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Tuesday, April 10, 2012

The Strategic Petroleum Reserve: Authorization, Operation, and Drawdown Policy

Anthony Andrews
Specialist in Energy and Defense Policy

Robert Pirog
Specialist in Energy Economics

Congress authorized the Strategic Petroleum Reserve (SPR) in the 1975 Energy Policy and Conservation Act (EPCA) to help prevent a repetition of the economic disruption caused by the 1973-1974 Arab oil embargo. EPCA specifically authorizes the President to draw down the SPR upon a finding that there is a “severe energy supply interruption.” The meaning of a “severe energy supply interruption” has been controversial. The authors of EPCA intended the SPR only to ameliorate discernible physical shortages of crude oil. Historically, increasing crude oil prices typically signal market concerns for supply availability. However, Congress deliberately kept price trigger considerations out of the President’s SPR drawdown authority because of the question about what price level should trigger a drawdown, and the concern that a price threshold could influence market behavior and industry inventory practices. International Energy Agency member countries (which include the United States) have committed to maintaining emergency reserves equal to 90 days of net crude oil imports, 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.

The Department of Energy (DOE) manages the SPR, comprised of five underground storage facilities, solution-mined from naturally occurring salt domes in Texas and Louisiana. The 2005 Energy Policy Act authorized SPR expansion to a capacity of 1 billion barrels, but physical capacity expansion of the SPR has not proceeded beyond 726.6 million barrels. The SPR’s maximum drawdown capacity is 4.4 million barrels per day, based on the capacity of the pipelines and marine terminals that serve it. Legislation restricts SPR sales to no more than 30 million barrels over a 60-day period for anything less than a severe energy supply interruption.

Congress initially appropriated funds to fill the SPR through crude oil purchases, but ended that practice in 1994. In 2000, the Department of Energy began acquiring oil to fill the SPR through the royalty-in-kind (RIK) program. In lieu of paying cash royalties on Gulf of Mexico leases, producers diverted a portion of their production volume to the SPR. The Secretary of the Interior terminated the RIK program in 2011.

Sales and loans of crude from the SPR have been carried out for several different reasons. The 1990 Energy Policy and Conservation Act Amendments expanded SPR drawdown authority to include responding to short term supply interruptions stemming from situations internal to the United States. U.S. Presidents have authorized emergency sale of SPR crude during the 1990 Persian Gulf War, in the aftermath of Hurricanes Katrina and Rita in 2005, and after a prolonged disruption of Libyan crude in 2011. After civil unrest in Libya curtailed its crude oil production in the spring of 2011, and speculative bidding began driving up global crude oil prices, President Obama ordered an SPR auction to satisfy International Energy Agency treaty obligations. In addition to these emergency sales, the Department of Energy, from time-to-time, has conducted drawdowns to test the SPR system, make loans to help refiners bridge temporary supply disruptions, and generate revenue for budget deficit reduction.

The 30.64 million barrel SPR sale in 2011 reduced the SPR’s inventory from 726.6 million barrels to 695.9 million barrels. The SPR currently holds the equivalent of 80 days of import protection (based on 2012 data of 8.72 million barrels per day of net petroleum imports).

Date of Report:
April 2, 2012
Number of Pages:
Order Number: R424
Price: $29.95

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