Tag Archives: Strategic Petroleum Reserve (SPR)

DOE in Focus: Strategic Petroleum Reserve

The Strategic Petroleum Reserve (SPR), owned by the U.S. federal government and operated by the Office of Fossil Energy within the Department of Energy (DOE), is collectively the largest reserve supply of crude oil in the world. These massive reserves of oil are divided between four storage sites along the Gulf of Mexico.
As the name implies, the SPR exists to provide a strategic fail-safe for the United States, ensuring that oil is reliably available in times of emergency, protecting against foreign threats to cut off trade, minimizing potential impacts of price fluctuations, and more. Understanding the SPR, both its history and its present form, are crucial to recognizing the role it may play in the future and understand the implications of its discussion by politicians.



Origin of the SPR

Initial calls for a stockpiling of emergency crude oil began as early as the 1940s, when Secretary of the Interior Harold Ickes advocated for such reserves. The idea continued to be brought up and kicked around through the decades– by the Minerals Policy Commission in 1952, by President Dwight Eisenhower in 1956, and by the Cabinet Task Force on Oil Import Control in 1970– but it wasn’t until the Arab oil embargo of 1973-74 that the concept of a strategic stockpiling of oil really gained traction.

For a detailed history on the embargo itself, I would recommend reading The Prize: The Epic Quest for Oil, Money, and Power by Daniel Yergin (who also wrote The Quest: Energy, Security, and the Remaking of the Modern World). But in short, the embargo was due to the United States’ support for Israel in the 1987 Arab-Israeli War. In response, the Organization of Arab Petroleum Exporting Countries (OAPEC) (not to be confused with OPEC– the Organization of Petroleum Exporting Countries) imposed an oil embargo on the United States, while also decreasing their overall production. U.S. production on its own was not enough to meet the country’s needs, and even in the rare instances when oil originating from the Arab nations made its way to the United States, it came at a price premium three times higher than before the embargo.

While an existing stockpile of oil would not have prevented the United States from paying the market price for oil, the availability of such reserves would be enough to help mitigate the magnitude of the market price jump. Not only that, but having reserves of oil available would buy the government time to continue diplomatic efforts to resolve the dispute before the oil shortage caused more devastating impacts on the national economy. Lastly, having a national reserve of oil would reduce the allure of any oil-exporting nations from using the control of their oil exports as a political tool in the first place, as it would not hold the immediate and impactful sway.
With these goals in mind and to prevent the repetition of the economic impacts felt in the U.S. by the oil embargo, President Gerald Ford signed into law the Energy Policy and Conservation Act (EPCA) in 1975. Among the law’s effects was to declare that the United States would build an oil reserve of up to one billion barrels, owned and operated by the federal government. On July 21, 1977, the first shipment of 412,000 barrels of oil from Saudi Arabia arrived and the SPR was officially open.

Operation of the SPR

Storage

The SPR comprises underground storage facilities at four different locations on the U.S. Gulf of Mexico, with each facility in a hollowed out salt dome. The locations in Texas and Louisiana were chosen because of the existence of the salt domes that have proven to be inexpensive and secure storage options and because the Gulf Coast is the most significant U.S. hub for oil refineries, pipelines, and shipments ports. Additionally, the SPR controls the Northeast Heating Oil Reserve (NEHHOR), which stores up to 2 million barrels of heating oil to ensure the northeast is insulated from emergency interruptions in heating oil during the winter months.
The SPR reserves have a storage capacity of over 713 million barrels, with the active amount of oil stored being enough to cover over 100 days of imports since early 2013.

Drawdowns

As the DOE is an executive agency, the decisions regarding when emergency withdrawals from the SPR are needed are made by the President, as specified in EPCA. According to this authorization, the President is only permitted to direct sales from the SPR if he or she “has found drawdown and sale are required by a severe energy supply interruption or by obligations of the United States under the international energy program” or if an emergency has significantly reduced the worldwide oil supply available and increased the market price of oil in such a way that it would cause “major adverse impact on the national economy.”
In addition to this authorization for full drawdowns, Congress enacted additional authority in 1990 to allow the President to direct a limited drawdowns to resolve internal U.S. disruptions without the need to declare a “severe energy supply interruption” or comply with international energy programs. These limited drawdowns are limited to a maximum of 30 million barrels.  Both full drawdowns and limited drawdowns are limited to the President’s authority.

Other SPR Movements

Outside of these authorities of the President over the SPR, the Energy Secretary also has the authority to direct a test sale of oil from the SPR of up to 5 million barrels. The purpose of these test sales is simply to evaluate the drawdown system of physically removing and transporting the oil from storage, as well as the sales procedure. By law, DOE is required to buy back oil from these test sales within a year.
SPR oil can also be sold through a process known as exchanges, where a company will borrow oil from the SPR to address emergency supply disruptions. The terms of the exchange will include the date by when the company is required to resupply the SPR with the amount of oil it borrowed plus an additional amount of oil as “interest.”
Lastly, Congress can enact laws to authorize additional sales of oil from the SPR. These non-emergency sales are typically to respond to smaller supply disruptions and/or to raise funds for specific reasons, such as the Bipartisan Budget Act authorization to sell a portion of SPR’s oil to pay for modernization of the SPR system and a general fund of the Department of Treasury.

Sales process

Regardless of the authority or reason for it, the oil sold from the SPR is done by competitive sale. The DOE issues a Notice of Sale in the Federal Register, detailing the volume, characteristics, and location of the oil for sale, as well as the procedural information for bidding on that oil. After the official authorization for a sale, it typically takes about two weeks to begin the movement of the oil– which can be moved at up to 4.4 million barrels per day.

Emergency drawdowns in SPR History

Since the embargo of the 1970s, there have been a handful of significant spikes in oil prices and interruptions to the U.S. and world supply caused by international conflict. However, having established U.S. reserves as large as they are has provided a domestic and foreign policy tool during that time.
There have only been three emergency drawdowns in SPR’s history. The first came in 1991, when President George H.W. Bush released 17.3 million barrels of SPR oil for sale to restore stability in world oil markets in response to the Persian Gulf War. In 2005, President George W. Bush called for the second emergency drawdown of SPR supplies, releasing 20.8 million barrels in response to the damage that Hurricane Katrina did to oil production and transportation infrastructure in the Gulf Coast. Most recently President Barack Obama authorized the largest sale by a President yet, releasing 30 million barrels in response to Middle East turbulence and subsequent disruption to the worldwide and U.S. oil supply.

Debate surrounding the SPR

Despite the agreement about the immense negative economic impacts from the oil embargo that prompted the formation of the SPR in the first place, the decisions surrounding the SPR are not without their faire share of critics and controversies.
One notable cause for debate surrounds the meaning of the language in the original authorization, specifically what exactly constitutes a “sever energy supply disruption.” This phrase was initially intended to authorize the SPR to release stocks of oil to resolve discernible, physical shortages of crude oil. However there have been debates about whether to expand that definition– such as the 2011 American Clean Energy and Security Act (which ultimately did not become law) to allow for the SPR to build reserves of additional refined oil products (outside of the already reserved crude oil and heating oil) and use them to mitigate drastic changes in the prices of those products independently of crude oil prices.
Other critics have pointed out that the private stock of inventory in the United States, excluding the SPR, far exceeds the SPR holdings. Some of these people then argue that it would be better to use these private stocks than any government stocks, as the free market would respond in the optimal way to prompt the release of these private stocks. The SPR, on the other hand, is rarely used and is more often positioned as a political tool and thus the role of keeping oil reserved is not one for the federal government, according to these credits
Another critique of the SPR, according to some, is that the government has demonstrated itself as incapable of using the stocks as they should. These critics point to times where oil prices climbed above $100 per barrel, causing significant economic disruption, without the government responding appropriately by releasing SPR oil to mitigate the price jumps. Instead, according to the argument, the markets (and specifically the oil futures market, which was created well after the inception of the SPR) do a better job.
Even as recently as September 2017, in the aftermath of the devastation in the Gulf Coast by Hurricanes Harvey and Irma, President Donald Trump and his Energy Secretary Rick Perry disagreed on the importance of keeping the SPR. While President Trump’s 2018 budget proposal called for selling off half of the oil in the SPR to pay off part of the federal deficit, Secretary Perry said the hurricanes were an example and reminder of why the United States needs the SPR. Worth noting is that the Trump administration did make the decision to send 500,000 barrels from the SPR to a Louisiana refinery in order to shield the economy from higher gas prices.

Future of the SPR

In August 2016, DOE reported to Congress on the state and the long-term strategy of the SPR. The main conclusions of this report included the following:
  • To ensure the stability of the SPR going forward, the infrastructure of the system needs further investment and upkeep;
  • Adding marine terminals is critical to the future ability of the SPR to add barrels to the market in an emergency;
  • The SPR continues to benefit the economy moving forward, and further reductions in the SPR beyond those already authorized would hinder those abilities;
  • If the SPR were to expand in inventory, new storage capacity would need to be developed;
  • Expansion beyond the current four-site configuration of the SPR would violate operational requirements; and
  • Certain improvements to the management and operations of the SPR could be made with limited amendments to EPCA.
However, the debate surrounding the SPR, the U.S. oil markets, and the worldwide energy landscapes are in a constant state of flux, so knowing what will come next for the SPR requires constant attention.

Keeping up with the SPR

If you’re interested in seeing the level of the reserves or watching the movement of oil into and out of the SPR, that information is publicly available to you. The Energy Information Administration’s website will let you look at the historical monthly/annual numbers for SPR stock. Additionally, the SPR website gives updates on the current inventory, broken out by sweet vs. sour crude.

The sale of oil from the SPR is uncommon enough that it will always be a newsworthy event. To be sure you keep up to date on any sales, you can sign up for email updates from the Office of Fossil Energy.  Subscribe to their email list here, making sure to select that you want information on “Petroleum Reserves.”

Sources and additional reading

History of SPR Releases– Office of Fossil Energy

History of the Strategic Petroleum Reserve

New legislation affects U.S. Strategic Petroleum Reserve– Today in Energy

Long-Term Strategic Review of the U.S. Strategic Petroleum Reserve– Report to Congress

Northeast Home Heating Oil Reserve (NEHHOR)

Statutory Authority for an SPR Drawdown

Strategic Petroleum Reserve- Office of Fossil Energy

Strategic Petroleum Reserve sales expected to start this month– Today in Energy

The Strategic Petroleum Reserve: History, Perspective, and Issues– Congressional Research Service

 

 

About the author: Matt Chester is an energy analyst in Washington DC, studied engineering and science & technology policy at the University of Virginia, and operates this blog and website to share news, insights, and advice in the fields of energy policy, energy technology, and more. For more quick hits in addition to posts on this blog, follow him on Twitter @ChesterEnergy.