March 21, 2017
Stocks of Oil: Security and Price Effects
In January 2017, almost 1.2 billion barrels of crude oil, or
about 60 days of consumption, were held as stocks, or
inventories, in the United States. This In Focus examines
the ownership and potential uses of these oil stocks while
also examining their relationship to important issues of oil
security and oil price determination.
Oil stocks in the United States are owned by both the public
and the private sectors. The Strategic Petroleum Reserve
(SPR) established by the Energy Policy and Conservation
Act of 1975 (P.L. 94-163) currently holds about 692 million
barrels of crude oil, with an authorized capacity of 1 billion
barrels. The key purpose of the SPR is to provide the
United States with a measure of oil security in case of
supply disruptions, both domestic and international,
although it also has linkages to oil price determination.
Private sector crude oil stocks totaled over 500 million
barrels in January 2017. These stocks are held by numerous
oil industry firms at refineries, bulk terminals, and in
pipelines. The purpose of these stocks is to insure the
continuous operation of the refining industry which
transforms crude oil into petroleum products used by
consumers. In recent years, private oil stocks have reflected
changing oil prices as well as affecting oil prices and price
reserves could be held either publicly, as in the United
States, or privately, as in most other IEA member countries.
Defining the target quantity of petroleum reserves in terms
of net imports meant that the required quantity could
change over time as the nation’s trade position on the
international oil market evolved. By 2006, U.S. net imports
had risen to over 10 mmb/d. The trend of increasing
petroleum import dependence began to reverse by 2010 as
U.S. production of light, tight oil began to increase and
consumption stabilized at around 19 mmb/d. By 2016, U.S.
oil production reached almost 9 mmb/d and net imports of
petroleum decreased to about 4.9 mmb/d.
Figure 1 shows that the net import coverage of SPR has
changed over time as the quantity of oil in the SPR, as well
as U.S. production, consumption, and net imports have
Figure 1. Import Coverage Provided by SPR
The embargo on the sale of oil to the United States by the
Organization of the Arab Petroleum Exporting Countries
(OAPEC) in 1973-1974 had psychological as well as some
physical effects on how the United States viewed oil issues.
Although U.S. crude oil production had peaked in 1970 at
about 9.1 million barrels per day (mmb/d), oil consumption
had increased to almost 15 mmb/d by that time, resulting in
a widening gap to be filled by imported oil. By the time of
the embargo, only four years later, U.S. production had
fallen to about 8.3 mmb/d and consumption had risen to
over 16 mmb/d, suggesting that crude oil import volumes
would continue to increase.
The SPR was created to provide security against
interruptions in U.S. access to imports from the world oil
market. Recognizing that the U.S. refining industry
maintained adequate domestic capacity to satisfy demand
for petroleum products, the decision was made to hold the
reserve in the form of crude oil, rather than petroleum
The International Energy Agency (IEA) was also formed in
the aftermath of the OAPEC actions. The IEA facilitated an
agreement among member countries to hold stocks of oil, or
petroleum products, equivalent to 90 days of net imports to
provide security against future supply interruptions. Oil
Notes: SPR stocks divided by last year’s net imports of crude oil and
The current value of SPR net import coverage of over 140
days has raised questions concerning whether the size of the
reserve should be reduced. Some view the oil in the SPR as
a national security asset, unlikely to be restored if sold off.
Others see the SPR as a potential funding source for other
high priority programs.
Since 2015, several laws were passed by the 114th Congress
which required the sale of oil from the SPR, with the
proceeds to be used largely for program funding. The
Bipartisan Budget Act of 2015 (P.L. 114-74) authorized the
sale of 58 million barrels of oil from the SPR over the
period FY2017 through FY2025. In addition to sales
revenues to be deposited in the U.S. Treasury, $2 billion is
Stocks of Oil: Security and Price Effects
to be used to modernize and maintain SPR facilities. The
21st Century Cures Act (P.L. 114-256) authorized the sale
of 25 million barrels of SPR oil for health care related
expenses. The Fixing American Surface Transportation Act
(P.L. 114-94) authorized the sale of 66 million barrels of
SPR oil from FY2023 through FY2025.
Once excess oil has made its way into storage, the
management of those oil stocks becomes related to the
futures price of oil. Oil futures contracts, and hence prices,
are written for one or more months into the future. The
basic futures contract obligates the owner of the contract to
buy, or sell, a given quantity of oil at a specified price.
In total, this legislation will reduce the SPR by 149 million
barrels by 2025, a 21% reduction in SPR inventories. While
all of this legislation includes restrictions to prevent a fall
below the 90 days of net import coverage threshold, it is
possible that further reductions could be in the offing.
Oil stock management depends on the relationship between
the current spot price of oil and the futures price. Two
possibilities exist. Backwardation refers to a price
relationship where the current price of oil is higher than the
futures price. This price relationship offers little, or no,
incentive to store oil. In addition to storage costs,
backwardation suggests that holding oil will result in
economic losses on future sales compared to sales in the
While providing oil security, the SPR also is related to oil
prices. Withdrawals can be ordered by the President when it
is determined that economically threatening disruptions in
the oil market are taking place, or are likely to occur. As in
2011, when SPR releases provided a calming effect on the
oil market after disruption of Libyan supplies, releases from
oil reserves can tend to balance shortages in the short term
and provide psychological support to the market and
stabilize oil prices.
Private Oil Stocks
Private holdings of oil stocks, unlike SPR inventories, are
held in widely dispersed facilities across the country by a
large number of firms. Although the private sector currently
holds about 534 million barrels of crude oil in storage, it
does not provide a level of oil security proportional to that
of the SPR. A certain amount of oil held in the system is not
likely to ever be drawn upon. For example, in the case of oil
in pipelines, some quantity may be considered as “pipe
fill,” oil required to keep the pipeline system operable.
The level of private oil stocks is closely related to the
production of oil as well as changes in the price of oil.
Management of these stocks can also affect the price of oil.
These effects are limited by the storage capacity of the
system as a whole, but that capacity can be augmented or
The most basic reason for increasing, or decreasing,
privately held oil stocks relates to quantities of oil
produced. If global production is greater, or less than,
current consumption needs, private stocks of oil will either
rise, or fall, respectively.
While there are a large number of oil prices depending on
the API specific gravity, sulfur content, and location of the
oil, the key reference oil price in U.S. markets is that of
West Texas Intermediate (WTI). Current prices are
measured by the spot price, while future prices are
measured by the trading value of futures contracts.
The price of oil reached a recent peak in July 2014, at over
$100 per barrel. Between that time and now, the price has
declined to below $40 per barrel, and currently has risen to
about $50 per barrel. The price of oil fell in 2014 largely as
a result of global production running ahead of demand. Oil
prices falling and reaching low levels relative to the
previous peak are reflected in increasing private stocks.
Both reflect an over-production of oil relative to market
Contango, on the other hand, is a situation where the
current price of oil is less than that of oil purchased in the
future. This means that anyone with access to oil storage
facilities can buy oil at the current, spot price; hold the oil
in storage; and then sell the oil in the future for a profit. Of
course, the carrying cost of holding oil must be smaller than
the difference between the current and future price. For
example, if the storage cost of oil were $0.40 per barrel per
month, and the contango price spread were $0.65 per barrel,
storing 100,000 barrels of oil for one month could yield a
profit of $25,000. If the cost of oil is taken to be $40 per
barrel, storage could yield a return of 6.25% in a month,
given available storage capability and idle cash balances.
Contango can also be thought of as an outcome resulting
from excess production relative to market demand.
Contango is based on the idea that current surpluses of oil
have driven the current price to low levels and that the
market will tend to balance, or move toward a zero surplus
position in the future.
An oil market with prices in contango encourages near
term, current purchases of oil. This behavior can either
strengthen or weaken contango. More demand for oil, other
things equal, should put upward pressure on current prices,
but if that oil is merely put into storage, rising reported
inventories might act to reduce the current price. The
relative strength of the two effects depends on specific
Both public and privately held oil stocks have important
roles to play in providing security in times of oil market
disruptions. Similarly, both public and private oil stocks
have some role in oil price determination and movements.
As the world oil market and the U.S. market evolve, it is
reasonable to reassess the role of each of these components
of the U.S. energy security equation.
Robert Pirog, Specialist in Energy Economics
Stocks of Oil: Security and Price Effects
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