Order Code IB87050
CRS Issue Brief for Congress
Received through the CRS Web
Strategic Petroleum Reserve
Updated October 1, 2003
Robert Bamberger
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Reauthorization of the SPR
The Drawdown Authorities
The FY2004 Budget
Establishment of a Regional Home Heating Oil Reserve
Purchases of Crude Oil
Royalty-In-Kind Acquisition for the SPR
Drawdown of the Reserve
Drawdown Capability
Debate Over When to Use the Reserve
Calls for a Drawdown: Home Heating Oil, Winter 1999-2000
September 2000: A Swap Is Announced
CHRONOLOGY
FOR ADDITIONAL READING


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Strategic Petroleum Reserve
SUMMARY
On April 11, 2003, the House passed
was not justified. In 1994, the Clinton Ad-
comprehensive energy legislation (H.R. 6)
ministration and Congress agreed to suspend
which would require that the Strategic Petro-
further purchases for the SPR. Maintaining
leum Reserve (SPR) be filled to its current
SPR readiness and upgrading aging infrastruc-
capacity of roughly 700 million barrels as
ture became the major priority.
soon as practicable, and would also authorize
$1.5 billion for expansion of the SPR to 1
The terrorist attacks on September 11,
billion barrels. The bill would also perma-
2001, renewed concerns about domestic en-
nently authorize the Reserve. The Senate
ergy security. On October 9, 2001, the House
version of H.R. 6, passed on July 31, 2003,
passed a resolution expressing House support
would also permanently authorize the SPR
for filling the SPR to its full authorized capac-
and require that it be filled to capacity, but
ity of 1 billion barrels. On November 13,
does not include a provision to expand it.
2001, the President ordered fill of the SPR to
its current capacity of roughly 700 million
Drawdown of the Reserve can be
barrels, principally through royalty-in-kind
initiated by the President in the event or likeli-
(RIK) acquisitions. The SPR holds more than
hood of a “severe energy supply interruption,”
622 million barrels, the highest level of inven-
to meet U.S. obligations to International
tory since the program began. Deliveries
Energy Agency allies for emergency oil-shar-
scheduled for late 2002 and the first months of
ing, or in the event of a shortage that would
2003 were delayed due to tightness in world
bring about an increase in petroleum prices
oil markets. However, deliveries ramped up
sharp enough to have “a major adverse im-
again during the spring and are projected to
pact” on the economy. For example, on
exceed 200,000 b/d in October 2003 before
March 17, Representative Tauzin, chairman of
declining during the late fall and winter of
the House Energy and Commerce Committee,
2004.
indicated that the SPR was positioned to be
tapped if war with Iraq threatened to disrupt
The FY2003 budget request for the SPR
oil supply. The Bush Administration indi-
was $187.8 million, including $11.0 million to
cated that it would carefully monitor markets.
support the costs of transporting RIK oil to
SPR sites. The Omnibus Appropriations bill,
The SPR was authorized in 1975 in the
H.J.Res. 2, enacted on February 13, 2003,
Energy Policy and Conservation Act (EPCA)
approved $185.9 million and reauthorized the
to protect the Nation against a repetition of the
SPR and the Northeast Home Heating Oil
economic dislocation caused by the 1973-74
Reserve (NHOR) through FY2008. The
oil embargo. Congressional attention to the
House agreed to the Administration request
SPR declined during the 1990s as a number of
for FY2004 of $180.1 million, including $5
developments intersected: (1) the need to cut
million for the NHOR. The Senate agreed to
federal spending; (2) declining likelihood of
$173.1 million. No new funds were requested
prolonged and crippling oil supply interrup-
for the SPR Petroleum Account because
tions; (3) unregulated oil markets that appear
contractors delivering RIK oil or returning oil
to operate efficiently in allocating and pricing
under the oil exchange program are absorbing
oil; and (4) a consensus that the SPR was pro-
transportation costs.
bably at an adequate level and additional fill

Congressional Research Service ˜ The Library of Congress

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MOST RECENT DEVELOPMENTS
On April 11, 2003, the House passed comprehensive energy legislation (H.R. 6) which
would require that the Strategic Petroleum Reserve (SPR) be filled to its current capacity of
roughly 700 million barrels as soon as practicable, and would also authorize $1.5 billion for
expansion of the SPR to 1 billion barrels. The bill would also permanently authorize the
Reserve. The Senate version of H.R. 6, passed on July 31, 2003, would also permanently
authorize the SPR and require that it be filled to capacity, but does not include a provision
to expand it. Deliveries of royalty-in-kind (RIK) oil, and oil still owed from an “exchange”
held in 2000, resumed in the spring and are projected to exceed 200,000 barresl per day (b/d)
in October 2003 before declining during the late fall and winter of 2004. The SPR currently
holds more than 622 million barrels.

The Bush Administration request for FY2004 was $180.1 million, including $5 million
for the Northeast Heating Oil reserve (NHOR). No new funds were requested for the SPR
Petroleum Account because contractors delivering RIK oil or returning oil under the oil
exchange program are absorbing transportation costs. The House agreed to the
Administration request; the Senate agreed to a level of $173.1 million.
In its version of the FY2004 Interior and Related Agencies Appropriations (H.R. 2691),
the Senate also included an amendment to require the development of procedures to assure
that the SPR is filled consistent with the objective of minimizing acquisition costs – or
revenue foregone when the oil is acquired under the RIK program – and consistent with
maximizing domestic supply. The amendment stems from a study commissioned by Senator
Levin that suggested that the Administration’s diversion of RIK and other oil to the SPR was
not always opportunely timed, exacerbating crude oil price increases.

BACKGROUND AND ANALYSIS
The anticipation of a possible confrontation with Iraq has already added what is
described as a “war premium” to oil prices. Exports of Iraqi oil were averaging around 1.7
million barrels daily in early March 2003, an amount which, if lost to world markets, could
be made up by other producers with spare capacity. However, uncertainty about how
prolonged a military conflict might be, and whether Middle Eastern oil producers would be
disposed to keeping prices reined in cannot be reliably predicted. In the wake of crude prices
approaching $40/barrel, and elevated gasoline and home heating oil prices, there were
several calls for a drawdown of the SPR. With the end of the military phase of the war with
Iraq – and the minimal effect on oil supply – oil prices have softened some, and calls for a
drawdown have subsided.
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 1973-74 Arab oil embargo. Physically, the SPR comprises five
underground storage facilities, hollowed out from naturally occurring salt domes, located
in Texas and Louisiana. Oil stored at one of the sites, Weeks Island, was transferred after
problems with the structural integrity of the cavern were discovered in the mid-1990s.
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It was generally believed that the mere existence of a large, operational reserve of crude
oil would deter future oil cutoffs and would discourage the use of oil as a weapon. 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 — 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 program fell increasingly behind schedule. By the end of 1978, the SPR was
supposed to contain 250 million barrels, but contained only 69 million barrels. When the
Iranian revolution cut supplies in the spring of 1979, purchases were suspended to reduce the
upward pressure on world oil prices. Filling of the Reserve was resumed in September 1980
following enactment of the Energy Security Act (P.L. 96-294), which established a minimum
fill rate of 100,000 barrels per day (b/d). An amendment to the FY1981 DOE appropriations
legislation required that the Administration accelerate the fill rate to 300,000 b/d, subject to
adjustments for cost and other market factors. The fill rate was 292,000 b/d in FY1981, but
steadily declined to a low of 34,000 b/d in FY1990.
Filling of the SPR was suspended during 1990-1992 after the Iraqi invasion of Kuwait,
but was resumed at a modest rate. Fill declined to 16,500 b/d during FY1994 before fill was
suspended at the end of that fiscal year. The SPR itself reached 592 million barrels before
purchases were again suspended. Owing to sales of SPR oil during 1996, the level in the
Reserve had fallen to 563.5 million barrels by the early spring of 1997. (At the prices
prevailing in the late spring of 1998, that inventory would have declined to roughly 542
million barrels had a sale authorized for FY1998 been carried out.) In mid-November of
2001, President Bush ordered fill of the SPR to its current capacity of roughly 700 million
barrels, principally through oil acquired as royalty-in-kind (RIK) for production from federal
offshore leases. Deliveries scheduled for late 2002 and the first months of 2003 were delayed
due to tightness in world oil markets. However, deliveries ramped up again during the spring
and are projected to exceed 200,000 b/d in October 2003 before declining during the late fall
and winter of 2004. The SPR now holds more than 622 million barrels.
Reauthorization of the SPR
The authorities governing a drawdown of the SPR are included in the Energy Policy and
Conservation Act (EPCA, P.L. 94-163). These authorities also provide for U.S.
participation in emergency-sharing activities of the International Energy Agency (IEA)
without risking violation of antitrust law and regulation. Comprehensive energy legislation
(H.R. 6), passed by the House on April 11, 2003, would permanently reauthorize the SPR
and avoid some of the confusion experienced in the past when the authorities expired before
Congress could agree to an extension. The Senate version of H.R. 6, passed on July 31,
2003, would also permanently authorize the SPR and require that it be filled to capacity, but
does not include a provision to expand it. What follows is a brief summary of
reauthorization history in recent years.
The 104th and 105th Congresses agreed to fairly short-term extensions of the authorities
governing the use of the SPR, pending a broader review of SPR policy. The 106th Congress
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passed a short-term extension of the SPR (P.L. 106-64) until March 31, 2000, to allow
additional time for consideration of legislation (S. 1051, H.R. 2884) to extend the authorities
until the end of FY2003. No agreement was reached before the authorities expired on March
31, 2000. Congress did not agree to an extension until October 24, 2000, which the President
signed on November 9, 2000 (P.L. 106-469). This legislation extended the authorities to the
end of September 2003. Conferees on the Omnibus Appropriations, H.J.Res. 2, passed
February 13, 2003, reauthorized the SPR and the NHOR through FY2008.
The Drawdown Authorities
The Energy Policy and Conservation Act (EPCA) authorizes drawdown of the Reserve
upon a finding by the President that there is a “severe energy supply interruption.” This is
deemed by the statute to exist if three conditions are 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), would allow 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.
Under this provision, a drawdown may be initiated in the event of a circumstance that
“constitutes, or is likely to become, a domestic or international 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. Though this authority has never been formally used,
it may have been the model for a swap ordered by President Clinton on September 22, 2000
(see p. 9). As noted above, agreement on extension of the EPCA authorities was not reached
until the final days of the 106th Congress (P.L. 106-469). During the roughly 7 months that
no formal authorities were in place, the Administration’s position was that the existence of
an annual appropriation for the SPR conveys Congress’ intention to maintain the SPR
irrespective of whether or not the statutes have lapsed. The existence of legislative proposals
in both the House and Senate to fund the SPR in FY2001 and to reauthorize the program
were also interpreted by DOE counsel as further evidence of Congress’ intention toward the
SPR.
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The FY2004 Budget
On July 17, 2003, the House agreed to the Bush Administration request for FY2004
(H.R. 2691) – $180.1 million, including $5 million for the Northeast Home Heating Oil
Reserve. No new funds were requested for the SPR Petroleum Account because contractors
delivering RIK oil or returning oil under the oil exchange program are absorbing
transportation costs. While agreeing to the the Administration request, the House
Appropriations Committee asked that DOE advise both the House and Senate Appropriations
Committees, by December 1, 2003, as to the “circumstances” under which the NHOR might
be used. The Committee’s request may imply that some in Congress are not satisfied with
the formula currently in place that would permit drawdown of the NHOR.
In its version of the Interior appropriations bill, the Senate agreed to a level of $173.1
million. The Senate also agreed to an amendment to require the development of procedures
to assure that the SPR is filled in a manner consistent with the objective of minimizing
acquisition costs – or revenue foregone when the oil is acquired under the RIK program –
and consistent with maximizing domestic supply. The amendment stems from a study
commissioned by Senator Levin that suggested that the Administration’s diversion of RIK
and other oil to the SPR was not always opportunely timed, exacerbating crude price
increases. Many industry analysts challenged the study’s conclusions shortly after its release.
The study has been posted on the Web.
Establishment of a Regional Home Heating Oil Reserve
While 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
immediately beforehand. It renewed interest in establishment of a regional reserve of home
heating oil. The Energy Policy and Conservation Act (EPCA, P.L. 94-163) includes
authority for the Secretary of Energy to establish regional reserves as part of the broader
Strategic Petroleum Reserve; however, the actual SPR Plan originally presented to Congress
in 1977 did not provide specifically for a regional reserve. In the 106th Congress, legislation
was introduced in both the House and Senate (S. 2047, H.R. 3608) to establish a regional
reserve.
On April 12, 2000, the House included in SPR reauthorization legislation (H.R. 2884)
language to establish a 2.0 million barrel home heating oil reserve in the Northeast. Within
45 days of enactment, the Secretary would transmit to Congress a plan detailing how the
Reserve would be developed. The legislation extends latitude to the Secretary of Energy to
acquire storage capacity and refined product by purchase, contract, exchange or lease. Home
heating oil from the Reserve could be released in the event of a severe supply disruption, a
“severe” price increase, or “another emergency affecting the Northeast.” The same language
was also included by the House in its version of the FY2001 Energy and Water
Appropriations bill (H.R. 4733).
President Clinton endorsed establishment of a regional reserve in his radio address on
April 18, 2000, but requested that Congress specifically authorize such a reserve for the
Northeast. When the House and Senate had not resolved their differences over SPR
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reauthorization, the Administration announced on July 10, 2000, its intention to proceed with
establishment of a regional home heating oil reserve on an interim basis after DOE’s General
Counsel made the determination that congressional enactment of FY2001 appropriations for
the SPR was sufficient authority to proceed. The Administration also submitted to Congress
an amendment to the Strategic Petroleum Reserve Plan that would give the regional reserve
permanent status. The proposed amendment provided for a regional distillate reserve, not to
exceed two million barrels. On July 18, 2000, the Senate amended H.R. 4578, the FY2001
Interior Appropriations, to provide $4 million for funding the regional reserve. The
conferees provided $8 million, including a transfer of $4 million in unexpended funds from
the SPR Petroleum Acquisition account. The House approved the conference report on
October 4, 2000 (348-69), and the President signed it into law (P.L. 106-291) on October 11,
2000.
DOE invited bids for the provision of storage and distillate. Crude oil from the SPR
was to be provided in exchange for the refined product and facilities. On August 20, 2000,
DOE announced that the regional reserve would be situated at three sites: (1) Equiva
Trading would provide 500,000 barrels of storage at a terminal in New Haven, Connecticut;
(2) Morgan Stanley Capital Group, Inc., would provide an additional 500,000 barrels of
storage at its own site in New Haven; and (3) 1 million barrels would be stored in a
Woodbridge, New Jersey, terminal (considered part of the New York Harbor) operated by
Amerada Hess. The terminals in New Haven can distribute product by tanker, barge, tank
truck or connection to the Buckeye Pipeline. The New Jersey site, near Perth Amboy,
distributes heating oil by barge.
On August 24, 2000, DOE accepted a bid from Equiva to provide 1 million barrels of
distillate to the two sites in New Haven, and on August 29, announced that the remaining 1
million barrels of home heating oil would be provided to the Amerada Hess storage terminal
by Morgan Stanley Capital Group, Inc. The regional reserve was filled by the middle of
October 2000.
Controversy over the regional reserve, and the language that would govern its use had
been caught up in differences between the House and Senate over extension of the EPCA
authorities in 2000. 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. One critic of the proposal, the Petroleum Industry
Research Foundation, predicted that “aggressive use of a government reserve to hold down
prices would hold down the supply response as well.” However, advocates of the regional
reserve pointed out that the experience of the 1999-2000 winter demonstrated how the
problems experienced in the Northeast can quickly generalize into associated increases in the
price of other petroleum fuels. They argued that the benefits from measures that prevent the
sort of price increases experienced in home heating oil ultimately are shared by consumers
of diesel fuel and gasoline, too.

An approach that was proposed by Senator Frank Murkowski in the 106th Congress and
included in the Senate version of H.R. 2884 was passed by unanimous consent on October
19, 2000. It 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
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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 House approved
the Senate version of H.R. 2884 on October 24, 2000, and it was signed into law (P.L. 106-
469) by the President on November 9, 2000. The regional reserve was officially titled the
Northeast Heating Oil Reserve (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. Nonetheless, some Democratic members
of Congress were urging President Clinton to initiate a drawdown from the NHOR before
leaving office. By February 2001, heating oil stocks had recovered sufficiently to ease any
serious concerns about adequacy of supply during the remainder of that winter.
The 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 have had to rely on refined product inventories to meet demand during
a particularly cold winter. The strike ended early in 2003 and Venezuelan production began
to resume slowly. Exports of Venezuelan oil began to reach the U.S. in March 2003, but
there is widespread agreement that and it will take time to restore U.S. crude and product
inventories. Consequently, home heating oil prices (as well as gasoline prices) are likely to
remain elevated for the present. By the week ending February 10, 2003, home heating oil
prices in sections of New England were exceeding, on average, $1.75/gallon. Calls began
for use of the NHOR; the price was approaching to within roughly 20 cents of meeting the
guidelines for a drawdown.1 However, with the end of the heating season and the end of the
military phase of the war with Iraq, calls for use of the SPR subsided. Nonetheless, in the
FY2004 appropriations, the House has asked that DOE advise both the House and Senate
Appropriations Committees, by December 1, 2003, as to the “circumstances” under which
the NHOR might be used. The Committee’s request may imply that some in Congress are
not satisfied with the formula currently in place that would permit drawdown of the NHOR.
Purchases of Crude Oil
With the expiration in the late 1980s of the most recent agreement with Petroleos
Mexicanos (PEMEX), the Defense Fuels Supply Center resumed making purchases for the
SPR on behalf of DOE from the spot market until fill was suspended for a second time after
FY1994. The federal deficit was a major concern, and in light of the common interests
established between consuming and producing nations during the Gulf War, the Reserve was
deemed by a majority in Congress to be sufficiently filled.
1 DOE updates and posts a table weekly which shows the various inputs that go into the
calculation to determine the current differential. (For additional information on the
establishment of the NHOR, readers are also referred to CRS Report RL30781, U.S. Home
Heating Oil Price and Supply During the Winter of 2000-2001: Policy Options
.)
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Alternative approaches to direct purchase of oil for the Reserve were studied and
debated during the 1980s. Most alternatives had distinct disadvantages or risks. Among the
options examined at length were the sale of oil-denominated bonds with the revenues applied
to oil purchases; imposition of SPR-dedicated fees on gasoline or oil imports; and sale of the
Naval Petroleum Reserves (NPR) or dedication of NPR revenues to SPR purchases. The
only option examined thought to have the same advantages as direct purchases was oil
leasing.
In the 102nd Congress, omnibus energy legislation in the House (H.R. 776) included
a provision that would have required that refiners of domestic and imported oil be assessed
1% of their domestic and imported crude, and imported refined product purchases or cash
equivalent, to provide 150,000 b/d for the SPR. The George H. W. Bush Administration and
the industry were opposed to this approach, arguing that a set-aside would be the equivalent
of a tax and that it would be borne disproportionately by certain companies. The contentious
set-aside language was struck on the House floor, and a similar provision in the Senate was
defeated during committee markup.
From 1995 until the latter part of 1998, sales of SPR oil, not acquisition, were at the
center of debate. However, reduction and elimination of the annual federal budget deficit
and the 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. It was
also periodically suggested that it be U.S. policy to purchase domestic oil for the SPR as a
means of keeping marginal wells in production. The SPR reauthorization enacted by the 106th
Congress (P.L. 106-469) included an amendment authorizing purchase of oil from U.S. wells
producing 15 barrels or less (25 or less if there is a high water content to the recovered oil)
in the event that the price of crude falls to $15/barrel (bbl) or below. In September 1998, the
Big Hill SPR site in Texas was activated as a foreign trade subzone, which would enable
foreign countries to store surplus production in the Reserve without paying customs fees and
taxes, but there have been no developments in this regard.
Royalty-In-Kind Acquisition for the SPR
When OMB turned down DOE’s request to fund purchases for SPR oil in FY1999,
DOE suggested as an alternative that a portion of the royalties 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 Interior (DOI) was reported to be unfavorably disposed to the
(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 have
favored institution of such a program because they maintain the current system for valuation
of oil at the wellhead is complex and flawed. Acquiring oil for the SPR by RIK avoids the
necessity for Congress to make outlays to finance direct purchase of oil; however, it also
means a loss of revenues in so far as the royalties are paid in wet barrels rather than in cash.
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Final details were worked out during the late winter of 1999. The ultimate intention was
to replace the 28 million barrels that were sold in recent years; it would take about 10 months
to replenish this volume at the anticipated rate of roughly 100,000 b/d. At its inception, the
RIK plan was greeted as a well-intended and helpful first step. This Clinton program, and
the return of oil that was “swapped out” from the SPR in 2000 by the Clinton
Administration, would account for a total of 47 million barrels to be restored to the SPR.
President Bush’s initiative projected adding another 108 million barrels to bring the SPR to
existing capacity in 2005.
Table 1 summarizes the number of sources that provided oil for the Reserve from the
program’s inception until the end of 1995, when conventional fill was suspended. Following
the test sale and actual drawdown of SPR oil during the Persian Gulf War, the SPR’s
holdings declined to 568.5 million barrels. Purchases restored the reserve to nearly 591.6
million barrels before they were suspended. Replacement of oil “swapped” from the SPR
and RIK oil had increased SPR storage to more than 605 million barrels by mid-June 2003.
The terrorist attacks upon the United States on September 11, 2001, accelerated interest
in purchasing crude for the SPR. Some thought, in the short term, that depending upon the
nature of the U.S. response and potential reprisals, the possibility existed for a politically
driven interruption in oil exports bound for U.S. shores, a threat to waterborne tankers, or
sabotage of oil facilities in the United States itself. On November 13, 2001, President Bush
ordered fill of the SPR to its capacity of 700 million barrels, relying upon oil acquired by the
government through royalty-in-kind. During 2002, nearly 40 million barrels of oil were
deposited in the SPR, some of which was oil returned under the terms of a “swap” in the fall
of 2000 (for details, see p. 10).
However, in light of tightness in world oil markets and increasing prices, the
Administration agreed to delay deliveries scheduled for late 2002 and the first months of
2003. The Administration had intended to boost deliveries to the SPR to 130,000 barrels per
day (b/d) during April 2003, a total of 3.9 million barrels. But, on March 4, 2003, DOE
delayed delivery of all but 15,000 b/d of RIK oil. With the end of the military phase of the
war in Iraq and little effect on oil markets, deliveries of RIK oil, and oil still owed from an
“exchange” held in 2000, resumed in the spring of 2003 and ranged between 180,000-
230,000 b/d during the late summer of 2003.
Deposit of 40 million barrels into the SPR during 2002 was criticized in a report
released on March 3 by Senator Levin, representing the minority on the U.S. Senate
Permanent Committee on Investigations. The study argued that this increment of fill had
been a major contributor to oil price increases during that year (the text is available at
[http://levin.senate.gov/issues/crudeoilreport.htm]). A number of industry analysts quickly
dismissed the study, arguing that the quantity of SPR fill was not significant enough to have
driven the market. On August 5, 2003, Senator Levin reiterated his charges in a letter to
Secretary of Energy Abraham, requesting that DOE suspend purchases for the SPR until
crude prices decline. The study has been posted on the Web.
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Table 1. SPR: Crude Oil Received Through 1995
(millions of barrels)
Source
Net Contract/Quantity
Percent of Total/%
Mexico
256.7
41.9
North Sea (U.K.)
147.3
24.0
United States
48.1
7.8
Saudi Arabia
27.1
4.4
Libya
23.7
3.9
Iran
20.0
3.3
UAE
18.4
3.0
Nigeria
15.1
2.5
Norway
11.9
1.9
Oman
9.0
1.5
Egypt
8.9
1.5
Ecuador
6.2
1.0
Algeria
6.2
1.0
Cameroon
3.4
0.6
Iraq
3.4
0.6
Gabon
2.4
0.4
Qatar
2.3
0.4
Angola
1.0
0.2
Venezuela
0.9
0.1
Peru
0.4
0.1
Argentina
0.4
0.1
Total Receipts
612.8
100.0
Source: U.S. Department of Energy
Drawdown of the Reserve
Drawdown Capability
The resources of the Strategic Petroleum Reserve are of little value unless DOE can
remove, transport, and sell the oil expeditiously and in significant volume during a supply
emergency. SPR drawdown and distribution capability was designed to be 4.3 million
barrels per day (mbd), sustainable for 90 days. However, owing to the decommissioning of
the Weeks Island storage site (completed during FY1999) the drawdown capability for the
SPR would be roughly 4.1 million barrels daily during the first 90 days.
Although fears were expressed periodically during the 1980s 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, during the Persian Gulf War, appears to have allayed
much of that concern. However, some SPR facilities and infrastructure were beginning to
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reach the end of their operational life. A Life Extension Program, initiated in 1993 and now
completed, upgraded or replaced all major systems to ensure the SPR’s readiness to 2025.
Concern has also been periodically raised about whether the SPR would be able to
provide meaningful relief to Hawaii. Reauthorization legislation enacted late in the 105th
Congress (P.L. 105-388) included new provisions that would allow companies servicing
Hawaii to enter into a binding agreement for purchase of SPR oil during a drawdown. The
state would be assured some quantity of oil at a price that would be an average of all
successful bids. The volume sold to Hawaii in this manner could be subject to certain limits.
Debate Over When to Use the Reserve
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. The intended use of the SPR has become an issue again, beginning with
the rise in home heating prices during the winter of 1999-2000.
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 even small 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 desirable 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, easing considerably 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.
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.
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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 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 (bbl) 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, and 17.3 million barrels were 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 “severe” enough to “likely . . . cause a major adverse impact on the
national economy.”
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.
What follows is a brief history of circumstances in recent years when there have been
calls for use of the SPR. A review of these events captures the difficulty of reconciling
market developments with the authorities that govern an SPR drawdown. This history also
touches upon how the SPR has been used in the past when the authorities governing the SPR
had expired.
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Calls for a Drawdown: Home Heating Oil, Winter 1999-2000
At the start of 2000, reducing the federal budget deficit was no longer the argument for
a sale of SPR oil. Some now argued that the leap in home heating oil prices from the winter
of 1998-1999 to the winter of 1999-2000 was a rationale for drawing down the SPR. As the
price increases generalized to diesel fuel, heating oil, and gasoline, the calls for an SPR
drawdown began to multiply.
Oil prices began making a sharp recovery in the late winter of 1999, rising from the low
teens at the beginning of the year to more than $22/bbl by the early fall and crossing $30/bbl
in mid-February 2000. A major cause was production cuts settled upon in March 1999 by
the Organization of Petroleum Exporting Countries (OPEC) and other major oil-exporting
nations. On September 21,1999, warning of high home heating oil prices in the winter in the
Northeast, Senator Schumer made the first of several requests to then-Secretary of Energy
Richardson to authorize a drawdown from the SPR to blunt price increases.
At issue during the winter of 1999-2000 was whether the price for home heating oil had
reached a level severe enough to stir a shift in policy governing SPR use – and whether the
SPR could be any sort of remedy. Though the price of heating oil and other petroleum
products is inextricably tied to oil supply, policy governing SPR use has generally been that
SPR oil is to be used primarily to ameliorate oil supply shortages and their consequences
(including higher prices), but not to be used to explicitly regulate prices.
Additionally, some argued that a drawdown of the SPR would not alleviate the problem.
The Clinton Administration’s contention was that high prices were the consequence of a
number of temporary factors that could not be resolved any faster by intervention. This was
because the tight supply of home heating oil in the Northeast was due in part to idle refinery
capacity and refiners’ drawdown of stocks during recent months while crude prices were
escalating. Refiners preferred to use lower-cost inventory rather than purchase higher-priced
crude. Prolonged freezing temperatures also had made certain ports less accessible, adding
to distribution problems. The Administration argued that the high prices prevailing would
encourage increased production of home heating oil, a shift of refined product stocks to the
Northeast, and additional product imports that would arrive in due course. Though it would
take some weeks for these effects to take hold, the argument was that these developments
would alleviate the supply problem long before a drawdown from the SPR could help. In
the meantime, some governors requested and received additional funds from LIHEAP, the
Low-Income Home Energy Assistance Program administered by the Department of Health
and Human Services.
As gasoline and diesel fuel prices began to increase in the late winter of 2000, the calls
for an SPR drawdown began to come from sections of the country other than the Northeast.
The Administration continued to oppose a drawdown, investing its efforts instead in a
number of trips by then-Secretary Richardson to the Middle East and elsewhere to talk with
OPEC oil ministers, and the oil ministers of other oil-exporting nations. Following OPEC’s
commitment on March 28, 2000, to boost production, crude price began to decline to the
mid-twenties. The pressure for an SPR drawdown had subsided by the first week of April
2000; however, it resumed in June 2000 when gasoline prices began to reach and breach
$2.00/gallon in the Midwest.
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September 2000: A Swap Is Announced
As the summer of 2000 ended, crude oil prices continued to escalate despite boosts in
production by the OPEC cartel. Stocks of home heating oil had been at historic lows, and
concern was growing about the fresh pressure that escalating crude prices, colder weather,
and anticipated refinery maintenance might have on home heating price and supply during
the winter. On September 22, 2000, President Clinton announced a swap of 30 million
barrels of oil from the SPR, and contracts were awarded on October 4. Interested parties bid
to borrow quantities of not less than 1 million barrels. Contracts were awarded on the basis
of how much oil bidders offered to return to the SPR between August 1 and November 30,
2001. In effect, bidders based their offers on their best models of what it would cost them
to acquire replacement crude, weighed against the benefit to them of having additional
supply at the beginning of the winter. Although there were reports that interest in the swap
was thin, this proved not to be the case. DOE awarded 24 million barrels of sweet crude, and
6 million barrels of sour. Under the contracts accepted by DOE, a total of 31.5 million barrels
were to be returned to the SPR in 2001.
Over the course of the days between announcement of the swap, and to the day after the
awards were made, crude prices softened from $37 to less than $31/bbl. It was arguable how
much of this was attributable to the swap, or whether, absent the escalation in Middle East
tensions during the week of October 9, 2000, the decrease would have been maintained
anyway. It may have been that U.S. willingness to use the SPR temporarily took the wind
out of a speculative element in the futures market. Some argued that the Administration
announcement was a calculated political gesture to affect price, that the circumstances did
not merit a drawdown of SPR oil, and that adding crude to the market would do little to boost
home heating oil supply because refineries were operating at near capacity. Others
contended that there was a legitimate need to call upon SPR supply, that it would increase
supply and exert some stabilizing influence.
The preponderant risk in the transaction has been borne by the oil companies or refiners
who placed bids. The volume a refiner promised to return, and the price at the time the
refiner acquired the replacement crude, determines the refiner’s effective return on
participating in the swap. However, in the absence of congressional appropriations to
acquire oil for the SPR in recent years, the Reserve receives under the swap a net acquisition
that it would not have otherwise had. In that sense, it is not especially material whether or
not the quantity of oil returned to the SPR is at price parity with the quantity originally
borrowed.
Criticism of the swap was renewed when three bidders awarded a total of 10 million
barrels of sweet crude were having difficulties securing letters of credit. Two were unable
to meet the deadline; on October 14, 2000, DOE awarded the 7 million barrels they
controlled to three firms who had been successful bidders in the initial solicitation.
The peculiar circumstances surrounding some of the original bidders spurred fresh
criticism and congressional hearings into the swap, as did reports that higher prices for home
heating oil in Europe were likely to draw product refined from the SPR crude to overseas
market. Senator Murkowski, Chairman of the Senate Energy Committee, issued a press
release on October 6, 2000, underscoring the irony that oil from the U.S. SPR might relieve
European, rather than domestic markets. While it can be argued that, in a world market, it
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does not greatly matter where the product goes, a principal issue here appeared to be the
reluctance among some European nations to draw upon their own strategic stocks. Officials
in Spain and France called for a coordinated stock drawdown by the European Union in light
of the U.S. action, but opinion was divided among the membership, and it was supposed that
countries more receptive to such a drawdown would be disinclined to act independently. An
advantage of a European drawdown is that these stocks are held in the form of refined
products, as well as crude, and would reach product markets faster. European Union
distillate stocks were reported to cover 100 days’ demand. On October 16, 2000, Secretary
of Energy Richardson indicated that several domestic refiners had agreed to temporarily
cease exporting home heating oil.
On March 29, 2001, the repayment schedule was renegotiated to allow five companies
to return nearly 24 million barrels of the swapped oil between December 2001-January 2003.
To compensate for the extension of the schedule, DOE will receive additional oil, bringing
the total projected repayment to 33.54 million barrels. It is believed that the schedule was
renegotiated to keep pressure off crude markets, and to keep this volume of oil in the private
sector where it could be tallied in industry stocks going into the winter of 2001-2002.
Delivery of the last 5.9 million barrels yet to be replaced was renegotiated in December 2002
and again at the end of January 2003 as the fall in crude exports from Venezuela contributed
to a tightness in world oil markets.
CHRONOLOGY
07/31/03 —
The Senate passed its own version of H.R. 6. It, too, would permanently
authorize the SPR and require that it be filled to its capacity, but does not
include any provisions for its expansion.
04/11/03 — The House passed comprehensive energy legislation (H.R. 6) that would
permanently authorize the SPR, and provide $1.5 billion to finance expansion
of the SPR to 1 billion barrels.
02/13/02 —
H.J.Res. 2, passed in both the House and Senate, included a 5-year extension
of the SPR and NHOR authorities through the end of FY2008.
09/24/02 —
Conferees on comprehensive energy legislation (H.R. 4) agreed to language
that would permanently authorize the SPR and require fill to its current
capacity of approximately 700 million barrels. The 107th Congress would
adjourn without enacting this legislation.
11/13/01 –-
President George W. Bush ordered that the SPR be filled to its capacity of
700 million barrels with oil paid to the government as royalty-in-kind.
03/29/01 –-
DOE agreed to a renegotiated schedule for return of nearly 24 million barrels
of the oil “swapped” from the SPR. Five companies are to return oil
between December 2001-January 2003, and will provide an additional 2.2
million barrels to compensate for the delay.
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11/09/00 –-
President Clinton signed legislation (P.L. 106-469, H.R. 2884) reauthorizing
the SPR and permanently establishing a Northeast Heating Oil Reserve
(NHOR).
09/22/00 –-
President Clinton authorized a “swap” of 30 million barrels from the SPR.
08/11/99
DOE announced that the Weeks Island site had been filled with brine, was
stable geologically, and ready to be turned over to the General Services
Administration for disposition. Of the oil stored in Weeks Island, 98% was
recovered and transferred to other SPR sites.
06/16/99 —
DOE announced four contracts to provide an additional 9.3 million barrels
to the SPR as royalty-in-kind for production from federal leases. This
brought the total volume settled upon to date from this program to more than
13 million barrels.
02/11/99 —
Secretary of Energy Bill Richardson announced a plan that would provide 28
million barrels of oil to the SPR at the rate of 100,000 b/d of crude oil as
payment “in-kind” of royalties on federal leases in the Gulf of Mexico.
11/13/96
DOE announced that it had accepted another $53.5 million in bids for SPR
oil authorized to be sold during FY1997, raising total sales for that fiscal year
to $142 million, or roughly two-thirds of the amount authorized by P.L. 104-
208.
04/29/96
President Clinton ordered the release of 12 million barrels of SPR oil to help
blunt a recent runup in crude and product prices.
03/00/96
DOE completed sale of SPR oil authorized to finance emptying and
decommissioning of the Weeks Island site. Owing to higher crude prices,
sale of 5.1 million barrels, at an average price of $18.92/bbl, was sufficient
to generate $96.4 million in revenues.
09/30/94
The FY1995 Department of Interior and Related Agencies Appropriations
Act (P.L. 103-332) essentially curtailed oil purchases and fill of the SPR for
FY1995, in keeping with the Clinton Administration’s budget proposal.
10/24/92
P.L. 102-486 enacted, broadening the circumstances under which the SPR
could be tapped, providing for expansion of the SPR to one billion barrels,
and including further provisions affecting leasing, potential purchases of oil
stripper well production, and requiring a study of how U.S. insular areas
would be accommodated in the event of a disruption.
06/19/92
The SPR took delivery of the first oil since fill was suspended in 1990.
05/12/92
The George H. W. Bush Administration announced purchase of one million
barrels of North Sea oil for the SPR at a contract price of $19.78, plus
transportation costs. A few days earlier, arrangements were announced for
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delivery of 2.4 million barrels of Naval Petroleum Reserve oil over a 4-month
period commencing in June 1992.
02/25/91
The George H. W. Bush Administration announced it was preparing to
resume purchase of oil for the SPR on international spot markets at a rate of
25,000 b/d for three months.
01/16/91
Within hours of the initial air attacks on Iraq, President George H. W. Bush
authorized a drawdown of the Strategic Petroleum Reserve in support of a
plan agreed to just days earlier by the International Energy Agency.
08/08/90
The George H. W. Bush Administration indicated its willingness to use the
SPR in the event of “any severe supply interruption,” but indicated that any
release of SPR crude would be coordinated with U.S. allies.
08/01/90
Iraqi forces invaded Kuwait. Acquisition of oil for the SPR was suspended.
07/11/84
The IEA agreed in principle that government-owned or -controlled oil stocks
should be used early during a supply disruption if deemed helpful to calming
nervous oil markets and restraining price increases. The agreement did not
supersede the emergency sharing program already in place, but was intended
to broaden the repertoire of emergency responses that the IEA may consider.
01/24/84
Secretary of Energy Donald Hodel testified before the Senate Subcommittee
on Energy, Nuclear Proliferation, and Government Processes of the
Committee on Governmental Affairs that the Reagan Administration
supported early use of the Strategic Petroleum Reserve during a petroleum
disruption to help stabilize markets.
05/00/82
DOE released a report required by the Omnibus Budget Reconciliation Act
of 1981, which concluded that a Reserve larger than 750 million barrels
would not provide net economic benefits to the United States.
06/30/80
Congress passed the Energy Security Act requiring that the SPR be filled at
a rate of at least 100,000 b/d for FY1981 beginning October 1, 1980. Fill was
resumed in late September 1980.
03/00/79
Purchase of oil for the SPR was suspended because of the tight international
crude oil market, Saudi objections, and budget considerations.
08/00/77
First crude oil pumped into SPR.
FOR ADDITIONAL READING
U.S. Congress. Senate. Committee on Energy and Natural Resources. Subcommittee on
Energy Research, Development, Production and Regulation. Energy Policy and
Conservation Act.
Hearing on S. 1051. Sept. 14, 1999. S.Hrg. 106-329.
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