American Geological Institute

Government Affairs Program

Update on Strategic Petroleum Reserve (11-6-98)

Most Recent Action
In an effort to provide some price relief for the domestic petroleum industry, the Senate passed a provision giving the Secretary of Energy emergency authority to purchase oil for the Strategic Petroleum Reserve (SPR) on September 3. An amendment to the FY99 Treasury and General Government appropriations bill would provide $420 million for the purchase, which could amount to as much as 35 million barrels of oil. The amendment was offered by Senators Jeff Bingaman (D-NM) and Frank Murkowski (R-AK). The House version of the legislation, which passed in mid-July, did not include a similar provision, and the final bill followed the House language and did not contain money for the purchase.

The last SPR sale was cancelled this past May in response to falling prices. On May 1st, the President signed an emergency supplemental appropriations bill for fiscal year 1998 to cover the cost of recent disaster-relief efforts. Included in the bill was a provision, sponsored by Murkowski and supported by the President, to halt the sale of oil -- mandated in an earlier spending bill -- from the Strategic Petroleum Reserve. Because the oil was purchased when prices were around $30 a barrel, the government stood to lose over $500 million by selling. Moreover, flooding the market with government oil would depress prices much to the dismay of small producers already strapped by the current situation.

Earlier Action
The House Science Committee's Energy and Environment Subcommittee held a hearing on July 31, 1997 to consider S.417, which authorizes extension of the Strategic Petroleum Reserve (SPR) for three years. The Senate bill, introduced by Energy and Natural Resources Committee Chairman Frank Murkowski (R-AK), passed the Senate with an amendment on June 27, 1997 by unanimous consent. Provisions of the Senate bill addressing the SPR include:

The Administration is expected to submit to Congress a Statement of Policy concerning the SPR in September.

The Department of Energy (DOE) published a Federal Register notice on April 30, 1997 asking for comments concerning the future of SPR in the following areas:

The need for a national petroleum reserve was recognized as early as the 1940s. In 1944, the Secretary of the Interior advocated the stockpiling of petroleum. President Truman's Minerals Policy Commission proposed a strategic petroleum supply in 1952. After the Suez Crisis in 1956, President Eisenhower suggested that a reserve be established. The Cabinet Task Force on Oil Import Control had a similar suggestion in 1970. Finally, after the 1973-1974 Arab oil embargo, a petroleum reserve was established. The United States determined that its vital foreign policy, national security, and economic interests were threatened by a dependence on imported oil (net imports in 1996 amounted to approximately 46% of U.S. oil consumption) and possible supply interruptions. In 1975, the Energy Policy and Conservation Act (Public Law 94-163) was enacted, authorizing American participation in the International Energy Agency (IEA) and the creation of the Strategic Petroleum Reserve.

IEA was established in 1974 as an autonomous agency within the Organization for Economic Cooperation and Development (OECD), an international organization of 29 countries whose goal is domestic and international economic growth. IEA's charter is the Agreement on an International Energy Program. The goals of IEA include:

Each member of the IEA is committed to maintaining a reserve that is equivalent to 90 days of net oil imports. Originally, the policy of IEA was to act as an emergency system based on allocation of available supplies among the oil importing countries. Currently, the U.S. maintains that the best response to rising prices associated with an emergency is to allow markets to balance supply and demand by injecting additional supply into the market "in a timely manner." Withdrawing oil from SPR early in a potential supply emergency can act as a deterrent to oil import embargoes and by doing this collectively, the mitigation impacts are greater than if each country acts alone.

SPR is made up of five oil storage sites located in underground salt domes along the Gulf of Mexico. This area was chosen for storage because there are 500 plus salt domes along the coast and many U.S. refineries are located there as well as numerous distribution points for tankers, barges and pipelines.

Major sites in the SPR storage network

The Weeks Island site developed a naturally occurring geologic fissure or fracture and will be decommissioned. As a result, 7 million barrels of oil were sold in January 1996 to raise funds for the transfer of the oil from the Weeks Island site to the Big Hill and Bayou Choctaw sites. In March of 1996, DOE offered to sell or lease SPR facilities that are not used or are used infrequently to raise revenue.

The government investment in SPR thus far totals $20 billion, with $17 billion going to buy crude oil. The current supply equals approximately 74 days of net imports. The remainder of the required 90 days of imports needed to meet the IEA obligation are from private inventories. Currently, there are 564 million barrels in SPR. Continued stockpiling was suspended in FY1995 so that the SPR budget could be used for the establishment of the Life Extension Program which refurbishes SPR equipment and extends the life of the storage facilities. The Program goal is to maintain the reliability and availability of SPR and extend the life of the Reserve through 2025. This program is to be completed by September 2000.

The Energy Policy and Conservation Act authorized a reserve of up to one billion barrels. At its peak in 1994, SPR held 592 million barrels. Decisions to withdraw oil from SPR are made by the President and if an emergency occurs, the SPR petroleum is distributed by competitive sale. SPR has only been used in one emergency to date, during Operation Desert Storm in 1991. Originally, 33.75 million barrels were slated for sale but this was later reduced to 17.3 million barrels when prices began to stabilize. There have been two non-emergency sales of SPR oil. In FY1996 $227 million worth of oil was sold and in FY1997 $220 million was sold. The revenue from these sales was used for deficit reduction.

Sources: Environment & Energy Weekly; Department of Energy website; Federal Register, April 30, 1997; Department of Energy Statement to House Energy and Environment Subcommittee.

Please send any comments or requests for information to the AGI Government Affairs Program.

Contributed by Catherine Runden, AGI Government Affairs Intern, and David Applegate, AGI Government Affairs Director

Last updated November 6, 1998

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