Order Code RL33341
The Strategic Petroleum Reserve:
History, Perspectives, and Issues
Updated February 22, 2007
Robert Bamberger and Carl E. Behrens
Specialists in Energy Policy
Resources, Sciences, and Industry Division
The Strategic Petroleum Reserve:
History, Perspectives, and Issues
Summary
Congress authorized the Strategic Petroleum Reserve (SPR) in the Energy
Policy and Conservation Act (EPCA, P.L. 94-163) to help prevent a repetition of the
economic dislocation caused by the 1973-1974 Arab oil embargo. The program is
managed by the Department of Energy (DOE). Physically, the SPR comprises five
underground storage facilities, hollowed out from naturally occurring salt domes in
Texas and Louisiana. 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.
The capacity of the SPR is currently 727 million barrels, but it contains about
690 million barrels. Fill was suspended in August 2005 as Hurricane Katrina
disrupted oil and gasoline supplies in the Gulf of Mexico, and DOE sold 11 million
barrels and loaned another 9.8 million from SPR. Almost all the loaned oil has been
repaid. In addition, a Northeast Heating Oil Reserve (NHOR) holds 2 million barrels
of heating oil in above-ground storage.
The Energy Policy Act of 2005 (P.L. 109-58) permanently authorized the SPR
and required, “as expeditiously as practicable,” expansion of the SPR to its
authorized maximum of 1 billion barrels. The Secretary of Energy was to select sites
— from among those that have been previously studied — for the expansion, and
was to develop procedures for achieving the fill objective without “incurring
excessive cost” or placing upward pressure on prices. DOE issued final procedures
(10 CFR Part 626) on November 8, 2006, and issued a Final Environmental Impact
Statement identifying salt domes in Richton, MS, as the preferred alternative to
expand SPR capacity to 1 billion barrels.
President Bush, in his State of the Union speech on January 23, 2007, proposed
expanding the Strategic Petroleum Reserve to 1.5 billion barrels. Some observers
questioned whether filling the SPR while oil prices are high is compatible with the
Energy Policy Act mandate to avoid placing upward pressure on prices.
EPCA authorized drawdown of the Reserve upon a finding by the President that
there is a “severe energy supply interruption.” It also authorized loans of SPR oil,
which is then returned with additional oil as a premium. Congress enacted additional
drawdown authority in 1990 (Energy Policy and Conservation Act Amendments of
1990, P.L. 101-383), permitting the President to use the SPR for a short period
without having to declare the existence of a “severe energy supply interruption.”
The meaning of a “severe energy supply interruption” has been controversial.
A spike in crude and product prices often stirs calls for use of the SPR. However, the
SPR is intended by statute to ameliorate discernible physical shortages of crude oil.
The sharp rise in prices following Hurricanes Katrina and Rita in 2005 was not a
response to any shortage of crude, but to shortages of products owing to the
shutdown of major refining capacity and an interruption of product transportation
systems. The complexity of the market has made decisions on when to use the SPR
more difficult.
Contents
History of the SPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Establishment of the SPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fill Rates Over the Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The SPR and Hurricanes Ivan, Katrina, and Rita (2004-2005) . . . . . . . . . . . 4
A Change in the Market Dynamics (2005-2007) . . . . . . . . . . . . . . . . . . . . . . 5
Reauthorization of the SPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Drawdown Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Establishment of a Regional Home Heating Oil Reserve . . . . . . . . . . . . . . . . . . . 7
Purchases of Crude Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Royalty-in-Kind Acquisition for the SPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Drawdown of the Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Drawdown Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Debate Over When to Use the Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Use of the SPR in the Persian Gulf War (1990) . . . . . . . . . . . . . . . . . 11
The Strategic Petroleum Reserve:
History, Perspectives, and Issues
History of the SPR
Establishment of the SPR
From the mid-1970s until 2006, world markets have had to absorb roughly five
significant spikes in the price of crude oil and petroleum products.1 Whether driven
by disruptions in the physical supply of crude or refined fuels, or by uncertainties
owing to international conflicts and instabilities, these price increases can have
consequences for the United States balance of trade and, owing to the relative
inelasticity of demand for gasoline at prices up to $3.00 per gallon, siphon away
disposable income that might be spent to support other economic activity or savings.
The origin of the U.S. Strategic Petroleum Reserve (SPR) stems from the 1973
Arab-Israeli War. In response to the United States’ support for Israel, the
Organization of Arab Exporting Countries (OAPEC) imposed an oil embargo on the
United States, the Netherlands, and Canada, and reduced production. While some
Arab crude did reach the United States, the price of imported crude oil rose from
roughly $4/barrel (bbl) during the last quarter of 1973 to an average price of
$12.50/bbl in 1974. While no amount of strategic stocks can insulate any oil-
consuming nation from paying the market price for oil in a supply emergency, the
availability of strategic stocks can help blunt the magnitude of the market’s reaction
to a crisis. More importantly, one of the original perceptions of the value of a
strategic stockpile was that its very existence would discourage the use of oil as a
political weapon. The embargo imposed by the Arab producers was a stark,
politically motivated event intended to create a very discernible physical disruption.
This probably explains, in part, why the genesis of the SPR was focused especially
on deliberate and dramatic physical disruptions of oil flow.
In response to the experience of the embargo, Congress authorized the Strategic
Petroleum Reserve in the Energy Policy and Conservation Act (EPCA, P.L. 94-163)
1 These have included the Arab oil embargo (1973-1974), the deposing of the Shah of Iran,
followed by the Iranian revolution (1979-1980), the first Gulf War (1990), and OPEC
production cuts and a resurgence in world oil demand (early 1999 into the fall of 2000).
Since 2003, crude oil and product prices have risen to new nominal highs, owing to a blend
of many factors, including international tensions and armed conflicts, as well as worldwide
demand. Some of the dynamics behind recent increases owe to factors internal to the United
States, including seasonal formulations of gasoline to help meet clean air standards and
strains on U.S. refining capacity. Hurricanes Rita and Katrina created havoc and alarm in
domestic and world markets.
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to help prevent a repetition of the economic dislocation caused by the 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. The caverns were finished by
injecting water and removing the brine. Similarly, oil is removed by displacing it
with water injection. For this reason, crude stored in the SPR remains undisturbed,
except in the event of a sale or exchange. Multiple injections of water, over time, will
compromise the structural integrity of the caverns.2 By 2005, the capacity of the SPR
reached 727 million barrels. It was filled to about 700 million barrels before
Hurricanes Katrina and Rita in 2005. Following the storms, some crude was loaned
and more was sold, leaving the Reserve with about 690 million barrels at the
beginning of 2007.3
As already noted, it was hoped that the creation of a significant operational
reserve of crude oil 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.
SPR oil is sold by competitive sale. A Notice of Sale is issued, including the
volume, characteristics, and location of the petroleum for sale; delivery dates and
procedures for submitting offers; as well as measures for assuring performance and
financial responsibility. Bids are reviewed by DOE and awards offered. The
Department of Energy estimates that oil could enter the market roughly two weeks
after the appearance of a notice of sale.4
The Arab oil embargo also fostered the establishment of the International
Energy Agency (IEA) to develop plans and measures for emergency responses to
energy crises. Strategic stocks are one of the policies included in the agency’s
2 Oil stored at one SPR site, Weeks Island, was transferred after problems with the structural
integrity of the cavern — unrelated to drawdown activity — were discovered in the mid-
1990s.
3 Details and current levels of SPR inventory are updated regularly at
[http://www2.spr.doe.gov/DIR/SilverStream/Pages/pgDailyInventoryReportViewDOE_
new.html]
4 [http://www.fe.doe.gov/programs/reserves/spr/spr-facts.html]. For more detail on the sales
procedure, see U.S. Federal Register, Department of Energy, Price Competitive Sale of
Strategic Petroleum Reserve Petroleum; Standard Sales Provisions: Final Rule, July 27,
2005, pp. 39363-39382; [http://www.fe.doe.gov/programs/reserves/spr/
spr_rule_070705.pdf]. The Department of Energy has a helpful history of SPR drawdowns,
sales, and exchanges on the web at [http://www.fe.doe.gov/programs/reserves/spr/spr-
drawdown.html].
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International Energy Program (IEP). Signatories to the IEA5 are committed to
maintaining emergency reserves, developing programs for demand restraint in the
event of emergencies, and agreeing to participate in allocation of oil deliveries among
the signatory nations to balance a shortage among IEA members.
While the U.S. SPR holds government-held crude oil stocks, some IEA nations
require a level of stocks to be held by the private sector or by both the public and
private sectors. Including the U.S. SPR, roughly two-thirds of IEA stocks are held
by the oil industry, whereas one-third is held by governments and supervisory
agencies.6
Fill Rates Over the Years
After its inception, the SPR program fell increasingly behind schedule. By the
end of 1978, the SPR was supposed to contain 250 million barrels, but it 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). The Reagan Administration accelerated the fill rate to 292,000
b/d in FY1981, but the rate 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 it 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 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.7 The program proved controversial, with some arguing that
keeping the RIK oil off the market during times of increasingly tight supply was
placing additional pressure on oil prices. Others argued that the volumes involved
in the RIK program were too small to affect prices. Deliveries of RIK oil ended in
August 2005.
5 IEA member countries are Australia, Austria, Belgium, Canada, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Republic of Korea,
Luxembourg, The Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, United Kingdom, and the United States. See [http://www.iea.org/
Textbase/about/membercountries.asp].
6 [http://www.iea.org/Textbase/subjectqueries/keyresult.asp?KEYWORD_ID=4103].
7 Under the RIK program, royalties for oil produced from federal lands are paid with a share
of the oil, rather than cash. The SPR estimated capacity of 727 million barrels followed a
reevaluation of the cavern formations and other work. Water injections into caverns when
oil has been moved have added capacity, as did completion of a project to remove excess
gas from stored petroleum.
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The debate over RIK fill stirred arguments that have been made over the years
that a government-owned strategic stock of petroleum is inappropriate under any
circumstance — that it essentially has saddled the public sector with the expense of
acquiring and holding stocks, the cost for which might have otherwise been borne by
the private sector. The existence of the SPR, this argument goes, has blunted the
level of stocks held in the private sector.8 (For additional details on the RIK fill
program and controversy, see below.)
If the Administration wishes to resume RIK fill — or any other means of
acquiring significant volumes of oil for the SPR — at any time in the future, its
decision will be affected by provisions in the Energy Policy Act of 2005 (P.L. 109-
58), enacted in the summer of 2005. This law requires 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. It is likely that these provisions of P.L. 109-58 were a partial consequence
of the debate over the wisdom of RIK fill.
The SPR and Hurricanes Ivan, Katrina, and Rita (2004-2005)
Crude oil 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.
8 See, for example, Taylor, Jerry and Van Doren, Peter, “The Case Against the Strategic
Petroleum Reserve,” Policy Analysis, No. 555, Nov. 21, 2005.
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Hurricanes Katrina and Rita in 2005 shut down oil and gas production from the
Outer Continental Shelf in the Gulf of Mexico, the source for 25% of U.S. crude oil
production and 20% of natural gas output. Katrina, which made landfall on August
29, 2005, resulted in the shutdown of most crude oil and natural gas production in the
Gulf of Mexico, as well as a great deal of refining capacity in Louisiana and
Alabama. Offshore oil and gas production was resuming when Hurricane Rita made
landfall on September 24, and an additional 4.8 million barrels per day of refining
capacity in Texas and nearby Louisiana was closed.
Combining the effects of both storms, 1.3 mbd of refining — about 8% of
national capability — was shut down, reducing the supply of domestically refined
fuels commensurately. Much of the refined product shortfall was made up by
imports of refined products, some of which were made available by strategic supplies
released by International Energy Agency (IEA) member nations on September 2. As
part of the IEA drawdown, 30 million barrels of crude oil were made available from
the SPR, which holds only crude. Only 11 million barrels was sold from the SPR,
in part because limited refinery capacity reduced the call on crude.
Stocks of heating oil proved more than adequate during the winter of 2005-
2006. There were no calls for use of the SPR during that winter. More attention was
focused on providing economic relief through the Low Income Home Energy
Assistance Program to low-income heating oil consumers.
A Change in the Market Dynamics (2005-2007)
As the history of the SPR lays bare, there are differences of opinion over what
should be termed a “severe energy supply interruption.” A spike in crude and
product prices often stirs calls for use of the SPR. However, as already noted, the
SPR is intended by statute to ameliorate discernible physical shortages of crude oil.
The price of gasoline and other petroleum products rose sharply following Hurricanes
Katrina and Rita. However, these price increases were not a response to any shortage
of crude, but to shortages of products owing to the shutdown of major refining
capacity in the United States and to an interruption of product transportation systems.
Demand growth that has strapped refinery capacity even before (as well as after) the
hurricanes has significantly altered the traditional correlation between crude and
product prices. Since mid-2005, owing to pressure on product supplies and
continued international tensions, the price of products has been divorced, in part,
from its traditional correlation with crude supply and price. Depending upon future
events, this new dynamic may complicate reconciling developments in markets with
possible use of the SPR.
Many of the events touched upon in this history are explored in greater detail
in subsequent sections of this report.
Reauthorization of the SPR
The authorities governing a drawdown of the SPR are included in the Energy
Policy and Conservation Act (EPCA), enacted in 1975. These authorities also
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provide for U.S. participation in emergency-sharing activities of the International
Energy Agency without risking violation of antitrust law and regulation. The Energy
Policy Act of 2005 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 being active (see section below), having the authorities
permanently in place will simplify use of the SPR in the future.
The Energy Policy Act of 2005 also required, “as expeditiously as practicable,”
expansion of the SPR to its authorized maximum of 1 billion barrels. The Secretary
of Energy was to select sites — from among those that have been previously studied
— for the expansion, and was to develop procedures for achieving the fill objective
without “incurring excessive cost” or placing upward pressure on prices. DOE issued
final procedures (10 CFR Part 626) on November 8, 2006, and issued a Final
Environmental Impact Statement identifying salt domes in Richton, MS, as the
preferred alternative to expand SPR capacity to 1 billion barrels.
President Bush, in his State of the Union speech on January 23, 2007, proposed
expanding the Strategic Petroleum Reserve (SPR) to 1.5 billion barrels. Some
observers questioned whether filling the SPR while oil prices are high is compatible
with the Energy Policy Act mandate to avoid placing upward pressure on prices.
The Drawdown Authorities
The Energy Policy and Conservation Act 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
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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 below). 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 the
intention of Congress 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 congressional intent toward the SPR. As noted
previously, the Energy Policy Act of 2005 made the SPR authorities permanent.
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 — from which both home heating oil and diesel fuels are produced
— immediately beforehand. It renewed interest in establishment of a regional
reserve of home heating oil. EPCA includes authority for the Secretary of Energy to
establish regional reserves as part of the broader Strategic Petroleum Reserve. With
support from the Clinton Administration, Congress moved to specifically authorize
and fund a regional heating oil reserve in the Northeast. The FY2001 Interior
Appropriations Act (P.L. 106-291) provided $8 million for the Northeast Heating Oil
Reserve (NHOR). The regional reserve was filled by the middle of October 2000 at
two sites in New Haven, CT, and terminals in Woodbridge, NJ, and Providence, RI.
The NHOR 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
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the same reporting period. As a consequence, while the 60% differential was
satisfied, other conditions prerequisite to authorizing a drawdown of the NHOR were
not.
A general strike in Venezuela that began in late 2002 resulted, for a time, in a
loss of as much as 1.5 million barrels of daily crude supply to the United States.
With refinery utilization lower than usual owing to less crude reaching the United
States, domestic markets for home heating oil had to rely on refined product
inventories to meet demand during a particularly cold winter. Prices rose, and there
were calls for use of the NHOR; still, the price of heating oil fell significantly short
of meeting the guidelines for a drawdown.9 In connection with the FY2004 Interior
appropriations, both the House and Senate Appropriations Committees included
language in their committee reports directing that DOE advise Congress as to the
“circumstances” under which the NHOR might be used. The provision implied that
some in Congress were not satisfied with the formula currently in place that would
permit drawdown of the NHOR. The language was not included in the final FY2004
Interior appropriations bill. As the sharp increases in home heating oil prices during
2005 are averaged into the five-year rolling average, the price differential needed to
trigger use of the NHOR will increase further. However, the President can invoke
the authorities for an NHOR drawdown even if the price threshold is not met.
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
9 During the heating oil season, DOE updates and posts a weekly table that shows the
various inputs that go into the calculation to determine the current differential,
[http://www.fe.doe.gov/programs/reserves/heatingoil/Sales_Basis_0506.html].
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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 has also been 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 countries to store surplus production in the
Reserve without paying customs fees and taxes, but this has never happened.
Royalty-in-Kind Acquisition for the SPR
Another alternative proposed by DOE was to arrange for a portion of the
royalties paid to the government from oil leases in the Gulf of Mexico to 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 that 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 previous years; it was
to take about 10 months to replenish this volume at the anticipated rate of roughly
100,000 b/d. 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.
At its inception, the RIK plan was generally greeted as a well-intended first step
toward filling the SPR. However, it became controversial when crude prices began
to rise sharply in 2002. Some policymakers and studies asserted that diverting RIK
CRS-10
oil to the SPR instead of selling it in the open market was putting additional pressure
on crude prices. 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 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.10
In light of tightness in world oil markets and increasing prices, the Bush
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 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 below).
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, 2004. 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. Despite the
continued opposition to RIK fill of some policy makers, the Administration
continued with it until August 2005, when the SPR held virtually 700 million barrels.
As 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.
Drawdown of the Reserve
Drawdown Capability
The SPR could be drawn down initially at a rate of roughly 4.3 mbd for up to
90 days; thereafter, the rate would begin to decline. Although fears were expressed
periodically during the 1980s about whether the facilities for withdrawing oil from
the Reserve were in proper readiness, the absence of problems during the first real
drawdown in early 1991 (the Persian Gulf War) appeared to allay much of that
concern. However, some SPR facilities and infrastructure were beginning to reach
10 The study was posted online at [http://www.access.gpo.gov/congress/senate/pdf/
108hrg/85551.pdf].
CRS-11
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.
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.11 The intended use of the
SPR became 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 shortages like
those of the 1970s or the tight inventories experienced during the spring of 1996, and
lack of confidence in supply availability. Early drawdown of the SPR, some argued,
was essential to achieve these objectives.
The Reagan Administration revised its position in January 1984, announcing
that the SPR would be drawn upon early in a disruption. This new policy was hailed
as a significant departure, considerably easing congressional discontent over the
Administration’s preparedness policy, but it also had international implications.
Some analysts began to stress the importance of coordinating stock drawdowns
worldwide during an emergency lest stocks drawn down by one nation merely
transfer into the stocks of another and defeat the price-stabilizing objectives of a
stock drawdown. In July 1984, responding to pressure from the United States, the
International Energy Agency agreed “in principle” to an early drawdown, reserving
decisions on “timing, magnitude, rate and duration of an appropriate stockdraw” until
a specific situation needed to be addressed.
Use of the SPR in the Persian Gulf War (1990). This debate was
revisited in the aftermath of the Iraqi invasion of Kuwait on August 2, 1990. The
escalation of gasoline prices and the prospect that there might be a worldwide crude
shortfall approaching 4.5-5.0 million barrels daily prompted some to call for
drawdown of the SPR. The debate focused on whether SPR oil should be used to
moderate anticipated price increases, before oil supply problems had become
physically evident.
11 These were sales ordered by Congress as deficit-reduction measures. For a chronology of
these sales, see [http://www.fe.doe.gov/programs/reserves/spr/spr-drawdown.html].
CRS-12
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, but DOE
accepted bids deemed reasonable for 17.3 million barrels. The oil was sold and
delivered in early 1991.
The Persian Gulf War was an important learning experience about ways in
which the SPR might be deployed to maximize its usefulness in decontrolled
markets. As previously noted, legislation enacted by the 101st Congress, P.L. 101-
383, liberalized drawdown authority for the SPR to allow for its use to prevent minor
or regional shortages from escalating into larger ones; an example was the shortages
on the West Coast and price jump that followed the Alaskan oil spill of March 1989.
In the 102nd Congress, omnibus energy legislation (H.R. 776, P.L. 102-486)
broadened the drawdown authority further to include instances where a reduction in
supply appeared sufficiently severe to bring about an increase in the price of
petroleum likely to “cause a major adverse impact on the national economy.” The
original EPCA authorities permit “exchanges” of oil for the purpose of acquiring
additional oil for the SPR. Under an exchange, a company borrows SPR crude and
later replaces it, including an additional quantity of oil as a premium for the loan.
There have been seven exchanges from 1996 through 2005, the most recent ones
following Hurricanes Katrina and Rita.
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.