The USA is one of few countries in which the government stores large volumes of crude oil. The Strategic Petroleum Reserve (SPR), is the largest emergency supply in the world with the capacity to hold up to 727 million barrels of oil.
In the aftermath of the Arab oil embargo of 1973-74 and the resulting oil price shock (in which the price of imported crude tripled), the US government decided it would be wise to invest in an emergency reserve of crude oil. In 1977 the government began to fill vast salt caverns, deep underground across four sites near the coast of Texas and Louisiana.
In theory the SPR should be able to mitigate price volatility in the event of a disruption to the global supply of oil. The SPR could, it was thought provide a guaranteed supply of oil to strategically important consumers, such as the military and certain industries. Merely the threat of a release from the SPR could be enough to temper an increase in the oil price, particularly when there has not been any actual cut to output.
The embargo also let to the development of the IEA (International Energy Agency), an intergovernmental organisation set up to develop measures and coordinate actions in response to future energy crises. The US government uses the SPR to meet its commitments under the International Energy Program (IEP) agreement, under the auspices of the IEA.
Signatories to the IEP agreement, including the United States, are committed to maintain petroleum stocks equivalent to 90 days of their prior year’s net imports, developing programs for demand restraint in the event of emergencies, and agreeing to participate in allocation of oil deliveries to balance a shortage among IEA members. The SPR goes well beyond the agreement required by the IEP. According to IEA data the US SPR typically holds emergency petroleum stocks equivalent to approximately 270 days of previous year’s net imports, around three times the obligation set by the IEA.
While other IEA member countries hold strategic stocks of petroleum products, the SPR only holds crude oil. The justification behind this decision was twofold: that the US has sufficient refining capacity in place and so a global energy crisis was more likely to impact crude supplies, and that petroleum based products are less flexible and degrade more rapidly than crude oil.
Crude oil has certain characteristics related to their specific density and sulphur content. Different crude oils are typically expressed on a scale from ‘light’ to ‘heavy’ and from ‘sweet’ to ‘sour’ respectively. The SPR holds a range of different types of crude oils which means it can optimise any release to the specific need. For example, most US Gulf Coast refineries are optimised to refine heavy crude. As of mid-2021 the SPR holds around 623 million barrels of crude oil (~85% of its capacity), and roughly split 59% sour crude and 41% sweet.
The terms by which crude can be released from the SPR are vague and really depends on the definition that the President and Congress put on the word ’emergency’. Presidents have ordered releases from the SPR on three occasions in response to severe energy supply interruptions, in coordination with other IEA member countries.
The first major drawdown occurred in early 1991 to counter the lost output from Iraq and Kuwait resulting from the first Gulf war. The SPR was used to offset disruptions to crude oil supply in the US Gulf following Hurricane Katrina in 2005, and most recently in 2011 following the political upheaval in Libya and loss of oil production.
Other reasons for sales from the SPR include crude that is loaned to private companies (known as exchange agreements), as a way to generate revenue to offset some of the government budget deficit, and also merely to test the functionality of the process.
The last time the SPR was tapped to help reduce the Federal budget deficit was in 1996-97. In the summer of 2021 the 5-year infrastructure plan announced by President Biden listed sales from the SPR as one of 12 options for financing the plan.
Chart: SPR releases by type through 2019, million barrels
The maximum speed at which crude can be released from the SPR is 4.4 million barrels per day for 90 days. This is due to capacity constraints in the infrastructure servicing the SPR. According to the Department of Energy (DoE), once a decision by the President, it takes about 13 days for the crude to enter the market.
Refilling the SPR remains at the President’s discretion. For example, the SPR was tapped to counter disruption from Hurricane Katrina in 2005, but it was four years later that a decision was made to purchase sufficient volumes to refill the SPR. In 2009 of course oil prices had been battered by the Great Financial Crisis. The average price of Brent crude was around $62 per barrel, significantly lower than it had been for the previous few years. Purchases made in 2009 built SPR stocks up to 726.6 million barrels – the one and only time that the SPR has been filled to almost 100% of its operating capacity.
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