Order Code IB87050
CRS Issue Brief for Congress
Received through the CRS Web
Strategic Petroleum Reserve
Updated February 22, 2006
Robert Bamberger
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Use of the SPR After Hurricanes Katrina and Rita
History of the SPR
Reauthorization of the SPR
The Drawdown Authorities
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


IB87050
02-22-06
Strategic Petroleum Reserve
SUMMARY
Congress authorized the Strategic Petro-
Among other provisions, the Secretary is also
leum reserve (SPR) in the Energy Policy and
required to develop procedures for achieving
Conservation Act (EPCA, P.L. 94-163) to
the fill objective without “incurring excessive
help prevent a repetition of the economic
cost” or placing upward pressure on prices.
dislocation caused by the 1973-74 Arab oil
embargo. The program is managed by the
The SPR currently has a capacity of 727
Department of Energy (DOE). Physically, the
million barrels. The SPR stood at 700 million
SPR comprises five underground storage
barrels when RIK fill ended in August 2005;
facilities, hollowed out from naturally occur-
the Reserve held roughly 684 million barrels
ring salt domes in Texas and Louisiana.
in early 2006, reflecting sales and loans of
SPR oil. Loaned oil will be returned before
In the aftermath of Hurricanes Katrina
summer 2006. A Northeast Heating Oil Re-
and Rita, Secretary of Energy Bodman indi-
serve (NHOR) holds 2 million barrels of
cated on August 31 that the Bush Administra-
heating oil in above-ground storage. A for-
tion was authorizing releases of SPR crude oil.
mula governs its use; it has yet to be tapped.
By September 19, seven requests for loans
totaling roughly 13.2 million barrels were
On October 7, 2005, the House passed
approved to operating refineries whose crude
H.R. 3893 (212-210), the Gasoline for Amer-
supply had been interrupted by the hurricanes.
ica’s Security Act. The act would allow sales
Delivery was taken on 9.8 million barrels; the
of SPR oil to finance the expansion of SPR
companies that borrow oil return at a later date
capacity as required by P.L. 109-58. Proceeds
a slightly greater quantity than was borrowed.
from sales would be deposited to an SPR
Expansion Fund. Additionally, the NHOR
On September 2, 2005, the International
would be expanded to 5 million barrels. The
Energy Agency (IEA) indicated that IEA
legislation has been referred to the Senate
signatories would be releasing 60 million
Committee on Energy and Natural Resources.
barrels of American, European, and Asian
Some policymakers have urged the establish-
strategic stocks at the rate of 2 million barrels
ment of regional product reserves. In early
a day. Half of the total drawdown was 30
January 2006, the Society of Independent
million barrels of SPR crude that were offered
Gasoline Marketers of America (SIGMA)
for bid. On September 14, DOE announced
requested that the National Petroleum Council
that bids for 11 million barrels had been
(NPC) study the feasibility of establishing
accepted.
gasoline, diesel, and jet fuel reserves.
On August 8, 2005, the President signed
The Administration has requested $155.4
the Energy Policy Act of 2005 (P.L. 109-58).
million for the SPR for FY2007 and nearly $5
The bill as enacted permanently authorizes the
million for the NHOR. Congress approved
SPR and requires, “as expeditiously as practi-
$166.0 million (Energy and Water Develop-
cable,” expansion of the SPR to its authorized
ment Appropriations Act, 2006, P.L. 109-103)
maximum of 1 billion barrels. Within one
to fund the SPR during FY2006. No new
year of enactment, the Secretary will select
money was requested for the NHOR in
sites — from among those that have been
FY2006, owing to prior year balances of $5.3
previously studied — for the expansion.
million.
Congressional Research Service ˜ The Library of Congress

IB87050
02-22-06
MOST RECENT DEVELOPMENTS
In the aftermath of Hurricanes Katrina and Rita, oil from the Strategic Petroleum
Reserve (SPR) was sold and loaned. On September 2, 2005, the International Energy Agency
(IEA) indicated that IEA signatories would be releasing 60 million barrels of American,
European, and Asian strategic stocks at the rate of 2 million barrels a day. Half of the total
drawdown was 30 million barrels of SPR crude that were offered for bid. DOE accepted bids
for 11 million barrels. Loans of 9.8 million barrels will be “repaid” with a slightly greater
quantity when returned.
On October 7, 2005, the House passed H.R. 3893 (212-210), the Gasoline for America’s
Security Act. The act would allow sales of SPR oil to finance expansion of the SPR to 1
billion barrels, as required by P.L. 109-58. Proceeds from the sale of SPR oil are to be
deposited to an SPR Expansion Fund. Additionally, the Northeast Heating Oil Reserve
(NHOR) would be expanded to 5 million barrels. The legislation has been referred to the
Senate Committee on Energy and Natural Resources. Some policymakers have urged the
establishment of regional product reserves. In early January 2006, the Society of Independent
Gasoline Marketers of America (SIGMA) requested that the National Petroleum Council
(NPC) study the feasibility of establishing gasoline, diesel, and jet fuel reserves. A request
for the Council to undertake a study would have to originate from or be approved by the
Secretary of Energy and be in the form of an official request letter.
The Administration has requested $155.4 million for the SPR for FY2007 and nearly
$5 million for the NHOR. Congress approved $166.0 million (Energy and Water
Development Appropriations Act, 2006, P.L. 109-103) to fund the SPR during FY2006. No
new money was requested for the NHOR in FY2006, owing to prior year balances of $5.3
million.
BACKGROUND AND ANALYSIS
Use of the SPR After Hurricanes Katrina and Rita
In the aftermath of Hurricanes Katrina and Rita, Secretary of Energy Bodman indicated
on August 31 that the Bush Administration was authorizing releases of Strategic Petroleum
Reserve (SPR) crude oil. By September 19, seven requests for loans totaling roughly 13.2
million barrels were approved to operating refineries whose crude supply had been
interrupted by the hurricanes. Delivery was taken on 9.8 million barrels.
Although the originally conceived purpose of the SPR was to make crude available in
the event of an interruption in oil imports from abroad, there is also authority to use the SPR
to address oil emergencies internal to the United States. On September 2, 2005, the
International Energy Agency (IEA) indicated that IEA signatories would be releasing 60
million barrels of American, European, and Asian strategic stocks at the rate of 2 million
barrels a day. Half of the total drawdown was 30 million barrels of SPR crude that were
offered for bid. On September 14, DOE announced that bids for 11 million barrels had been
accepted.
CRS-1

IB87050
02-22-06
Use of the SPR as a policy tool to respond to the hurricane-induced shortages was
limited by the effect of the storms on U.S. refining capacity. A barrel of crude can contribute
to product supply only if there is refining capacity to turn the crude into gasoline or diesel
fuel. More than 5 million barrels per day (b/d) of U.S. refining capacity were shut down as
a result of the storms. The more than 500,000 b/d of capacity still off-line at the end of
January 2006 should be restarted by the end of March.
In the wake of the storms, some policymakers have urged the establishment of regional
product reserves. In early January 2006, the Society of Independent Gasoline Marketers of
America (SIGMA) requested that the National Petroleum Council (NPC) study the feasibility
of establishing gasoline, diesel, and jet fuel reserves. This issue may get attention during the
second session. A request for the Council to undertake a study would have to originate from
or be approved by the Secretary of Energy and be in the form of an official request letter.
History of the SPR
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). 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.
Congress agreed to a funding level of $174.6 million for the program in the
Consolidated Appropriations Act for FY2005 (P.L. 108-447). This figure included $4.9
million for the NHOR. Congress agreed to the $166 million Administration request in the
Energy and Water Development Appropriations Act, 2006 (P.L. 109-103) to fund the SPR
during FY2006. No new money was requested for the Northeast Heating Oil Reserve
(NHOR) in FY2006, owing to prior year balances of $5.3 million.
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
CRS-2

IB87050
02-22-06
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 being
suspended at the end of that fiscal year; by then the SPR itself held 592 million barrels.
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 700 million barrels, principally through oil acquired as royalty-in-kind (RIK) for
production from federal offshore leases.1 Deliveries scheduled for late 2002 and the first
months of 2003 were delayed due to tightness in world oil markets. Deliveries of RIK oil,
and oil that was still owed from an “exchange” held in 2000, resumed in the spring, exceeded
200,000 barrels per day during summer 2003, and variously averaged between 60,000 and
200,000 b/d through October 2004. Oil obligations to the SPR from the 2000 exchange were
satisfied in January 2004.
Efforts in the 108th Congress to compel a cessation of RIK fill were unsuccessful. On
March 11, 2004, in its debate on the FY2005 budget resolution, the Senate called for a
suspension of deliveries and a sale instead of 53 million barrels of RIK oil. Proceeds
(pegged at $1.7 billion) would have been used for deficit reduction and increased homeland
security funding for states. The Administration remained firm that it would maintain its
current fill policy, and that it would not defer RIK deliveries. Another effort to suspend
deliveries to the SPR of RIK oil occurred on September 14, 2004, during debate on H.R.
4567, the FY2005 Department of Homeland Security appropriations bill. Senator Byrd
proposed suspension of RIK fill in order to provide $470 million in additional funding for
homeland security purposes. The amendment fell on a point of order.
Estimates of the effect on prices of continued SPR fill varied widely, with some arguing
that the effect would be negligible, while one economist argued that the removal of RIK oil
from the market during 2003 had added $6/barrel to the price of crude and $.25 to a gallon
of gasoline. Others argued that the volumes involved in the RIK program were too small to
affect prices. The question became moot (for the moment, at least) when RIK deliveries
ended in August.
If the Administration wishes to resume RIK fill at any time in the future, its decision
will be affected by provisions in the enacted Energy Policy Act of 2005 (P.L. 109-58) that
require the Secretary 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.
1 Current capacity is 727 million barrels following a re-evaluation of the cavern formations and other
work. Water injections into caverns when oil has been moved have added capacity, as has
completion of the project to remove excess gas from stored petroleum.
CRS-3

IB87050
02-22-06
Crude prices exceeded $50/barrel during October 2004, accompanied by declines in
crude and product inventories. A major factor was Hurricane Ivan, which rampaged through
the Gulf Coast in mid-September, and temporarily interrupted more than 70% of offshore
crude production, affecting crude oil deliveries to refineries. On September 23, 2004, the
Administration agreed to a request placed to the Department of Energy from a couple of
refineries seeking to borrow crude oil from the SPR, to be replaced within a short period of
time. Subsequent requests raised the amount of borrowed crude to roughly 5.4 million
barrels. The volume of oil returned was greater than the volume borrowed, in keeping with
the mechanics of a “swap” of oil conducted in 2002 under comparable circumstances.
Critics claimed that it was a belated and insufficient use of the SPR, and that it even
“backfired” in terms of calming the market. However, because the swap was limited and
sharply focused, and represented such a tiny volume of oil, it may have been a
misinterpretation to see it as intended to do anything more than it did — which was to
provide supply to refiners to whom deliveries of crude were temporarily affected by
Hurricane Ivan. As there is provision in law for limited uses of the SPR to mitigate the
effects of domestic interruptions in supply, the Administration argued that the decision to
loan oil to these refineries was consistent with its overall SPR policy not to suspend fill or
to authorize a broader drawdown for the purpose of reducing high prices. The swap was not
characterized as a broader market-calming measure. The fact that the price of oil rose even
after the announcement was a reflection of much stronger factors and uncertainties then
prevailing in world markets than could be offset by such a limited swap.
Hurricane Katrina shut down production of nearly 1.4 million barrels per day of crude
production. On August 31, the Administration announced that it would consider requests
from refiners for loans of SPR oil. By September 13, loans of more than 13.2 million barrels
of SPR crude had been approved. In the end, delivery was taken on 9.8 million barrels of
the volume approved for loan.
On September 2, 2005, the International Energy Agency (IEA) indicated that IEA
signatories would be releasing 60 million barrels of American, European, and Asian strategic
stocks at the rate of 2 million barrels a day. Half of the total drawdown was 30 million
barrels of SPR crude that were offered for bid. On September 14, DOE announced that bids
for 11 million barrels had been accepted. When loaned oil is fully returned in 2006 and
deliveries of sold oil are taken, the SPR would theoretically settle to a level of roughly 690
million barrels.
Owing to threats to oil supply in Nigeria, crude prices exceeded $65 in mid-January
2006, even while prices for gasoline, diesel, and home heating oil were off of previous highs
but still significantly higher than year-earlier levels. Growing stocks of crude and petroleum
products by the end of January 2006 led to a drop in crude prices below $60/bbl and some
drop in gasoline and distillate prices. Nonetheless, prices overall remain substantially higher
than year-earlier levels. There have been no calls for use of the SPR going into 2006.
With respect to the program’s budget, the Administration has requested $155.4 million
for the SPR for FY2007 and nearly $5 million for the NHOR. Congress approved $166.0
million (Energy and Water Development Appropriations Act, 2006, P.L. 109-103) to fund
the SPR during FY2006. No new money was requested for the NHOR in FY2006, owing
to prior year balances of $5.3 million.
CRS-4

IB87050
02-22-06
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. The Energy Policy Act of 2005 (P.L. 109-58)
permanently authorized the SPR. This should avoid the repeat of an episode in the past when
the authorities expired and remained so for a number of months. While a legal argument was
made that the SPR can be used without its underlying authorities active (see section below),
having the authorities permanently in place will simplify use of the SPR in the future.
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), allows 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. 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 (see p. 13). 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
seven 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’s intention to
maintain the SPR irrespective of whether 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. As noted previously, the Energy Policy Act of 2005
(P.L. 109-58) made the SPR authorities permanent.
CRS-5

IB87050
02-22-06
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. With support from the Administration, Congress moved to
specifically authorize and fund a regional heating oil reserve in the Northeast. The FY2001
Interior Appropriations (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, Connecticut, and terminals in Woodbridge, New Jersey, and Providence,
Rhode Island. The NHOR would 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
may 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.
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 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.2 In
the FY2004 Interior appropriations, both the House and Senate Committees included
language asking that DOE advise Congress as to the “circumstances” under which the NHOR
2 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,
see CRS Report RL30781, U.S. Home Heating Oil Price and Supply During the Winter of 2000-
2001: Policy Options
, by Robert L. Bamberger.)
CRS-6

IB87050
02-22-06
might be used. The provision implied that some in Congress were not satisfied with the
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.
On October 7, 2005, the House passed H.R. 3893 (212-210), the Gasoline for America’s
Security Act. Among other provisions, it would expand the NHOR to 5 million barrels.
Purchases of Crude Oil
With the expiration in the late 1980s of an 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.
Alternatives to the 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 products — or the 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 or below. In September 1998, the Big
Hill SPR site in Texas was activated as a foreign trade subzone, which would enable foreign
CRS-7

IB87050
02-22-06
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 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 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.
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, was to account for a total of 47 million barrels restored to the SPR.
Deliveries of RIK oil ordered by the Bush Administration in 2001 ended in August 2005
when the SPR reached 700 million barrels.
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.
The terrorist attacks upon the United States on September 11, 2001, accelerated interest
in acquiring 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 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 “September 2000: A Swap Is Announced” section below).
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 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 declared end of the military phase of the
CRS-8

IB87050
02-22-06
war in Iraq and little effect on oil markets, deliveries of RIK oil were resumed, as well as
delivery of oil still owed from a “swap” held in 2000 (see p. 13).
Deposit of 40 million barrels into the SPR during 2002 was criticized in a report
released on March 3, 2003, 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. 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 acquisitions for the
SPR until crude prices decline. The study was posted on the Web at [http://www.
access.gpo.gov/congress/senate/pdf/108hrg/85551.pdf].
Efforts in the 108th Congress to compel suspension of RIK fill were unsuccessful. An
amendment to the FY2005 Interior Appropriations bill (H.R. 4568) to suspend RIK
deliveries and cap the SPR at 647 million barrels was defeated on the House floor (152-267)
on June 17. Another effort to suspend RIK deliveries to the SPR occurred on September 14,
2004, during debate on H.R. 4567, the FY2005 Department of Homeland Security
appropriations bill. Senator Byrd proposed suspension of RIK fill in order to provide $470
million in additional funding for homeland security purposes. The amendment was set aside.
As noted earlier, deliveries of RIK oil ended in August 2005. As also noted previously,
provisions in the Energy Policy Act of 2005 will require review of the potential impact of
removing RIK oil from the market if there is intention to resume RIK fill in the future.
Table 1. SPR: Crude Oil Received Through 1995
(millions of barrels)
Source
Net contract/quantity
Percentage 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
CRS-9

IB87050
02-22-06
Source
Net contract/quantity
Percentage of total/%
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. The SPR could be drawn down initially at a rate of 4.3 million barrels per day
(mbd) for up to 90 days; thereafter, the rate would begin to decline. 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 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.
Concern was also 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
CRS-10

IB87050
02-22-06
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.
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 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
CRS-11

IB87050
02-22-06
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.”
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 prior to Hurricanes Katrina and Rita
when there have also 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 was used in the past when the
authorities governing the SPR had expired — a scenario that, owing to the permanent
authorization of the program in the Energy Policy Act of 2005 — will not be repeated in the
future.
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 argued that a 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. 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
CRS-12

IB87050
02-22-06
meantime, some governors 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.
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 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, because it would
increase supply and exert some stabilizing influence.
The preponderant risk in the transaction was 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, determined 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 received 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 was at price parity with the quantity originally borrowed. Criticism of
CRS-13

IB87050
02-22-06
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 Frank 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 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.
Some European officials called for a coordinated stock drawdown by the European Union
in light of the U.S. action, but opinion was divided among the membership. An advantage
of any European drawdown is that stocks are held in the form of both refined products and
crude; product would reach markets faster. European Union distillate stocks were reported
to cover 100 days’ demand. In October 2000, several domestic refiners indicated to DOE that
they would 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 received additional oil, bringing the
total projected repayment to 33.54 million barrels. Some assert 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. Obligations were fully satisfied by January 2004.
CHRONOLOGY
10/07/05 — The House passed H.R. 3893 (212-210), the Gasoline for America’s Security
Act. Among other provisions, it would expand the NHOR to 5 million barrels.
09/02/05 — The Administration announced it was making 30 million barrels of SPR oil
available for bid. On September 14, the Administration announced it had accepted bids for
11 million barrels.
08/31/05 — The Administration announced that it would make SPR oil available to refiners
who requested a loan of crude supply. By mid-September, seven loans totaling 13.2 million
barrels had been approved.
08/08/05 — The President signed the Energy Policy Act of 2005 which, among other
provisions, permanently authorizes the SPR, and calls for fill of the SPR to 1 billion barrels,
subject to consideration of the effect upon markets of acquiring oil for the Reserve. There
are other factors the Secretary will be required to weigh.
CRS-14

IB87050
02-22-06
09/23/04 — The Administration announced it would loan less than 2 million barrels of SPR
crude to refiners that had been adversely affected by interruptions in normal crude deliveries
owing to Hurricane Ivan. Loan of SPR oil ultimately reached 5.4 million barrels.
02/14/04 — A less costly version of H.R. 6 (S. 2095) was introduced in the Senate. It did
not provide funds for expansion of the SPR, but otherwise included the SPR language
approved by the conferees on H.R. 6. The 108th Congress would adjourn without passing
comprehensive energy legislation.
11/23/03 — A cloture motion to limit debate on the conference report on comprehensive
energy legislation (H.R. 6) in the Senate failed (57-40).
07/31/03 — The Senate passed its version of H.R. 6. It would have permanently authorized
the SPR and require that it be filled to its capacity, but did not include any provisions for its
expansion.
04/11/03 — The House passed its version of comprehensive energy legislation, H.R. 6,
which would have permanently authorized the SPR and provided $1.5 billion to finance
expansion of the SPR to 1 billion barrels.
02/13/03 — H.J.Res. 2, passed in both the House and Senate, included a five-year extension
of the SPR and NHOR authorities through the end of FY2008 (P.L. 108-7).
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 capacity at that time 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 at that
time of 700 million barrels with oil paid to the government as royalty-in-kind.
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.
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 accepted another $53.5 million in bids for SPR oil authorized to be sold
during FY1997, raising total sales for the fiscal year to $142 million, 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
CRS-15

IB87050
02-22-06
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 the 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 1 billion barrels.
06/19/92 — The SPR took delivery of the first oil since fill was suspended in 1990.
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 disruption.
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.
CRS-16