate time to call upon

the SPR.

The SPR Drawdown Plan, submitted by the Reagan Administration in late 1982, provided for

price-competitive sale of SPR oil. The plan rejected the idea of conditioning a decision to

distribute SPR oil on any “trigger” or formula. To do so, the Administration argued, would

discourage private sector initiatives for preparedness or investment in contingency inventories.

Many analysts, in and out of Congress, agreed with the Administration that reliance upon the

marketplace during the shortages of 1973 and 1979 would probably have been less disruptive

than the price and allocation regulations that were imposed. But many argued that the SPR should

be used to moderate the price effects that can be triggered by shortages like those of the 1970s or

the tight inventories experienced during the spring of 1996, and lack of confidence in supply

availability. Early drawdown of the SPR, some argued, was essential to achieve these objectives.

The Reagan Administration revised its position in January 1984, announcing that the SPR would

be drawn upon early in a disruption. This new policy was hailed as a significant departure,

considerably easing congressional discontent over the Administration’s preparedness policy, but it

also had international implications. Some analysts began to stress the importance of coordinating

stock drawdowns worldwide during an emergency lest stocks drawn down by one nation merely

transfer into the stocks of another and defeat the price-stabilizing objectives of a stock drawdown.

In July 1984, responding to pressure from the United States, the International Energy Agency

agreed “in principle” to an early drawdown, reserving decisions on “timing, magnitude, rate and

duration of an appropriate stockdraw” until a specific situation needed to be addressed.

Use of the SPR in the Persian Gulf War (1990)

This debate was revisited in the aftermath of the Iraqi invasion of Kuwait on August 2, 1990. The

escalation of gasoline prices and the prospect that there might be a worldwide crude shortfall

approaching 4.5-5.0 million barrels daily prompted some to call for drawdown of the SPR. The

debate focused on whether SPR oil should be used to moderate anticipated price increases, before

oil supply problems had become physically evident.

In the days immediately following the Iraqi invasion of Kuwait, the George H. W. Bush

Administration indicated that it would not draw down the SPR in the absence of a physical

shortage simply to lower prices. On the other hand, some argued that a perceived shortage does as

much and more immediate damage than a real one, and that flooding the market with stockpiled

oil to calm markets is a desirable end in itself. From this perspective, the best opportunity to use

the SPR during the first months of the crisis was squandered. It became clear during the fall of

12

These were sales ordered by Congress as deficit-reduction measures. For a chronology of these sales, see

http://www.fe.doe.gov/programs/reserves/spr/spr-drawdown.html.

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1990 that in a decontrolled market, physical shortages are less likely to occur. Instead, shortages

are likely to be expressed in the form of higher prices, as purchasers are free to bid as high as they

wish to secure scarce supply.

Within hours of the first air strike against Iraq in January 1991, the White House announced that

President Bush was authorizing a drawdown of the SPR, and the IEA activated the plan on

January 17. Crude prices plummeted by nearly $10/barrel in the next day’s trading, falling below

$20/bbl for the first time since the original invasion. The price drop was attributed to optimistic

reports about the allied forces’ crippling of Iraqi air power and the diminished likelihood, despite

the outbreak of war, of further jeopardy to world oil supply. The IEA plan and the SPR drawdown

did not appear to be needed to help settle markets, and there was some criticism of it.

Nonetheless, more than 30 million barrels of SPR oil was put out to bid, but DOE accepted bids

deemed reasonable for 17.3 million barrels. The oil was sold and delivered in early 1991.

The Persian Gulf War was an important learning experience about ways in which the SPR might

be deployed to maximize its usefulness in decontrolled markets. As previously noted, legislation

enacted by the 101st Congress, P.L. 101-383, liberalized drawdown authority for the SPR to allow

for its use to prevent minor or regional shortages from escalating into larger ones; an example

was the shortages on the West Coast and price jump that followed the Alaskan oil spill of March

1989. In the 102nd Congress, omnibus energy legislation (H.R. 776, P.L. 102-486) broadened the

drawdown authority further to include instances where a reduction in supply appeared sufficiently

severe to bring about an increase in the price of petroleum likely to “cause a major adverse

impact on the national economy.” The original EPCA authorities permit “exchanges” of oil for the

purpose of acquiring additional oil for the SPR. Under an exchange, a company borrows SPR

crude and later replaces it, including an additional quantity of oil as a premium for the loan. There

were seven exchanges between 1996 and 2005. The most recent one (with the exception of a test

exchange in the spring of 2008) was in June 2006. ConocoPhillips and Citgo borrowed 750

thousand barrels of sour crude for two refineries affected by temporary closure of a ship channel.

A new dimension of SPR drawdown and sale was introduced by the Clinton Administration’s

proposal in its FY1996 budget to sell 7 million barrels to help finance the SPR program. While

agreeing that a sale of slightly more than 1% of SPR oil was not about to cripple U.S. emergency

preparedness, some in the Congress vigorously opposed the idea, in part because it might

establish a precedent that would bring about additional sales of SPR oil for purely budgetary

reasons, as did indeed occur. There were three sales of SPR oil during FY1996. The first was to

pay for the decommissioning of the Weeks Island site. The second was for the purpose of

reducing the federal budget deficit, and the third was to offset FY1997 appropriations. The total

quantity of SPR sold was 28.1 million barrels, and the revenues raised were $544.7 million. Fill

of the SPR with RIK oil was initiated in some measure to replace the volume of oil that had been

sold during this period.

Hurricanes and Changes in the Market Dynamics (2005-2008)

Prior to Hurricanes Ivan, Katrina, and Rita in 2005, growth in oil demand had begun to strap U.S.

refinery capacity. A result has been an altering in a once-observed historic correlation between

crude oil and refined oil product prices. In the past, changes in the price of crude had driven

changes in the cost of refined products. The assumption that product prices are driven by, and

follow the path of, crude prices, was at the center of debates from the 1980s until early in the

decade of 2000 whether an SPR drawdown was warranted when prices spiked.

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However, beginning in the middle of the first decade of the new century, pressure on product

supplies and the accompanying anxiety stoked by international tensions caused a divorce in that

traditional correlation between crude and product prices. The increases in prices of gasoline and

other petroleum products following Hurricanes Katrina and Rita, for example, were not a

response to any shortage of crude, but to shortages of products owing to the shutdown of major

refining capacity in the United States, and to an interruption of product transportation systems.

The rise in crude prices to over $140/barrel by the summer of 2008 was attributable to many

contributing factors, including increasing international demand, and concern that demand for

crude might outstrip world production. Markets were described as “tight,” meaning that there

might be little cushion in terms of spare production capacity to replace any crude lost to the

market, or to provide adequate supply of petroleum products. In such a market, where demand

seems to be brushing against the limits to meet that demand, refinery outages, whether routine or

unexpected, can spur a spike in crude and product prices, as can weekly reports of U.S. crude and

petroleum stocks, if the numbers reported are not consistent with expectations. As prices

continued to increase during 2007-2008, some argued that market conditions did not support the

high prices. One market analyst remarked at the end of October 2007, “The market at this stage

totally ignores any bearish news [that would soften the price of oil], but it tends to exaggerate

bullish news.”13 Significant and sustained increases in oil prices were observed in the absence of

the sort of “severe energy supply interruption” that remains the basis for use of the SPR. As has

been noted, legislation in the Senate (S. 1462) would introduce a price basis for authorizing a

drawdown of the SPR. A release from the SPR might not lower prices under every scenario.

The Call for an SPR Drawdown: Summer 2008

Some policymakers were urging the Administration to release oil from the SPR during the spring

and summer of 2008. A review of the dynamics in the oil market during this period provides a

demonstration of why an SPR release in the face of high prices will not necessarily foster a

decline in petroleum prices.

By mid-July 2008, U.S. gasoline prices were exceeding $4.00/gallon and diesel fuel was

averaging $4.75/gallon. Crude oil prices had briefly exceeded more than $145/barrel, but declined

late in the month to less than $128/barrel. Oil prices had risen in recent years in the absence of the

normal association with the concept of “disruption” or “shortage.” The escalation in prices to

their observed peak in July 2008 was driven by several factors that are difficult to weigh. Chief

among them was the existence of little or no spare oil production capacity worldwide, and a

general inelasticity in demand for oil products despite high prices. Prices also generally prove

sensitive to the ebb and flow of international tensions, the value of the U.S. dollar, and even the

appearance of storms that could develop into hurricanes that might make landfall in the Gulf of

Mexico.

In the months prior to Hurricanes Gustav and Ike, there were some calls for an SPR drawdown

despite the absence of any discernible shortage. On July 24, 2008, legislation (H.R. 6578) to

require a 10% drawdown of SPR oil failed to achieve a two-thirds majority in the House under

suspension of the rules (226-190). The language was included in H.R. 6899, the Comprehensive

American Energy Security and Consumer Protection Act, which passed the House on September

16th (236-189).

13

Oil Daily, October 30, 2007. Crude Continues Its Rally as Storm Hits Mexican Crude Exports: p. 3.

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The Strategic Petroleum Reserve: History, Perspectives, and Issues

The bill would have required a sale of 70 million barrels of light grade petroleum from the SPR

within six months following enactment. The bill stipulated that 20 million barrels must be offered

for sale during the first 60 days. All oil from the sale would be replaced with “sour” crude to be

acquired after the six-month sale period, with the replacement acquisition completed not later

than five years after enactment.

The genesis of the proposal lay partly in an analysis by the Government Accountability Office,

which observed that the proportion of grades of oil in the SPR was not as compatible as it could

be with the trend of refineries toward being able to handle heavier grades of crudes. Refiners

reported to GAO that running lighter crude in units designed to handle heavy crudes could

impose as much as an 11% penalty in gasoline production and 35% in diesel production. The

agency reported that other refiners indicated that they might have to shut down some of their

units.14

It was unclear what sort of effect a roughly 70 million barrel draw on the SPR would have on

prices. In a market where there is no physical shortage, oil companies may have limited interest in

SPR oil unless they have spare refining capacity to turn the crude into useful products, or want to

build crude oil stocks. 15 SPR oil is not sold at below-market prices. Bids on SPR oil are accepted

only if the bids are deemed fair to the U.S. government. If the announcement itself that the SPR is

going to be tapped does not prompt or contribute to a softening of prices, there may be limited

interest on the part of the oil industry in bidding on SPR supply. Although the possibility exists

that prices might decline if additional refined product is released into the market, it was

impossible to predict what effect an SPR drawdown would have had on oil prices at any time in

2008, given the many other factors that bear on daily oil prices.

There are additional considerations. A unilateral draw on U.S. stocks will probably have less

impact on the world oil market than a coordinated international drawdown of the sort that

occurred after Hurricanes Katrina and Rita in 2005. Some might argue that it would be unwise

under any scenario for the U.S. to draw down its strategic stocks while other nations continue to

hold theirs at current levels. Additionally, it is always possible that producing nations might

reduce production to offset any SPR oil delivered into the market. In the setting of 2008,

producing, exporting nations could have argued that the market was already well-supplied and

that short-term supply concerns were not what was supporting elevated prices.

The SPR has been perceived as a defensive policy tool against high oil prices, but if it is used

without a discernible impact on oil prices, it is possible that the SPR will lose some of whatever

psychological leverage it exercises on prices when left as an untapped option.

14

See Government Accountability Office. Options for Improving the Cost-Effectiveness of Filling the Reserve.

February 2008. GAO-08-521T. http://www.gao.gov/new.items/d08521t.pdf. An additional benefit to acquiring heavier

grades of crude is that it is less expensive.

15

Use of refining capacity has been running at generally observed averages, taking into account seasonal maintenance

and other events that will take refinery units offline temporarily. See Table 2 at http://www.eia.doe.gov/oil_gas/

petroleum/data_publications/weekly_petroleum_status_report/wpsr.html.

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Establishment of a Regional Home Heating Oil

Reserve

Although a number of factors contributed to the virtual doubling in some Northeastern locales of

home heating oil prices during the winter of 1999-2000, one that drew the particular attention of

lawmakers was the sharply lower level of middle distillate stocks—from which both home

heating oil and diesel fuels are produced—immediately beforehand. It renewed interest in

establishment of a regional reserve of home heating oil. EPCA includes authority for the

Secretary of Energy to establish regional reserves as part of the broader Strategic Petroleum

Reserve. With support from the Clinton Administration, Congress moved to specifically authorize

and fund a regional heating oil reserve in the Northeast. The FY2001 Interior Appropriations Act

(P.L. 106-291) provided $8 million for the Northeast Heating Oil Reserve (NHOR). The regional

reserve was filled by the middle of October 2000 at two sites in New Haven, CT, and terminals in

Woodbridge, NJ, and Providence, RI. The NHOR is intended to provide roughly 10 days of

Northeast home heating oil demand.

There was controversy over the language that would govern its use. Opponents of establishing a

regional reserve suspected that it might be tapped at times that some consider inappropriate, and

that the potential availability of the reserve could be a disincentive for the private sector to

maintain inventories as aggressively as it would if there were no reserve. The approach enacted

predicated drawdown on a regional supply shortage of “significant scope and duration,” or if—for

seven consecutive days—the price differential between crude oil and home heating oil increased

by more than 60% over its five-year rolling average. The intention was to make the threshold for

use of the regional reserve high enough so that it would not discourage oil marketers and

distributors from stockbuilding. The President could also authorize a release of the NHOR in the

event that a “circumstance exists (other than the defined dislocation) that is a regional supply

shortage of significant scope and duration,” the adverse impacts of which would be

“significantly” reduced by use of the NHOR.

During mid- and late December 2000, the 60% differential was breached. However, this was due

to a sharp decline in crude prices rather than to a rise in home heating oil prices. In fact, home

heating oil prices were drifting slightly lower during the same reporting period. As a

consequence, while the 60% differential was satisfied, other conditions prerequisite to authorizing

a drawdown of the NHOR were not.

A general strike in Venezuela that began in late 2002 resulted, for a time, in a loss of as much as

1.5 million barrels of daily crude supply to the United States. With refinery utilization lower than

usual owing to less crude reaching the United States, domestic markets for home heating oil had

to rely on refined product inventories to meet demand during a particularly cold winter. Prices

rose, and there were calls for use of the NHOR; still, the price of heating oil fell significantly

short of meeting the guidelines for a drawdown. 16 In connection with the FY2004 Interior

appropriations, both the House and Senate Appropriations Committees included language in their

committee reports directing that DOE advise Congress as to the “circumstances” under which the

NHOR might be used. The provision implied that some in Congress were not satisfied with the

16

During the heating oil season, DOE updates and posts a weekly table that shows the various inputs that go into the

calculation to determine the current differential, http://www.fe.doe.gov/programs/reserves/heatingoil/

Sales_Basis_0506.html.

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formula currently in place that would permit drawdown of the NHOR. The language was not

included in the final FY2004 Interior appropriations bill. As the sharp increases in home heating

oil prices during 2005 are averaged into the five-year rolling average, the price differential needed

to trigger use of the NHOR will increase further. However, the President can invoke the

authorities for an NHOR drawdown even if the price threshold is not met.

S. 283, introduced on January 21, 2009, would permit drawdown on the basis of price as well as

supply. The bill would mandate a release of 20% of the heating oil held in the Reserve if the

average retail price for home heating oil in the Northeast exceeds $4.00 per gallon on November

1 of the fiscal year. An additional 20% would be released in four additional installments if the

average retail price exceeded $4.00/gallon on the first of each month, December through March.

Author Contact Information

(name redacted)

Specialist in Energy Policy

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

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