How Does the Strategic Petroleum Reserve Work? How Should It Work?

Posted: February 14, 2023
Category: Periodicals

History of the SPR

The SPR was commissioned in 1974 in response to the 1973 Arab Oil Embargo. American legislators wanted both to provide the United States with a greater amount of stockpiled oil reserves in case supplies were again interrupted and to satisfy oil stockpiling requirements that were dictated by the newly-formed International Energy Agency that was formed under the Organization for Economic Co-Operation and Development to provide greater stability to global energy markets. At a cost of almost $4 billion, the SPR was completed in 1977. The first oil –412,000 barrels of Saudi Arabian light crude– was delivered to the SPR on July 21, 1977.

SPR Facilities

The Strategic Petroleum Reserve is a group of naturally-formed salt caverns along the Gulf Coast of the United States. There are four facilities each with several artificial salt caverns. Each salt cavern is, on average, 200 feet wide and 2,000 feet deep. The capacity ranges from 6 to 37 million barrels per cavern. Together, the four facilities that make up the SPR have a total storage capacity of 714 million barrels of oil. The SPR is connected to three major midstream systems: Seaway, Texoma, and Capline. These pipeline networks connect the SPR to 28 Gulf Coast refineries and six refineries in Michigan, Ohio, and Kentucky, offering the SPR a wide range of potential downstream customers. The SPR is also connected to four major marine terminals than can output 2.62 MMbbl/d jointly. Between the pipelines and the marine terminals, the SPR can draw out as much as 4.4 MMbbl/d

The caverns were created by drilling into salt layers and then dissolving the salt away from the borehole. Being around 2,000 feet deep, there is a natural temperature gradient in the caverns that churns the oil held in storage.

Rules of the SPR

The Strategic Petroleum Reserve must contain an amount of oil equal to 90 days worth of oil imports (based on average daily crude imports during the previous calendar year), an obligation imposed by the United State’s membership in the International Energy Agency. The nation is also obligated to contribute 44% of any release of oil mandated amongst IEA countries. Though the United States imports almost exactly as much crude as it exports, it must maintain a certain amount in reserve to help brace other members of the International Energy Agency against supply shocks. As of April 2022, the United States is obligated to keep 252.4 million barrels in reserve for this purpose.

Security of America’s Oil Supply

Many conservative Americans have argued that President Joe Biden’s attempts to lower oil prices by using the SPR undermine the strategic capability of the SPR to brace the US against oil supply shocks and that these releases are used only to temporarily depress gasoline prices to curry favor with voters. However, defenders of President Biden’s decision to allow the SPR release have argued that the crude oil supply situation has drastically changed in the US since the commissioning of the SPR and that the nation need no longer regard the SPR as a tool purely for bracing against foreign supply disruptions.

Crude oil imports into the United States have steadily decreased from the record of 14,697,000 million barrels per day in August of 2006 to 8,132,000 barrels per day in October of 2022. Driven by the Shale Revolution, US crude exports have crept upward and now stand at around 8 million barrels per day. Resultantly, the United States is now as much an oil exporter as it is an oil importer, though exports gain a greater share of oil trade with each coming year.

Furthermore, the United States, over time, has progressively imported more Canadian crude oil than oil sourced from the Arabian Gulf. Presently, imports from Canada are four times greater than imports from OPEC. Canada, America’s most closest ally, is a very secure source of hydrocarbons for the United States.

There have been a number of recent developments that have strengthened the political and social ties between key Middle Eastern powers and the US, providing further security for America’s oil supply.

The most important aspect of America’s newfound energy security is the shale revolution. US oil production has increased by 150% since bottoming out in the mid-2000s as many of America’s conventional oilfields reached their economic limits. The collapses of the oil market in 2016 and in 2020 sent production lower for a short time, but the trend towards ever-higher US shale production is clear.

Future of the SPR

While the United States did commission the SPR as a defensive tool to prevent sudden supply shocks, the oil supply of the United States is considerably more secure than it was in the 1970s and it continues to become more stable. With a greater reliance on Canada instead of OPEC, a moderately better geopolitical climate in the Middle East, and ever-increasing domestic shale production, the need for the SPR as a strategic defense has fallen considerably.

Instead of being applied as a strategic, defensive reserve, the SPR could continue to function more like a regulator of oil supply. If it were allowed to freely buy and sell oil depending on commodity prices, the SPR could help to smooth domestic and international oil prices.

Using the SPR in this manner would be advantageous to the citizenry, the American government, oil producers, and to foreign countries. It would advantage the citizenry because it would blunt the effects of sharp commodity price increases. A release from the SPR in a bullish commodity season would serve to reduce gasoline prices, albeit briefly and moderately. The American government could benefit from this style of usage by being able to capitalize on price arbitrage. If the reserves are filled at $70/bbl and sold at $110/bbl, the Government stands to benefit monetarily. Oil producers, especially shale oil producers with narrower margins who are more sensitive to commodity price swings, would benefit from more moderate price fluctuations. It would allow companies to forecast revenues with a slightly higher degree of certainty about commodity prices. Lastly, America’s oil-poor allies might benefit from the slightly more stable oil price environment that using the SPR as a “capacitor” would help to create.

Summarily, future presidents might justifiably use the SPR in a similar fashion to President Biden, though it always runs the risk of leaving the U.S. with less oil than may be necessary for unforseed future geopolitical events.

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