Policy Debate: Should the Strategic Petroleum Reserve be used to Reduce Fluctuations in Oil Prices?
Issues and Background
....if withholding a few hundred thousand barrels a day from the market can drive prices sky-high, putting a similar amount back in
can bring them back down to earth -- as demonstrated by the sharp drop in oil prices that followed the announcement of plans to
tap U.S. strategic reserves. And Western governments have more than a billion barrels in reserve. Why not use those reserves to
break the market corner, or at least to limit its effectiveness?
~Paul Krugman, New York Times, September 9, 2000
...I have always viewed the Strategic Petroleum Reserve as a reserve in the event of a serious crisis.
By that, I mean a shutdown in Middle East oil or something of that nature, because of a catastrophe of some form.
I think it would be a mistake to try to move market prices by small additions or subtractions from the Strategic Petroleum
Reserve. We are dealing with an overall world market which is huge relative to our Strategic Petroleum Reserve. It is foolishness
to believe that we could have any significant impact short of a very major liquidation in the short term of that reserve, and I don't
think anybody is arguing for that.
~Alan Greenspan, February 17, 2000 Testimony Before the House Committee on Banking and Financial Services
The Strategic Petroleum Reserve (SPR) was created as a result of the Energy Policy and Conservation Act
in December 1975 in response to the 1973-74 oil embargo. This Act allowed the U.S. to store up
to 1 billion barrels of petroleum in salt caverns located near the Gulf of Mexico. Oil has been
added to these salt caverns from June 1977 to the present. The SPR now holds approximately 700 million
barrels of crude oil. This reserve contains enough oil to provide for approximately 2 months of
oil use at current consumption rates.
Oil was first withdrawn from the SPR during 1991 to help prevent price hikes during the Persian
Gulf War. While the U.S. originally planned to withdraw 33.75 billion barrels of crude oil during
the war, only 17.3 million barrels were actually withdrawn from the SPR since
oil supplies and prices were more stable than originally anticipated.
In energy markets, short-run demand and supply elasticities are relatively low. Consequently, relatively
small changes in demand and supply can have large impacts on prices. Oil prices had
risen rather dramatically in the 1970s and early 1980s in response to the Arab oil embargo.
Throughout most of the 1980s and 1990s, real oil prices had been trending downward. In 1999,
real oil prices fell substantially in response to a glut in the world oil market. In response,
the Organization of the Petroleum Exporting Countries (OPEC) reduced the supply of oil during the
winter of 1999-2000. This reduction in oil production, combined with growing demand as the
Asian economies recovered from recession, resulted in a tripling in the price of a barrel of oil
in a one-year period.
In recent decades, the U.S. economy has dealt with three substantial oil price shocks associated
with the Arab-Israeli war, the Iranian Revolution, and the Gulf War. The first two of these shocks
resulted in recessions in the U.S. This past experience raises at least some concerns that the
current price shock may have an adverse effect on the U.S. economy. In response to these concerns,
President Clinton, on September 22, 2000, authorized the release of 30 million barrels of crude
oil from the SPR. This move resulted in a fair amount of controversy. In 2005, a similar release
of 30 million barrels of oil to the open market was used to help reduce domestic oil prices. Oil
was also temporarily loaned to producers to meet supply disruptions caused by hurricanes in 2002, 2004, and 2005.
Those who believe that the SPR should be used to moderate oil price fluctuations argue that OPEC has
manipulated production to artificially increase the price of oil. They suggest that higher oil
prices may result in higher inflation rates and higher production costs in oil-consuming
nations. Advocates of the use of the SPR also note that the supply shocks of the 1970s
resulted in a state of "stagflation" in which increased inflation occurred while output
declined. Paul Krugman and others have noted that cartels such as OPEC tend to have difficulty
in maintaining supply restrictions for long periods of
time (since each participant has an incentive to cheat on the agreement). They suggest that
the release of oil from the SPR can offset the temporary control that OPEC has been able to achieve
over world oil prices.
Economists opposed to the use of the SPR to moderate fluctuations in oil prices argue that interference
with market prices distorts incentives. They note that higher energy prices provide increased
incentives to conserve energy and to discover and tap new sources of energy. It is also noted
that the economic situation today is quite unlike that of the 1970s. Inflation remains relatively
low and economic growth does not appear to be threatened by higher energy costs. Opponents of the
use of the SPR argue that even though the price of oil has increased, the real cost of energy is
substantially lower today than it was in the 1970s. Conservation measures and technological
change have also resulted in a reduction in energy costs as a share of total production costs.
Thus, it is suggested that the SPR should be saved for a more serious emergency that threatens
There is also a question concerning how OPEC might respond to the use of the SPR. If OPEC responds
to releases of oil from the SPR by reducing oil production, then the release of oil will have no
effect on oil prices. If, on the other hand, the increase in the supply of oil to world markets
threatens to lower oil prices, OPEC members have an incentive to increase current supply in response
to lower expected future prices.
Primary Resources and Data
- U.S. Department of Energy
The U.S. Department of Energy website contains information about energy markets, energy conservation,
federal strategic energy plans, and an extensive collection of data and statistics concerning energy
consumption, production, and prices.
- U.S. Department of Energy, "Strategic Petroleum Reserve"
This website provides a history of the Strategic Petroleum Reserve. It also provides
energy statistics and information about the individual storage sites used for the reserve program.
- U.S. Department of Energy, "The Energy Policy and Conservation Act: Statutory Provisions for an SPR Drawdown"
This page, provided by the U.S. Department of Energy, contains the text of the sections of
The Energy Policy and Conservation Act that state the legal requirements for the withdrawal of
oil from the Strategic Petroleum Reserve.
- U.S. Department of Energy, "Fossil Energy"
The Fossil Energy website provided by the U.S. Department of Energy contains information on the
release of oil from the SPR, as well as other information related to fossil fuel energy
- Energy Information Administration, "International Energy Prices"
The Energy Information Administration provides recent weekly, monthly and/or annual data on
a variety of energy prices at this website.
- United States Geological Survey, "Energy Research and News"
The Energy Resources Program of the United States Geological Survey conducts research concerning
underground oil and natural gas supplies. This website contains information about their research
programs, online versions of their publications, and other information concerning energy resources.
- Federal Energy Regulatory Commission
The Federal Energy Regulatory Commission regulates interstate commerce in natural gas and
electricity. It also oversees the enforcement of environmental regulations related to energy
production and distribution. This website contains information about its history and operations.
- Organization of the Petroleum Exporting Countries
The OPEC web page contains general information about OPEC, an extensive collection of
speeches and press releases, and a FAQ dealing with oil prices and OPEC policy.
- INO.COM, "New York Mercantile Exchange"
This page provides information on a variety of energy prices determined at the New York
Mercantile Exchange (NYMEX). Current market prices are displayed for electricity, heating oil,
natural gas, light sweet crude oil, unleaded gasoline, and propane.
- Paul Leiby, Donald W. Jones, T. Randall Curlee, and Russell Lee, "Oil Imports: An Assessment of Benefits and Costs"
In this November 1, 1997 Oak Ridge National Laboratory paper, Leiby,
Jones, Curlee, and Lee note that oil imports have been steadily rising
in the U.S. They examine the costs of these imports in this study. In
particular, they focus on the influence of OPEC, the impact of oil supply
disruptions and price spikes, and environmental damage resulting from
oil imports. Their results suggest that the marginal cost of these factors
amount of an amount between $0 and $10 per barrel of oil above the market
price of oil. (Caution: portions of this paper are relatively technical.
Most of the paper, though, can be read by a student with only a knowledge
of introductory economics.) The Adobe Acrobat viewer plugin is required
to view this document. You may download this viewer by clicking here.
Different Perspectives in the Debate
- Paul Krugman, "A Drop in the Barrel?"
Paul Krugman argues, in this September 9, 2000 New York Times article, that it is
appropriate to use the Strategic Petroleum Reserve to stabilize oil prices. He notes
that the oil shortage beginning in the winter of 1999-2000 is a short-term phenomenon that
has allowed OPEC to regain greater control over oil prices. Krugman argues that strategic
oil reserves in the U.S. and other countries should be used to stabilize prices and to limit
OPEC's impact on world oil prices. He suggests, though, that the long-run policy should be
to encourage production and reduce consumption so that such a problem does not recur.
- Paul N. Leiby and David Bowman, "The Value of Expanding the U.S. Strategic
Petroleum Reserve" http://pzl1.ed.ornl.gov/ORNL_SPRSizeStudy11302000.pdf
Paul N. Leiby and David Bowman discuss the costs and benefits of expanding
the size of the U.S. Strategic Petroleum Reserve in this January 23,
2000 Oak Ridge National Lab working paper. They use simulation analysis
to examine the possible effects of supply disruptions. Leiby and Bowman
conclude that net benefit would increase if the level of reserves were
to increase by at least 120 million barrels. (The Adobe Acrobat viewer
plugin is required to view this document. You may download this viewer
by clicking here.)
- Paul N. Leiby and David Bowman, "The Value of Expanded Drawdown Capability"
In this October 18, 2000 Oak Ridge National Laboratory study, Paul N.
Leiby and David Bowman examine the costs and benefits associated with
an expansion in the drawdown capability of the U.S. Strategic Petroleum
Reserve. They find that an expansion in the size of the reserve and
in drawdown capacity would be beneficial. (The Adobe Acrobat viewer
plugin is required to view this document. You may download this viewer
by clicking here.)
- Lorraine Woellert, "Hands Off the Strategic Petroleum Reserve"
Lorraine Woellert argues against the use of the SPR to lower oil prices in this March 6, 2000
Business Week Online article. She notes that world oil consumption is about 77 million
barrels per day. The U.S. uses about 20 million barrels per day. In light of this, the entire
SPR only contains enough oil for less than a month of U.S. consumption. Woellert argues that this
should be saved for a real emergency and not used to deal with a short-run problem.
- Alan Greenspan, "2/17/2000 Testimony Before the House Committee on Banking and Financial Services"
In this testimony, Alan Greenspan argues that releasing oil from the SPR will have only a negligible
impact on world oil prices unless there is a massive release.
- John Anderson, "The Surge in Oil Prices: The Anatomy of a Non-Crisis"
In this April 2000 Resources for the Future discussion paper,
John Anderson argues that releases of oil from the SPR or rollbacks
in the federal gasoline tax would be expected to do more harm than good.
He argues that releases from the SPR would have only a minor impact
on prices over a prolonged period. Anderson suggests that the SPR should
be held for use only in dire emergencies. (The Adobe Acrobat viewer plugin
is required to view this document. You may download this viewer by clicking
- Robert L. Bradley, Jr. "What Now for U.S. Energy Policy? A Free-Market Perspective"
Robert L. Bradley, Jr. argues for a free-market approach to U.S. energy policy is this January 29,
1991 Cato Institute Policy Analysis. He argues that the problems associated with the oil
price shocks of the 1970s were, in large part, the result of price ceilings on gasoline.
He argues that high prices stimulate increases in production and exploration and encourage
conservation. Bradley believes that the SPR should be privatized, even if this means that it would
be liquidated. He suggests that the government should reduce taxes and regulations that reduce
incentives in the production and distribution of oil and natural gas.
- American Petroleum Institute
The American Petroleum Institute argues that government regulations are the primary cause of
supply restrictions and higher energy prices. They note that there are large supplies of oil
under government owned land and in offshore locations that cannot be exploited due to
environmental regulations. They suggest that
a reduction in government regulation would lessen U.S. dependence on foreign oil supplies.
- D. Mark Wilson and Angela Antonelli, "Overtaxed at the Pump: What's Behind High Gas Prices"
D. Mark Wilson and Angela Antonelli examine the causes of higher gas prices in this July 19, 2000
Heritage Foundation Backgrounder article. They argue that the price of gasoline increased
as a result of higher demand and a reduction in production. Wilson and Antonelli argue that the
federal government has not undertaken any policies that will alleviate this problem and instead have
made the problem worse through environmental mandates. They also suggest that federal and state
taxes on gasoline should be reduced to reduce the impact of higher gas prices on low-income households.
(Their argument ignores the effect of lower gas prices on gasoline consumption.) Wilson and Antonelli
argue that the patchwork of different state taxes on gasoline results in substantial variation in gas
prices across state borders. They also suggest that different mandated reformulations of gasoline
substantially raise refining and distribution costs.
- James Phillips, "Declining U.S. Credibility and Rising Oil Prices"
In this March 17, 2000 Heritage Foundation Executive Memorandum,
Jack Phillip argues against the use of the SPR to smooth out oil price
fluctuations. He indicates that the SPR is designed to be used only
for a crisis situation and its use for other purposes would leave the
U.S. vulnerable to a serious energy crisis if foreign supplies are cut
off. Phillips encourages more extensive exploration and exploitation
of domestic oil reserves.
- Alan Reynolds, "Oil Reserves and Politics"
In this April 8, 2004 Cato Institute article, Alan Reynolds argues in support of selling
some of the oil in the Strategic Petroleum Reserve. He suggests that even the threat of such a release
would be likely to result in a significant reduction in world oil prices.
- Timothy Considine and Kevin M. Dowd, "A Superfluous Petroleum Reserve"
In this article, appearing in the Summer 2005 issue of Regulation, Timothy Considine
and Kevin M. Dowd argue that there is no need to maintain the Strategic Petroleum Reserve. They argue,
though, that the buildup of the oil reserve had no significant effect on oil prices during
the period from 2001 to 2004. Considine and Dowd argue that the allocation of oil across time and
space would be done more efficiently by the market in the absence of government intervention.
(The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking
- Jerry Taylor and Peter Van Doren, "Strategic Petroleum Reserve Inflating Oil Prices"
Jerry Taylor and Peter Van Doren, in this January 1, 2005 article, argue that buying oil to fill the Strategic Petroleum
Reserve drives up the price of oil, resulting in higher U.S. energy costs. They suggest that the government
should not be involved in the business of maintaining inventories of commodities because this
encourages the government to engage in inefficient intervention in the oil market. Taylor and Van Doren advocate selling off
the oil reserve and allowing the oil market to function without government intervention.