The Strategic Petroleum Reserve May Have Outlived Its Purpose

In December 1975, when memories of gas lines were fresh on the minds of Americans as a result of the 1973 OPEC oil embargo, Congress established the Strategic Petroleum Reserve (SPR). The law was designed “to reduce the impact of severe energy supply interruptions” such as that caused by the embargo.

But many have argued that the SPR has outlived its usefulness. As a result of the surge of U.S. shale oil production, U.S. demand for OPEC crude oil imports has dropped over the past decade. In 2005, the U.S. imported 10.1 million barrels per day (BPD) of crude oil, of which 4.8 million BPD (~48%) came from OPEC. By 2016, U.S. imports had dropped to 7.9 million BPD, with 3.2 million BPD (~40%) from OPEC.

U.S. energy security has improved, and because of the decline in imports the oil in the SPR will cover more days of imported supplies. Again, in 2005, the SPR contained 685 million barrels. With the U.S. importing 10.1 million BPD of crude oil at that time, that was enough oil to cover 68 days of supply. In 2016 the SPR contained 695 million barrels, which, at the reduced rate of U.S. crude oil imports, covered 88 days of supply.

In light of the resurgence of U.S. crude oil production, it is not surprising that President Trump’s budget calls for selling half of the crude oil in the SPR. Trump’s plan calls for SPR sales to begin in the 2018 fiscal year, with estimated revenues totaling nearly $16.6 billion from 2018 to 2027 (presuming oil prices remain in the current range).

[tweet_quote display=”The key question is whether the SPR still makes sense given the turnaround in U.S. oil production.”]The key question is whether the SPR still makes sense given the turnaround in U.S. oil production.[/tweet_quote] How much oil does the country actually need in an emergency reserve? If the outlook is that U.S. oil production can grow for several more years, and there is a reasonable belief that U.S. crude oil demand will fall, then the SPR becomes much less important that it was when it was originally established.

But selling off the oil is a risk. According to the Department of Energy’s website on the SPR:

In the event of an energy emergency, SPR oil would be distributed by competitive sale. The SPR’s formidable size (design capacity of 713.5 million barrels) makes it a significant deterrent to oil import cutoffs and a key tool of foreign policy. The SPR has been used under these circumstances only three times, most recently in June 2011 when the President directed a sale of 30 million barrels of crude oil to offset disruptions in supply due to Middle East unrest.

The U.S. still depends on OPEC for 40% of its imports, so a significant supply disruption in the Middle East, Venezuela, or Nigeria could quickly remind us of the SPR’s importance.

Historically SPR volumes tended to grow during Republican administrations and to fall during Democratic administrations. That pattern has held true since 1980. Presidents Clinton and Obama both used the SPR to try to ease high gasoline prices around election time, while the Republican presidents added to the SPR. So this would be a break from typical Republican policy. Of course, President Trump isn’t a typical Republican, but it could indicate that he may face resistance on this issue.

9 thoughts on “The Strategic Petroleum Reserve May Have Outlived Its Purpose”

  1. Interesting. I seem to recall you had a number of posts saying that the low gasoline prices before elections are normal annual changes and not caused by politicians. Anyhow, I was looking for the SPR sales where you claim “Presidents Clinton and Obama both used the SPR to try to ease high gasoline prices around election time”. I am looking in and I don’t see it. The non-emergency 1996-1997 sale seems to have come from the Republican Congress, not Clinton. The 2012 Hurricane Isaac Exchange was an emergency loan requested by Marathon Petroleum.

    Wouldn’t we need the SPR for future hurricanes as well?

    1. It is true that fall is when you see gasoline prices fall. But presidents have tried to influence prices with SPR releases. Right now, with crude inventories as high as they are, an SPR release would keep downward pressure on oil prices.

      You can make an argument that we need an SPR, but how big does it need to be? That’s the real question here. Because U.S. imports have plummeted, the SPR essentially covers a lot more days of imports.

  2. So the article headline isn’t the real question. The Strategic Petroleum Reserve has not outlived its purpose, but at current inventory levels we have more than the 90 days of imports that the International Energy Agency (IEA) requires. So obviously we can sell some and still meet the 90 day requirement. How big does it need to be? By international agreement, apparently 90 days worth. Has anything changed to make the “90 day” requirement no longer necessary? Venezuela doesn’t seem too stable these days. The Middle East has never been stable. I am not convinced the 90 day requirement has outlived its purpose. Are you proposing another number than “90 days”?

    1. No, it’s just that at the rate we are heading, the volume required to meet 90 days (of imports) is falling, and it could go all the way to zero in the future. That’s a very different picture than it was just 5 years ago.

  3. Measuring the SPR capacity in “days” of supply is short-sighted. Should a full scale kinetic war break out on the Gulf of Arabia, terminal facilities would likely be decimated. These things are rebuilt in “years”, not “days”. It is a “Strategic” reserve….. much like the strategic nuclear deterrent of the US military- their nuclear capability exists, we all hope it is never needed. The SPR should be treated the same way. A bad actor could easily take out production platforms in the north sea or the coast of Africa or African port facilities – these are all soft targets. Our energy supply is not guaranteed by any means.

    1. Sure, but then the question becomes “How large should it be?” The point is that it’s now a lot larger than it used to be just because of the changes in U.S. oil production. If for instance, U.S. net imports fell to zero, we technically wouldn’t even need a reserve. Since that’s the direction imports have been headed, it’s a good question to ponder.

      1. ” If for instance, U.S. net imports fell to zero, we technically wouldn’t even need a reserve.”
        In that case it may not be legally required, but it would be just as reasonable to maintain it (at least some) anyway. Domestic supplies can also be disrupted (terrorism, natural disasters, etc.), and a major disruption affecting the rest of the world could also make it desirable or necessary to be able to sell some oil. I’m not suggesting altruism, but it may be necessary to help out key allies or to stabilise strategically important regions. I also wonder whether net imports could really fall to zero, and how long they could stay there…

  4. I agree that the SPR is mostly a deterrent and doesn’t really get used.
    I read an article that suggested that only 90 days is needed because the US has oil wells that could be completed in that time frame, but they aren’t because of prices. To me this suggests that while US imports are going down, they will never drop to zero as long as it is more profitable for refiners to import some cheap oil from OPEC.

  5. Nice to have a total independent fuel supply, ethanol, as the fuel additive mostly on separate supply chain. I just read an article of feed supply capable of 2x current levels of 1BBM production. It’s proven that our gasoline fleet can run better and with less pollution with E30. One company sold an injector kit for diesel engine. It was a basic system that just injected fuel into intake. The normal engine control would compensate with less diesel fuel. Reviews I read the technology worked good, but cost savings didn’t pay for the install or equipment. But, in emergency who knows? I’ve posted the military should have this capability to maximize capability of warfare and all important fuel supply.

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