5 Misunderstandings About the Strategic Oil Reserve

Mon Mar 14, 2011 9:30am EDT

The national average gas price rose this week for the 14th consecutive day, climbing above $3.50 per gallon for the first time since 2008. The hike comes in response to a jump in crude oil futures, which have traded above $100 for weeks on supply interruptions and fears that political unrest in the Middle East and Africa could intensify and eventually spread to some of the region's top oil producers.

Following the script of other recent spikes, this latest rise in gas prices has precipitated a series of calls from both Democrats and Republicans to use a portion of the Strategic Petroleum Reserve. But for all of the rhetoric about releasing or expanding the reserve, not many people seem to know all that much about it or its purpose.

With that in mind, HybridCars.com takes a look at five common misunderstandings about Strategic Petroleum Reserve, and its power to protect us from a shortage of modern civilization's most vital energy source.

1 It Was Designed to Protect Only Against Large Supply Disruptions. Not High Oil Prices

The SPR has never been a panacea for relieving the pain caused by high oil prices to businesses and consumers. In reality, the government's ability to use it to stem the economic consequences of sustained or even short-term supply shortages is limited.

"The SPR exists to deal with large international supply disruptions," said White House chief economist Austin Goolsbee this week. "The SPR exists to deal with large international supply disruptions. That is why we created it." The Energy Policy and Conservation Act in 1975, which established the SPR, describes the criteria as "a severe energy supply interruption." That's currently not happening.

2 It Can Replace Less Than 40 Percent of Daily Oil Use (And Not For Long)

Though the SPR technically boasts 165 days worth of oil, that timeline doesn't tell the whole story. With more than 720 million barrels of oil on hand, the supply actually represents less than two months of average American consumption. Even if the federal government wanted to release enough oil to meet the country's daily 12 million barrel per day fix, it couldn't, since the daily withdrawal capacity of the reserve is capped at about 4.4 million barrels.

3 It Can't Reverse Long-Term Market Trends

Oil is traded on a series of international markets that respond to every significant change in supply or demand for the resource, allowing it to move wherever demand is greatest and prices are highest. These markets may be fickle, but they're not stupid. Releasing a steady trickle of petroleum won't trick anyone into thinking that there's actually more oil in the world, and the markets will adjust to price-in a time when that spigot is finally cut.

But even in the short-run, trying to influence oil prices with the SPR is a dangerous game. "[It] will send a message we are scared, and it could mean an increase in prices, not a decrease," said Christophe de Margerie, CEO of Total, a major French oil company recently. "It's to be left for a time when we are really confronted with a shortage of oil, which is not the case."

4 It's Not a Very Good Way to Subsidize Consumer Energy Spending

Theoretically, if a major U.S. supplier were to suddenly lose all access to its petroleum fields, much of that fuel would eventually be replaced by more expensive oil purchased from other producers. In order to attract new producers though, Americans would be forced to pay more, and in so doing drive up prices for all of the other markets competing for that oil.

For this reason, the overall size and power of the U.S. reserves must be viewed both through the lens of domestic supply needs and those of the international market. As a portion of the world's total daily oil use, the SPR is not all that significant.

5 It Doesn't Protect Against Disruptions to Refining Capacity

A barrel of crude may be worth more than $100 on the international market, but as a means of fueling your car it's only as useful as the tools you have to refine it into gasoline.

This reality took center stage in the period following Hurricane Katrina, when the U.S. lost a significant portion of its domestic refining capability located in the Gulf region. Though the government soon acted to release a portion of the reserve to counteract the effect of the storm on domestic oil production, the amount of gasoline available to consumers in the region still suffered because there was simply nowhere to refine the oil.

Though not relevant to the current oil price spikes, this point underscores the fact that SPR isn't a fail-safe. The security it offers Americans against another oil crisis is at best temporary, and only applicable in the face of certain threats.

A Modern 'Duck and Cover?'

A deeper look into the Strategic Petroleum Reserve's purpose and capabilities reveals its potential to prevent the possibly catastrophic effects of a serious oil shortage is limited. So why does Washington spend billions each year maintaining and filling it? Aside from its real and potentially quite useful application as a limited buffer against supply disruptions, the reserve is a security blanket of sorts for the broader economy-keeping consumers and investors from panicking in response to small, temporary spikes.

"My sense is that the Strategic Petroleum Reserve is more important as a psychological aid (like the stashes of food survivalists keep in case of catastrophe) than as a practical solution to energy security," writes author and energy specialist Lisa Margonelli in her excellent 2007 New York Times piece about the SPR. "In many ways, it is a relic of cold-war thinking that lives on even though the very idea of energy security has changed."

Margonelli told HybridCars.com this week that only real protection against a rapid increase in gas prices remains breaking the nation's addiction to oil. "Sure, we can try to put some more supply on the market to see if we can moderate prices. But the other thing we need to do is figure out how to lower demand." She said that Americans are spending more than a billion dollars a day on gasoline. "It's a hemorrhage."

She called for looking beyond knee-jerk reactions to a "comprehensive program" with emergency measures to lower oil demand in the short term, and significantly reducing it in the long term.

Reprinted with permission from HybridCars

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.