Strategic Petroleum Reserve:

Available Oil Can Provide Significant Benefits, but Many Factors Should Influence Future Decisions about Fill, Use, and Expansion

GAO-06-872: Published: Aug 24, 2006. Publicly Released: Oct 3, 2006.

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Congress authorized the Strategic Petroleum Reserve (SPR), operated by the Department of Energy (DOE), to release oil to the market during supply disruptions and protect the U.S. economy from damage. The reserve can store up to 727 million barrels of crude oil, and currently contains enough oil to offset 59 days of U.S. oil imports. GAO answered the following questions: (1) What factors do experts recommend be considered when filling and using the SPR? (2) To what extent can the SPR protect the U.S. economy from damage during oil supply disruptions? (3) Under what circumstances would an SPR larger than its current size be warranted? As part of this study, GAO developed oil supply disruption scenarios, used models to estimate potential economic harm, and convened 13 experts in conjunction with the National Academy of Sciences.

The group of experts recommended a number of factors to be considered when filling and using the SPR. They generally agreed that filling the reserve by acquiring a steady dollar value of oil over time, rather than a steady volume of oil over time as has occurred in recent years, would ensure that more oil will be acquired when prices are low and less when prices are high. Experts also suggested allowing oil producers to defer delivery of oil to the reserve at times when supply and demand are in tight balance, with oil producers providing additional oil to the SPR to pay for the delay. Regarding use of the SPR, experts described several factors to consider when making future use decisions, including using the reserve without delay when it is needed to minimize economic damage. During oil supply disruptions, releasing oil from the SPR could greatly reduce damage to the U.S. economy, based on our analyses and expert opinions. Particularly when used in conjunction with reserves in other countries, the SPR can replace the oil lost in all but the most catastrophic oil disruption scenarios we considered, lasting from 3 months to 2 years. DOE uses one model to estimate the optimal size of the SPR and another to estimate the economic effects of oil supply disruptions. Both models predict positive effects from using the SPR, but the magnitude of such benefits differ. The substantial differences between the results of these two models could lead DOE to provide inconsistent advice about expanding and using the reserve. Furthermore, factors beyond the SPR's ability to replace oil affect the extent to which the SPR can protect the U.S. economy from damage. For example, SPR crude is not compatible with all U.S. refineries. During a disruption of heavy sour crude oil, refineries configured to use this type of oil would have to reduce production of some petroleum products when refining the lighter oil in the SPR, decreasing the reserve's effectiveness at preventing economic damage. If demand for oil increases as expected, a larger SPR would be necessary to maintain the existing level of protection for the U.S. economy. The Energy Information Administration recently projected increases in U.S. demand for petroleum of approximately 12 percent by 2015 and 24 percent by 2025, compared with the 2005 level. In this regard, a 2005 study prepared for DOE found that the benefits of expanding the reserve to 1.5 billion barrels exceed the costs over a range of future conditions. However, many factors that influence the SPR's ideal size are likely to change over time. For example, although projections show increasing oil demand, the level of demand depends on many factors, including rates of economic growth, the price of oil, policy choices related to alternatives to oil, and technology changes. Consequently, periodic reassessments of the SPR's size in light of new information could be helpful as part of the nation's energy security planning.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOE offices have examined and compared the methods, models, assumptions and data used to analyze the economic effects of disruptions in global oil markets, as GAO suggested. In this regard, during FYs 2007 and 2008, DOE prepared a written description of the models, held a meeting to review the models [among other things], and developed an analysis of the methodologies. In addition, DOE said that the comparisons of model results and the insight derived from them will be shared with policymakers and it will also clarify to policymakers how the models are used when providing advice about the economic impacts of disruptions. These actions implement our recommendation by the end of 2008.

    Recommendation: The Secretary of Energy, to improve the operation of the current SPR and to improve decisions surrounding the SPR's use and expansion, should clarify the differences in structure and assumptions between the models used by the Office of Petroleum Reserves and the Energy Information Administration and clarify to policymakers how the models are used when providing advice to Congress and the executive branch.

    Agency Affected: Department of Energy

  2. Status: Closed - Implemented

    Comments: DOE noted that it would be prohibitively expensive to alter the current crude mix in the SPR, but said that future acquisitions of crude oil should include heavy crudes to meet the needs of U.S. refineries. In 2007, DOE undertook a follow-up Crude Compatibility Study with regard to the refinery industry. Although the Department was close to publicly issuing the report in 2007, management decided to do a more comprehensive review to take into consideration many of the changes that were occurring in the industry--such as planned refinery expansions--as well as the political consideration of a refined product reserve. In 2008 DOE brought in an industry expert to help with this effort and by 2009 DOE had a technical report looking at the optimal fuel mix for the SPR, among other things. Senior DOE management are being briefed on the results, however, a timeline for the report's public release has not been set. These actions implement our recommendation by 2009.

    Recommendation: The Secretary of Energy, to improve the operation of the current SPR and to improve decisions surrounding the SPR's use and expansion, should conduct a new review about the optimal oil mix in the SPR that would examine the maximum amount of heavy sour oil that should be held in the SPR, in addition to the minimum amount determined in DOE's prior report. The Secretary should ensure that DOE, at a minimum, implements its own recommendation to have at least 10 percent heavy sour oil in the SPR.

    Agency Affected: Department of Energy

  3. Status: Closed - Implemented

    Comments: Approximately 3 months after the issuance of our report, on November 8, 2006, DOE published new oil acquisition procedures, including provisions to consider a wide array of factors when acquiring oil--such as fill rate, prices, and expert opinions. DOE said that it will review these factors prior to new purchases of oil. It will also provide for deferrals of contractually scheduled deliveries--as we suggested--in the event that the market is distorted by a disruption to supply or other factors. These actions implement our recommendation.

    Recommendation: The Secretary of Energy, to improve the operation of the current SPR and to improve decisions surrounding the SPR's use and expansion, should study how to best implement experts' suggestions to fill the SPR more cost-effectively, including acquiring a steady dollar value of oil for the SPR over the long term, rather than a steady volume, to ensure a greater volume of fill when prices are low and a lesser volume of fill when prices are high and proving the industry with more flexibility in the royalty-in-kind program to delay oil delivery to the SPR during times when supply and demand are in tight balance and current prices are higher than expected future prices.

    Agency Affected: Department of Energy

  4. Status: Closed - Implemented

    Comments: The Office of Fossil Energy said that it considers the assessment of the SPR size to be part of its ongoing management responsibilities and that events and related policy developments in the Administration and Department have directed the times when the SPR's size has been reassessed. In 2007, while DOE was planning to expand the SPR to its authorized size of 1 billion barrels, the current Administration has re-evaluated the need for SPR expansion and has decided that the current level of 727 million barrels is adequate. This position takes into consideration the expected decline in oil imports (due to lower economic activity and other things) and the increased contributions from renewable energy. The Office of the SPR also told us that there is generally no overt policy statement that the SPR is being reassessed. Rather, DOE's recent reassessment has taken the form of more "actionable items," such as not requesting expansion-funding in its 2011 budget and canceling and redirecting the prior year expansion funding for the current operation of the SPR instead. These actions implement our recommendation as of 2009.

    Recommendation: The Secretary of Energy, to improve the operation of the current SPR and to improve decisions surrounding the SPR's use and expansion, should periodically reassess the appropriate size of the SPR in light of changing oil supply and demand in the United States and the world.

    Agency Affected: Department of Energy

 

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