NCPA - National Center for Policy Analysis

Is it Time to Use the Strategic Petroleum Reserve?

March 30, 2011

Rep. Ed Markey has proposed a bill directing the Department of Energy to sell 30 million barrels of crude oil -- about 4 percent of the Strategic Petroleum Reserve's (SPR) stockpile -- over the next six months, say Jerry Taylor and Peter Van Doren, senior fellows at the Cato Institute.

Opponents of an SPR release argue that the reserve should be shut-in until a true supply disruption hits the market.  The argument to hold on to SPR's crude until a much larger supply disruption hits would seem compelling, but there's so much oil in the SPR at present, we don't need to be miserly.

  • Oil economist Timothy Considine examines a scenario in which the world experiences a five million barrel per day loss of non-Saudi crude and responds with an SPR release of 90 million barrels per month for the first three months, 60 million barrels per month for the next two months and 30 million barrels during the sixth month.
  • He concludes that slightly more than two-thirds of the price increase would be avoided.
  • But this scenario would drain only 58 percent of the SPR, so smaller releases here and there do not seriously jeopardize our ability to respond to "the big one."

But does the federal government really need to be in the commodities business?  Most people forget that the SPR was not established in order to stabilize prices during supply disruptions, but in response to the Saudi oil embargo in the fall of 1973 -- an embargo that was blamed for fuel shortages and gas lines.  But subsequent analysis by economists demonstrated that Saudi oil found its way onto the world oil market; albeit indirectly.

Thus the entire narrative about the embargo and the need to protect ourselves against foreign policy blackmail was never true.  Nor is it true today, say Taylor and Van Doren.

Source: Jerry Taylor and Peter Van Doren, "Should We Use the Strategic Petroleum Reserve?" Forbes, March 21, 2011.

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