Low-Energy Fridays: What is the Strategic Petroleum Reserve (and do we still need it)?
To preempt the inevitable future date at which the Strategic Petroleum Reserve (SPR) reenters the news cycle, it’s worth reviewing what it is, its intended function, and whether it is worth maintaining. The SPR regularly comes up in the news as a tool the executive branch uses to try to mitigate increases in fuel prices; however, there has been some debate about whether it’s worth having an SPR at all.
The SPR is a series of 61 underground salt caverns at four sites on the Gulf Coast where the federal government stores crude oil. The combined storage capacity is 714 million barrels, and the current reserves are approximately 405 million barrels. While the idea for an SPR had been proposed as early as 1944, it wasn’t formally pursued until the 1973 oil embargo against the United States and it began operating in 1977.
The intent of the SPR was to reduce the economic impact of the (ostensibly temporary) geopolitical events disrupting oil supply. The thinking was that the government could buy oil when it was cheap and available and sell off SPR stocks to the public when it became scarce, thereby increasing supply and reducing prices. The United States has been a net-importer of oil for most of the SPR’s existence, and the initial policies governing the volume of oil to store were based on the trade deficit, requiring an inventory equal to 90 days’ worth of net-oil imports.
The SPR has been tapped many times over the years. Four instances were related to emergencies: the 2022 invasion of Ukraine, the 2011 war in Libya, Hurricane Katrina in 2005, and Operation Desert Storm in 1991. Each “emergency drawdown” related to a major event expected to impact global oil supplies; therefore, the SPR was used to mitigate oil price shocks. Most other times, the SPR was tapped at the order of Congress—typically, either to pay for another policy or in response to Congress’s belief that an SPR drawdown was in order.
The cost of maintaining the SPR as a security policy is also subject to debate. It costs about $200 million per year to maintain the SPR, with a total investment of $25.7 billion ($20.7 billion for crude oil; $5 billion for facilities). These costs can theoretically be mitigated by selling the stocks at a profit (as of this writing, the average price paid per barrel in the reserve is $29.70, compared to the current West Texas Intermediate price of $63.66), although any “profit” turned by selling stocks must be considered against the cost of refilling the reserve.
The real question is whether we even need an SPR. The United States is now a net-exporter of petroleum products, rendering the 90-day benchmark for determining necessary inventories useless. An economic argument against the SPR is that any policy mechanism by which the government can insulate the economy from price shocks could do more harm than good in the long term. This is because it diminishes the effectiveness of price signals in leading to more efficient outcomes (e.g., people using less oil when it’s expensive or transitioning to alternative fuels). Another problem is that policymakers often look to the SPR as a potential piggy bank to support other policies rather than prioritizing its strategic intent.
Despite this, there is a reasonable national security rationale for the SPR. Governments—not private actors—manage most global oil production, and it is a staple of energy policy that foreign producers will try to leverage their market position to gain concessions from importers. Not only was this the rationale behind the 1973 oil embargo, it’s also why there is considerable concern about Europe’s reliance on Russian energy.
From a policy perspective, there is tension between these two ideas. We know that the SPR carries an unappreciated economic cost due to its interference with price formation. We also acknowledge the potential national security risk associated with the economy having a soft underbelly that is vulnerable to foreign oil producers. Both positions are strongly rooted in demonstrable economic theory, meaning there are no simple answers.
The path forward lies somewhere in the middle. If we didn’t have an SPR, it would make little sense to create one under current conditions. But we do have one, and it can theoretically mitigate some national security vulnerabilities. The appropriate approach is for policymakers to resist the temptation to improperly use the SPR (and especially avoid using it as a pay-for), lest its interference in price formation be exacerbated. The inverse is also true—policymakers should avoid using SPR purchases as a mechanism to increase demand and raise energy costs to the public while subsidizing oil producers.
Overall, the SPR serves a reasonable function. But its potential to harm or benefit the public is contingent upon policymakers’ discipline in keeping its use within its intended energy security mission.