What is the Strategic Petroleum Reserve?
Stories emerged last week suggesting that President Donald Trump is considering a release of crude oil from the Strategic Petroleum Reserve in an effort to nudge oil and gasoline prices lower. So, just what is the SPR, and can the president successfully use it to reduce gas prices?
In 1944, toward the end of World War II, Secretary of the Interior Harold Ickes first proposed the idea of a U.S. government cache of crude oil to provide an emergency supply for national defense in the event of wartime disruptions. It took the acute fuel shortages in the wake of the 1973-74 Arab oil embargo to motivate Congress to authorize the creation of an oil stockpile available to provide energy supplies in times of emergency. President Gerald Ford signed the legislation in 1975, and by 1977 the Strategic Petroleum Reserve began receiving its first deliveries (ironically supplied by Saudi Arabia).
Today, the SPR has the capacity to store 713 million barrels of crude oil in four separate locations along the Texas and Louisiana Gulf Coast. The current inventory of 660 million barrels is located in massive underground salt caverns excavated for the express purpose of storing the government’s emergency petroleum supply.
Releases of oil from the SPR are facilitated via a competitive bidding process among potential buyers. There have been two significant emergency sales from the reserve since its inception: during Desert Storm in 1996, and in response to supply disruptions from Hurricane Katrina in 2005. Three smaller non-emergency releases include a 2011 sale in response to unrest in Libya, and as a source of revenue applied to reduction of the U.S. budget deficit in 1996 and 1997.
Perhaps unsurprisingly, Congress has become enamored with raiding the oil piggy bank. Both the Budget Act of 2018 and the Tax Cuts and Jobs Act mandate sales from the SPR through 2027 as a gimmick aimed at reducing the huge deficits resulting from those acts.
Today the United States is contemplating a limited use of the SPR, ostensibly in response to supply constraints from the collapse of Venezuela’s government, impending sanctions of Iran, and the disruption of Libyan exports by rebel forces. But perhaps more determinative is the political motivation to mitigate the rise of gas prices in the months leading up to midterm elections. The administration is simultaneously jawboning OPEC members to crank up production in an effort to dampen prices. Results so far are mixed. It is important to recognize that the SPR was intended as an emergency backup supply in times of national emergency. Trump would not be the first chief executive tempted by political calculations to ponder an SPR release. But note that any such injection of U.S. supply would have limited impact on price and run counter to Republicans’ aversion to intervening in the free market. Some of the President’s own advisers are opposed to a release as an unwarranted interference in the market.
Some argue the SPR is an anachronism. Given America’s newfound abundance of domestic petroleum, the imperative of maintaining a large emergency supply seems diminished. The U.S. is on track to glide past Saudi Arabia and Russia to reclaim the title of world’s largest producer. In a pinch, we could be energy self-sufficient (with a boost from our Canadian friends) and rely not a whit on potentially hostile sources of oil.
In any event, the SPR exists to provide a supply cushion in times of crisis threatening our critical fuel supplies. Many presidents have been tempted to dip into the till in an election year; commendably they have all (so far) resisted the temptation.