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 03, 2006.
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Highlights

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.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Energy 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.
Closed – Implemented
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.
Department of Energy 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.
Closed – Implemented
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.
Department of Energy 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.
Closed – Implemented
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.
Department of Energy 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.
Closed – Implemented
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.

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