Private Crude Oil Stocks and the Strategic Petroleum Reserve Debate
CRS Report for Congress
Received through t he CRS W e b
Private Crude Oil Stocks
and t he St rategic Petro leum
Analys t in Energy Economics and Po licy
Resources, Sc ience, and Industry Division
Congressional Research Service ˜ The Library of Congress
Private Crude Oils Stocks and the S trategic P etroleum
Periodically, since the i nception of t he Strategi c P et roleum Reserve (SPR) i n
1975, debate has o ccurred concerning it s optimal s ize. In the 108th Congress, the
House h as passed energy l e g islation (H. R. 6) which would require the SPR to be
filled t o i ts current capacity of approx imately 700 million barrels and would
authorize funds to further ex p and t he capacity of the reserve to 1 b illion b arrels.
Anal ys is of the SPR issue has been carried out in a benefit/cost framework in
which b enefits, t he avoided cost t o t he national economy o f a supply d isruption, are
set agai n st t h e real resource cost s associ at ed wi t h i nvest i n g i n t he S P R . T he rol e of
the privately held stock of crude oil has been largel y s tati c i n t h e s e an al ys es . The
data show, however, t hat p rivate stock b ehavior h as been changi ng. Industry holds
l ess crude oi l , a n d h a s l ess capaci t y t o hol d crude oi l , t h an a d ecade ago . T hese
changes refl ect a d ecade l ong st rat egy of reduci n g operat i n g cost s t o rem ai n
competitive. However, oil m arkets face gr eater ex posure t o s upply d isruption t oday
because our dependence o n imported c r ude oil h as risen s ubstantially since 1992.
The effectiveness o f t he SPR in providing security from crude oil s upply d isruptions
may be primarily a function of its siz e, but may also b e d ependent on the underlyi ng
stocks of crude oil h eld b y t he private s ector.
T h e International E nergy Agency (IE A) has s tudied the b ehavior o f crude o i l
stocks in the U.S. s ince 1989. It finds that our total s tocks, measured as days of net
i m port s t h at can be repl aced by st ock d raw-down, have been decl i n i n g. Thi s t rend
results from t he interaction of i ncreas ing import dependency, the essentially constant
siz e of the SPR over t he period, and t he declining size of privately held stocks. The
IEA concludes t hat with no change in any o f t hese factors, the U.S. will no longer be
able to replace ninety days of net imports from domestic stocks in 2006.
Because the IEA focuses o n t otal reserves , its analys is may overstate the ability
of U.S. stocks to mitigat e o i l supply disruptions. This is because not al l p ri vat el y
held oil s tocks can be drawn upon without di srupting t he functioning of the s ys tem
itself. Once these l ower operational i nventor y l evels are considered, t he thinness of
privat el y hel d s tocks i s apparent. As a result, the ability of privat el y hel d s tocks t o
provide a buffer t o s upply d isruptions is reduced.
This report will be updated as events warrant.
Benefits/Costs oftheSPR ...........................................2
Implications ofCurrent StockStatus ...................................7
Fi gu re 1. U.S. Oil S tocks, 1989-2002 .................................4
Fi gu re 2. Behavior of U.S. Stocks, 1973-2002 ...........................6
Table 1 . Net Im ports of Petroleum, 1989-2002 ...........................5
Private C rude Oil Stocks and the Strategic
Petroleum Reserve D ebate
The Energy P olicy and Conservation Act of 1975 1 authorized the creation of t he
Strategi c P et roleum Reserve (SPR) for the s torage of up to 1 billion barrels of crude
oil. The federal government began filling t he SPR in 1977, mostly with imported oil.
By 1992, t h e S PR held 575 million barrels of crude oil, and i n M ay 2003, over a
decade l ater, holds approx imately 600 million barrels in reserve. Since t he creation
of the SPR in 1975, debate has periodically focused on t he optimal s ize of t he SPR,
specifically whether i t s hould b e ex p anded t o 700 million or 1 billion barrels of oil.th
In the 108 Congress, legi slation p assed b y t h e H o u s e (H.R. 6) would require the
SPR to be filled t o its current capacity o f 7 0 0 million barrels of crude oil and
provides funding of $1.5 billion t o ex pand t he capacity of the SPR to 1 billion
W o rldwide concern over t he unstab l e n a t ure o f t he crude oil m arket h as led
other n ations to es t a blish emergency oi l s tocks as p art o f International E nergy
Administration (IEA) agreements to manage supply d isruptions. For ex ample, at the
end of 1999 J apan held 315 million barrels of cr u d e o i l , OECD Europe held 325
million barrels, S outh Korea held 43 million barrels, and Tai w an held 13 million
barrels. The U.S. is the only country in this group where s ecurity stocks are t otally
government owned. In J apan, South Korea, and OECD Europe, t he total s tock is
divided b etween government and m andated p rivate stocks. In Taiwan, the s tock is
completely mandated private.3
Although d ecisions on the s iz e o f t he SPR and p rivate stocks are m ade t hrough
very different decision processes, they are linked b y t he fact that both m ay be useful
in times of s upply disruption. When supply i s disrupted, prices rise quickly through
active futures, s pot, and product m arkets. Higher p rices gi ve businesses an i ncentive
to bring p roduct t o m arket, which mitigates potential physical sho r tages, gi ving
policy makers time to consider an SPR draw-down. If businesses have reduced
1 P.L. 94-163
2 A detailed analysis of t he his t o r y o f p e t roleum allocations to the SPR as well as current
data and a nalysis of r elated policy i s s u e s c a n be found in CRS Issue Brief IB87050,
Strategic Petroleum Reserve, by Robert Bamberge r.
3 Paul N. Leiby a nd Davi d Bowma n, The Value of Expanding the U.S. Strategic Petroleum
Reserve, ORNL/T M-2000/179, Nove mber 30, 2000, p. 20. T he r eport i s a va ilable a t t he
Oak Ridge National Laboratory website, http://pzl 1.ed.ornl.gov
available i nventories t o cut costs, thei r ability to play this role is diminished. For t his
reas on, the s ize and availability of privat e s tocks of crude oil i s rel evant t o debat es
over t he optimal s ize o f t he SPR as well as wh en, and under what circumstances, t o
Benefits/Costs of the SPR
The case for the ex i stence of the SPR is us u a l l y fram ed i n a benefit/cost4
framework. The b enefi t s are t yp i cal l y defi ned as avoided costs which are then set
against t he real resource, or opportunity, cos ts of maintaining t he reserve. The s ame
approach is followed for considering m argi nal adjustments t o t he reserve, but with
a focus on the additional v alue of avoided costs implied by a reserve ex pansion set
against t he marginal resource cost of ex panding the reserve. Although d ebate o n t he
size of the SPR is normally framed i n t erms of millions of barrels of crude oil hel d,
another m easure, consistent with In ternational E nergy Agency (IE A) measurement,
is the number o f d ays o f n et imports for which the reserve can substitute. Although
the primary focus of SPR usage i s c oncerned with international oil market
disruptions, t he SPR could also be used i n times of e mergency stemming from
domestic supply disruption.
The benefit of maintaining t he SPR lies i n avoiding the effect s o f s ev ere oil
price s pikes and shortages t hat might result from s upply disruptions. S ignificant,
rapid s pikes i n t he price o f crude oil and act ual s hortages can have damagi ng effects
on the m acroeconomic performance o f t h e economy. Reduced economic output,
l eadi n g t o i ncreased unem p l o ym ent and a reduction i n t he rate of economic growth
are possible consequences. In t erms of the bal ance of paym ent s , h i gher o i l pri ces wi l l
m ean a great er ex pense for oi l i m port s , causi ng t h e b a l a n c e o f t rade t o d et eri o rat e.
The costs of the SPR are m uch like t hose of other public investment projects.
The capital cost o f t he reserve and/or ex pans i o n o f t he reserve, cost s associ at ed wi t h
providing for t he draw of the reserve, t he operat i ons and m anagem ent cost , and t he
cost of the o il stored in the reserve are all part of total cost. The cost o f t he stored oil
is a real budget cost in the year of acquisition t o b e recouped l ater when, and if, t he
reserve i s d rawn down.
Proponents o f t he SPR see t he ex istence, as well as t h e u se, o f t he reserve
contributing t o s tability in the oil market . The ex istence of t he reserve could det er
some politically or economically motivated disruptions. If t he reserve i s d rawn upon,
it might allow affect ed economies time to make other adjustments t o t he new m arket
conditions, i ncluding diplomacy, which might rem e d y, o r mitigate t he underlyi ng
cause of the d isruption. The ex i stence and/or use o f t he reserve might calm uncertain
oil markets and dampen the effect of underlyi ng market imbalances leading to a
moderated price spike.
Those opposed to market intervention s ee less benefit associated with the SPR
and its use. T h ey believe that the freel y functioning market can mitigat e m ost
4 Ib i d .
disruptions a n d t hat government interven tion i n m arket processes i s unlikel y t o
enhance resource allocation. In this view, friendly s uppliers might ex pand short t erm
output in case o f a disruption, and h i g h e r p rices will allocate available s upplies t o
their m ost p ressing needs, minimizing t he effect of the s upply d isruption.
The SPR is not a s tand-alone policy for energy security. In t he longer term,
diversifyi ng energy sources and improving energy efficiency, engaging i n p roductive
dialogue with oil p roducers and enhanc i n g t he price responsiveness o f consumer
demand are all important measures. In t he shorter t erm, encouraging fuel s witching
capability and dem and reduction can be useful energy security meas ures .
Role of Private S tocks
The implicit assumption underlyi ng the SPR debate appears t o b e t hat t he stock
of private o il reserves held by the U.S. p et roleum industry i s known, unchanging, and
available t o reach the m arket during a suppl y d isruption. To put the S P R ex pansion
issue i n proper contex t, the optimal size of t he SPR might be considered as part of
the t otal stock o f reserves t he nation h as to draw upon in times o f emergency. 5
C onsi d er t h e fol l o wi ng ex t rem e, hypot het i cal cases. If t he pri v at e s ect or were abl e,
technically and economically, t o run the oil production s ys tem with z ero inventories,
or reserve s tocks, every world oil m ar k e t s upply d isruption would b e quickly
t r an smitted t o t he domestic consumer market , l eading t o immediat e shortages a n d
price s pikes. In this case, a l arge reserv e, coupled with quick response u sage rules
might be required for market stability. At the other ex t reme, i f t he oil i ndustry found
i t either technologically or economically useful to hold a year’s worth o f s uppl y i n
reserve which it was willing t o draw down as needed, t here might be little need for
any government reserve. If, i n reality, we are somew here bet ween thes e ex t remes,
so might be the requirement fo r t h e SPR, and, as a corollary, i f t he capability of
privat el y hel d stocks varies, so must the capability of the SPR if our overall ability
to meet market challenges is to remain constant.
5 Care must be exercised i n evaluating private stocks of crude oil. T he Energy Information
Admi nistration, in the J une 13, 2003 Weekl y Pet roleum Status Report, Figure 2, page 7,
reports that although t he five year, average monthly holdings of c rude oil i n 2002 and 2003
i n the private sector are between 280 and 350 million barrels, i t would be i ncorrect to
assume that at any time t here was t hat much oil available f or draw-down. T he s ys tem has
a l ower operational i nventory level of 270 million barrels. T his value represents the oil that
is being held or i n t ransit to refineries and bulk t ermi nals as well as oil i n pipelines. T his
oil cannot be accessed f or emergency use; i t r epresents a ki nd of fill in the s ys tem, which
must be present f or the continuous operation of t he production process from well head to
consumption. Private s tocks available f or emerge ncy draw-down s hould be c onsidered to
be the t otal stocks held net of the l ower operational i nventory levels. Reserves held i n t he
SPR are, in principle, fully available f or extr action and use. T herefore, stocks of crude oil
held in the SPR are not directly comparable to total stocks held i n t he private sector. T he
correct comparison is between barrels of crude oil held i n t he SPR a n d t h e net level of
private stocks. This observation substa n t i a l l y reduces the effective private reserve stock
levels in the U.S. i n t erms of their ability to replace net imports.
In fact, t he behavior of private l evels o f crude oil s tocks h ave not been constant,
they have been declining. Crude oil s tocks, e x c l u d i n g the SPR, s tood at 285.1
million b arrels on May 16, 2003. One year ago t he stock s tood at 325.6 million
barrels, which implies a reduction o f 12.4 percent i n s tocks h eld b y t he nation’s o il
industry.6 Fi gu re 1 , computed by the IEA, s hows t he behavior of total U.S. o il
stocks, m easured as days of net imports. 7
Figure 1 . U.S. Oil Stocks, 1989-2002
Fi gure 1 sh o w s a d ecad e l ong decline i n t he ability of industry stocks, al ong
with the SPR, t o replace imported oil. Several forces are at work i n Fi gure 1 .First,
the i ncreasing d ependence o f t he U.S. on imported oil makes a stock of any size less
capable of replacing imports. Eve n i f t h e a ctual stocks shown i n t he figu re were
constant, days of imports would decline i f t he quantity of oil we import rises . Table
1 s hows t hat net imports of crude oil have i ncreas ed from approx imately 5.7 million
barrels per d ay on average i n 1989 to approx imately 9.0 million b ar r els per day on
average i n 2002. 8 Thi s i n creased dependency h as c ontributed to the downward t rend
6 Stocks of refined petroleum products were also lower t han t he previous year by margins
ranging from 2 percent t o 30 percent. Up t o d ate information on petroleum stocks is
publ i s hed i n t he Weekl y Pet r ol eum St a t us Repor t s avai l a bl e a t www.ei a.doe.gov.
7 IEA data provi ded by William C. Ramsay, Deputy Executive Director, IEA, A Fossil Fuel
Fut ure, presentation a t CRS, M ay 22, 2003.
8 T a ble 1 also shows t hat t he U.S. has i ncreas ed its imports of petroleum products, mostly
ga soline. Depending on the nature of f uture mar ke t disruptions, t he U.S. could i mport more
petroleum products in lieu of i mporting crude oil.
Table 1. N et Imports of Petroleum, 1989-2002
( in t housands of bar r e ls per day)
Y e arly average Crude Oil P e troleum P roducts Net I mports
1989 5,701 1,500 7,202
1990 5,785 1,375 7,161
1991 5,666 959 6,626
1992 5,994 944 6,938
1993 6,689 929 7,618
1994 6,964 1,090 8,054
1995 7,135 750 7,886
1996 7,398 1,100 8,498
1997 8,117 1,040 9,158
1998 8,596 1,167 9,764
1999 8,613 1,300 9,912
2000 9,021 1,399 10,419
2001 9,308 1,592 10,900
2002 9,038 1,340 10,378
Source: U.S. Ener gy I nfo r matio n Ad ministr atio n. Monthly Energ y Review, March 2003 ,p.43.
Secondly, as noted above, i n t he short t er m , stocks of privately h eld o il have
decl i n ed. Fi gure 2 shows the behavior of U.S. stocks, measured in billions of
barrels, i n t he longer term, from 1973-2002. The figure s hows t hat non-SPR crude
oil s tocks h ave ex p erienced a l ong term decline s ince their p e a k in the mid 1970's,
even though i n t he last two d ecades imports and consumption h ave risen. Figure 2
al so suggests s ome i ncreas ed volatility in the l evel of privat el y hel d s tocks s ince the
mid 1990's. This behavior might be ex pected if firms were o p timizing their
inventory holdings. Additions to stock when p rices of crude oil a r e l o w a n d draw
downs from i nventory when p rices are h igh enhance p rofit opportunities.9
Trends similar t o t hose observed i n crude oil have also occurred i n pet roleum
products. The Petroleum Industry R esearch Foundation, In c. calculates t hat finished
gasoline s tocks fell from a 30 day s tock in 1985 to an 18-19 day s tock in 2001. This
translated into a 41 million barrel decline in gasoline stocks over the period. An
additional complication i s t hat gasoline i s not as fungible as it once was. Different
9 Production i s also price sensitive. Marginal production can be brought to market with the
incentive of higher prices.
blends of gasoline t o s atisfy differing air pollution s tandards i n v arious parts o f t he
country put further s train o n a system that is reducing s tocks. 10
Fi n a l l y, not only p rivately held stocks have declined, but the p rivately held
capacity to hold s tocks h as also declined. In 1990, the capacity of re f i neries in the
U . S . t o hold s tocks o f crude oil was 204 million b arrels; b y 2002 this capacity had
declined to 183.3 million b arrels, a reduction o f over 1 0 p ercent.11 This decline i n
capacity, coupled with the d ecline i n h eld s tocks, suggests t hat t he industry might be
attempting t o reduce t he level o f i nventory as a way o f m anaging cost. Much of U.S.
industry h as adopted “just i n time” i nvent ory t echniques as a way t o l ower costs and
enhance effici ency. It would be c o n s istent with this trend for the pet roleum sect or
Figure 2 . Behavior of U.S. S tocks, 1973-2002
(measured i n billions of barrels)
to follow a similar strat egy.
10 Refining Concentration and Industry Dynamics, Petroleum Industry Research Foundation,
In c., Apr i l , 2002, avai l a bl e a t t he web s i t e , www.pi r i nc.or g.
11 Storage at refineries is not the only location for stocks of crude oil. Additional stocks
mi ght be engaged in the t ransportation and distribution process at any of several l evels.
Implications of Current Stock S tatus
Fi gure 3 r e p r e s e n t s a “break even” anal ysi s o f t he rel at i onshi p b et ween t o t al
stocks of U.S. crude oil and time, assuming t h a t t h e n ation has a s ecurity target of
ninety days of import s ubstitution, consistent with IEA t argets. The IEA dat a are
based o n t otal stocks of crude oil which ignores the l ower operational i nventory
constraint for i ndustry and, therefore, may overstate the ability of combined stocks
t o act ual l y m eet em ergency n eeds.
Figure 3 . Break Even Relationship
Anal ys is by the IEA offers the t entative conclusion that U.S. ability to maintain
a t arget o f n i n et y d ays o f i m port repl acem ent wi t h current t rends cont i nui ng, and no
change in current government policy, will end i n 2006. An i n c rease i n t he SPR
w o u l d push t hi s d at e furt h er i n t o t h e fut ure, whi l e an accel erat i o n o f p ri vat e sect o r
stock draw down would bring the dat e closer t o t he pres ent time. Additionally, t he
figure al so implies t hat i f t he SPR fill were ex panded t o 700 million barrels, or even
1 b illion b arrels, t he increase i n s ecurity that we might receive from enhanced levels
of import replacement could b e only t emporary. The underlyi ng decline o f p rivate
sector stocks and i ncreasing d ependence on importe d o i l will also influence our
susceptibility to supply disruptions in the future.
Although t he IEA analysis s uggests a developing problem for t he U.S. in terms
of replaci ng imported oil in times of emergency, t he real situation m ay be even more
challenging t han t he IEA analysis s uggests. Energy Information Administration dat a
shows t hat i n t he fall of 2002 and again in early 2003 private s tocks o f crude oil were
reduced to the l ower operational i nventory l evel s discussed earlier. At those times12
there were n o additional crude oil reserves i n t he pri v at e s ect or i n a p ract i cal sense.
The m ore t he private s ector economiz es on crude oil s tock holdings, the m ore likely
12 Da ta included i n t he Weekly Petroleum Status Report f or the week ending May 30,2003.
Avai l a bl e a t t he Ener gy In f o r mat i o n Admi n i s t r at i o n websi t e , www.ei a.doe.gov.
i t is that the l ower operational i nventory c onstrai nt will become effective during a
market disruption, limiting t he ability of industry t o m eet consumer demand.
W h ile private s ector stock s e x i s t p rimarily because of the economic and
t e chnological requirements o f t he oil i ndustry, they have also served a publi c
purpose. Private s tocks h ave at l east p artially played the role o f a public good. They
have provided b enefits to the domestic oil m arket as a whol e, as wel l as t o p o l i cy
m akers as t h ey faced di ffi cul t deci si o n s a b out when, and i f, t o d raw o n t he S P R .
P r i v ate s ect or stocks are usually drawn down first, with market forces guiding t he
decision. Decisions on the optimal s iz e o f t he SPR may n eed to tak e i n t o account
changes i n i ndustry p ractices which might affect the ability of private s tocks o f crude
oil t o p lay t his role i n t he future.
Net s tocks of privately held crude oil, in many ways the first buffer bet ween an
international oil supply disruption and U.S. consumer markets, were reduced to very
low l evels during t he recent d isruptions to the oil markets. Industry holds less stock
in 2003 than it did a decade ago , even t hough U.S . d ependence o n crude oil imports
has risen. The SPR currently h o l d s approx imately 600 million barrels of crude oil
which could b e u sed i n a supply emergency. T he effect of the rising d ependence o n
imports and t he reduced availability of privat e s tocks implies t hat 600 million barrels
of crude oi l t ransl at es i nt o fewer days of repl aced reserves.