Response Options to Oil Supply Disruptions

Response Options to Oil Supply Disruptions

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November 1, 2019
Response Options to Oil Supply Disruptions
Overview
In a supply interruption emergency, the President can
The September 2019 oil infrastructure attacks in Saudi
authorize a release from the SPR and/or the IEA can call for
Arabia temporarily disrupted production and processing of
a coordinated release from IEA member countries. After the
approximately 6% of global crude oil supply. This resulted
September 2019 attacks on the Saudi oil infrastructure,
in the largest single-day price increase over the last 10
initially, as prices rose, the Trump Administration (under
years, as measured by West Texas Intermediate (WTI, the
EPCA authority) responded with an announcement to
U.S. domestic oil price benchmark). This effect on U.S.
authorize a release from the SPR. However, as prices
domestic price levels from a temporary disruption in a
stabilized several days after the attacks, there was no
foreign country illustrates the integrated and global nature
release. Further, the IEA has not announced any plans to
of crude oil markets. Interruptions in oil supply could affect
coordinate a release of strategic supplies (crude or
the price of crude oil and petroleum products (e.g.,
petroleum products).
gasoline). The volume and rate at which lost supply is
restored are key factors that contribute to the duration and
According to the IEA, a coordinated collective member
magnitude of price effect. Also, assured access to crude oil
release from stocks has occurred three times: early in the
is associated with energy independence and energy security.
1991 Gulf War; after Hurricanes Katrina and Rita in the
Gulf of Mexico in 2005; and in June 2011, after political
There are two primary options to replace lost or interrupted
unrest in Libya led to a production loss of 1.7 million
supplies: releasing stockpiles or using spare capacity. These
barrels per day (mb/d). At that time, crude oil prices were
and other options may be of interest to Congress during a
trading above $100/barrel. Today, prices are stabilizing
crude oil supply disruption.
under $70/barrel, and the United States is the top crude oil
producer in the world.
Stockpiling Inventories
Many countries and private companies retain crude oil
Commercial Stocks
supply stockpiles as well as product stocks like gasoline
IEA members can use both public and commercial stocks to
and heating oil. Stockpiling oil supplies has been a practice
meet their 90-day obligation. In June 2019, according to the
of government and industry for several decades.
IEA, Organization for Economic Cooperation and
Development (OECD) members held around 1,122 million
Although many countries stockpile crude oil and petroleum
barrels of crude oil in commercial inventories and 1,230
products, not all provide transparent or frequently updated
million barrels in government stocks (Figure 1). The
volume information. This unknown volume puts a
United States had 461 million barrels of commercial crude
limitation on measuring the full scope of readily available
oil stocks in June 2019, equaling around 711 days’ worth of
crude oil and petroleum products in response to a supply
net imports when combined with SPR stocks, according to
disruption. For instance, in 2019, China’s National Energy
the IEA’s methodologies.
Administration announced storage of roughly 80 days’
worth of imports. Prior to this announcement, China had
Figure 1. OECD Crude Oil Stocks
not released numbers since 2017.
June 2019, Mil ions of Barrels
International Energy Agency (IEA) and the
Strategic Petroleum Reserve (SPR)
One major public sector coordinated stockpiling effort
came about in response to the 1973 Organization of Arab
Petroleum Exporting Countries (OAPEC) oil embargo. The
United States entered into the International Energy Program
in 1974, an agreement implemented through the IEA that
requires all members to hold a 90-day supply of oil (based
on the previous year’s net imports) for emergency use.
The following year, Congress passed the Energy Policy and
Conservation Act (EPCA, P.L. 94-163), which authorized
the creation of the government controlled stock—the
SPR—to address emergency supply shortages. According
to the U.S. Department of Energy, as of September 27,
2019, the SPR’s inventory totaled approximately 645

million barrels of oil, meeting the IEA requirement.
Source: IEA, Oil Market Report, September 12, 2019.
Notes: Excludes non-OECD volumes. See source for details.
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Response Options to Oil Supply Disruptions
Numerous oil industry firms hold commercial stocks of
The Organization of the Petroleum Exporting Countries
crude oil at refineries, bulk terminals, and in pipelines. The
(OPEC), a group of 14 oil-producing nations, typically
purpose of these stocks is to ensure the continuous
holds enough spare capacity to influence the market when it
operation of the refining industry, which transforms crude
deems it necessary. According to the EIA, OPEC’s spare
oil into petroleum products used by consumers.
capacity is generally around 2.3 mb/d (Figure 2).
Commercial stocks do not necessarily provide a level of
Normally, Saudi Arabia keeps around 1.5-2 mb/d of spare
security proportional to that of the SPR. A certain amount
capacity, the majority of OPEC spare capacity.
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
Spare capacity in non-OPEC countries is difficult to
may be considered as “pipe fill” (i.e., oil required to keep
quantify as the definition of spare capacity can vary.
the pipeline system operable).
Further according to the EIA, non-OPEC countries typically
attempt to produce at full capacity and have limited spare
Congressional Considerations
capacity. OPEC typically sets its supply target based on this
The role of the SPR continues to be a topic of debate for
assumption of non-OPEC members, which is referred to as
Congress. Congress authorized the creation of the SPR to
the “call on OPEC.”
meet IEA obligations to mitigate the effects of oil supply
disruptions. Some assert that using the SPR for emergency
Congressional Considerations
supply disruptions should be its sole purpose. The SPR was
Issues for Congress include whether and how to affect
used in the three IEA-coordinated releases to date.
OPEC’s use of their spare capacity. In recent years, several
bills have been introduced to address OPEC’s influence in
Others contend that commercial stocks meet IEA
the oil market. For example, the No Oil Producing and
obligations and Congress could authorize the SPR to meet
Exporting Cartels (NOPEC) Act of 2019 (H.R. 948 and S.
other needs. Since the 1970s, Congress has expanded the
370) would modify the Sherman Antitrust Act (15 U.S.C. 1
role of the SPR to include natural disaster response and
et seq.), criminalizing collective actions by foreign states or
economic stabilization. Hurricanes (e.g., Harvey 2017) have
persons that affect markets and prices for crude oil and
resulted in drawdowns from the SPR to supply refineries
other commodities. Some contend that NOPEC may cause
and aid consumers. Congress also has allowed various
unintended consequences. OPEC members may respond by
economic drawdowns of the SPR known as mandated and
producing oil at full capacity, lowering prices. Low oil
modernization sales. Proceeds from mandated sales are
prices may not be ideal for all U.S. stakeholders. For
deposited into the general fund of the U.S. Treasury.
example, some U.S. producers may find extraction of crude
Proceeds from modernization sales are required by law to
oil uneconomic below a certain price.
be used for construction and maintenance of SPR facilities.
Other Measures
Spare Capacity
Governments can use other measures to mitigate oil supply
Spare production capacity is potential oil production that
disruptions. These include demand-side management tools,
can brought to market within 30 days, and sustained for at
such as fuel rationing, which were used in the 1970s in
least 90 days, as defined by the U.S. Energy Information
response to the oil embargo. Another tool that may help
Administration (EIA). Countries with the greatest spare
reduce U.S. demand for oil is the Renewable Fuel Standard.
capacity are sometimes referred to as “swing producers.”
However, some of these options may take time before
Spare capacity may enhance these countries’ oil market
results materialize.
influence.
Figure 2. OPEC Spare Capacity
CRS Products
Mil ions of Barrels
CRS Testimony TE10040, The Strategic Petroleum Reserve, by
Phil ip Brown.
CRS Report R45493, The World Oil Market and U.S. Policy:
Background and Select Issues for Congress, by Heather L.
Greenley.
CRS Insight IN11167, Attacks Against Saudi Oil Rattle Markets, by
Michael Ratner, Christopher M. Blanchard, and Heather L.
Greenley.
CRS Report R42460, The Strategic Petroleum Reserve:
Authorization, Operation, and Drawdown Policy, by Robert Pirog.
CRS Recorded Event WRE00205, Oil Prices: Oil Supply and the
Potential for Price Volatility, by Phil ip Brown.
CRS In Focus IF11186, No Oil Producing and Exporting Cartels
(NOPEC) Act of 2019, by Phil ip Brown.

Source: U.S. EIA, Refinitiv, “What Drives Crude Oil Prices: Supply

OPEC,” accessed October 23, 2019.
Notes: Data though 2019 3rd quarter, last updated October 8, 2019.
Heather L. Greenley, Analyst in Energy Policy
IF11350
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Response Options to Oil Supply Disruptions

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