NCPA - National Center for Policy Analysis


February 16, 2006

The Strategic Petroleum Reserve (SPR) has been embraced by politicians and energy economists as one of the best means to protect the nation against oil supply shocks, but studies have found that there is little evidence for the proposition that government inventories are necessary to protect the country against supply disruptions, say Jerry Taylor and Peter Van Doren of the Cato Institute.

SPR -- a federally owned and operated stockpile of 700.1 million barrels of oil in Texas and Louisiana -- has only been used three times since it was created in 1975. In each of those instances, the releases were too modest and, with the exception of the 2005 release related to Hurricane Katrina, too late to produce any significant benefits; in other words, the cost associated with SPR have been larger than the benefits, says Taylor and Van Doren.

According to researchers:

  • A conservative estimate finds that SPR has cost taxpayers at least $41.2-$50.8 billion (in 2004 dollars), or $64.64-$79.58 per barrel of oil deposited.
  • Accordingly, the premium associated with the insurance provided by SPR is quite high relative to market prices for oil, even during 2005.
  • SPR's insurance policy is unlikely to pay off in the future either, since major oil supply shocks are much rarer than many believe, the executive branch has been unwilling to use the reserve as quickly and robustly as economists recommend and the benefits from a release are almost certainly overstated.

Therefore, policymakers should resist calls to increase the size of the reserve and instead sell the oil within SPR and eventually terminate the program, says Taylor and Van Doren.

Source: Jerry Taylor and Peter Van Doren, "The Case against the Strategic Petroleum Reserve," Cato Policy Analysis, November 21, 2005.

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