The Strategic Petroleum Reserve: An Underappreciated National Security Asset

November 5, 2018 by Rebecca Strauss

By Alex D. Pappas, Staff Contributor

Proposals to reform an emergency storage repository for crude oil known as the Strategic Petroleum Reserve (“SPR”) abound as President Trump and lawmakers react to changing oil market dynamics. As the policy goals and technical utilization of the SPR are evaluated, policymakers could benefit from additional assessment of the costs and benefits of SPR modifications that could imperil an essential national security asset.

Congress originally enacted the Energy Policy and Conservation Act (“EPCA”) to prevent or dampen the effect of “drastic shortages in crude oil supplies and [a] spiraling of petroleum costs.”[1]A core feature of EPCA was the creation of the Strategic Petroleum Reserve (“SPR”), an emergency repository of crude oil, residual fuel oil, and refined petroleum products. The SPR was intended to “insulate the domestic economy from future supply interruptions.”[2]As renewed political attention is paid to the SPR, policymakers may benefit from taking a harder look at the truly underappreciated role that the SPR plays in the maintenance of national security. In doing so, they should retain fidelity to EPCA’s praiseworthy and traditionally bipartisan prioritization of domestic energy security.

Today the prospect of considerable natural and geopolitical instability remains as it did when Congress enacted EPCA in 1975. Foundationally, domestic oil access depends on various narrow global corridors like the Bab-el-Mandeb, the Strait of Hormuz, the Straits of Malacca, the Straits of Gibraltar, and the Suez and Panama Canals which are prime targets for potential disruption.[3]Not to mention, other potential pressures on domestic oil supply abound: the impact of sanctions on Iran, violence and instability in Libya and Nigeria, and leadership uncertainties in Venezuela and Saudi Arabia, among other related possible exigencies.[4]As Fatih Birol, the Executive Director of the International Energy Agency (“IEA”), recently warned: “[w]e should all see the risky situation, the oil markets are entering the red zone.”[5]

An unmitigated supply disruption could have detrimental effects on the economy and on the ability of the United States to effectively exercise international leadership. Even the fear of a supply disruption can substantially increase the price consumers pay at the pump.[6]Empirical evidence also establishes a robust correlation between supply disruptions from geopolitical events and nearly all economic recessions in history.[7]And where the economy declines, the prospect of substantial global conflict increases.[8]The effects on United States leadership and power projection may also be potentially destructive as a stable oil supply allows the United States to maintain its high level of military performance and to effectively rally collective action in response to untold global challenges.[9]Maintaining leadership is also paramount because where United States leadership falters, so too does the resiliency of key aspects of the global commons like increasing democratic consolidation and the maintenance of international norms against violence.[10]

Against this geopolitical backdrop, Congress and the President have increasingly taken actions related to the SPR that may benefit from a more nuanced understanding of the magnitude of the SPR’s contribution to national security. Notably, as a possible means of raising revenue, the Trump Administration proposed selling portions of the SPR.[11]Though far-reaching sales did not come to fruition, the Trump administration recently sold 11 million barrels from the SPR to mitigate the oil price effect of sanctions on Iran.[12]The President has also made oblique references to the prospect of additional SPR releases as a means of influencing the price of oil.[13]Most recently, the United States House of Representatives passed legislation that would affect the SPR’s technical utilization and perhaps its ability to effectuate essential policy goals.[14]This legislation, if enacted, would authorize the Department of Energy (“DOE”) to lease storage facilities to private entities and mandate that DOE conduct a pilot program regarding the potential for such private sector leases. These actions and proposals may benefit from being weighed against several foundational considerations which have guided the federal government’s approach to energy security since the enactment of EPCA.

First, economic goals are likely better realized by the SPR’s robust supply buffer effect than by short-term budgetary improvements.[15]This reality is most astutely explained by a Government Accountability Office (“GAO”) analysis which found that releasing oil during a supply disruption could substantially mitigate resulting economic damage.[16]In fact, according to the GAO, many supply disruptions, including those resulting from both natural and geopolitical incidents, could be fully dampened or at least largely mitigated.[17]In fact, the SPR is the “one and only insurance policy against global supply disruption” resulting from natural and geopolitical risks like Hurricane Katrina and Operation Desert Storm alike.[18]Achieving incremental fiscal benefit is laudable, but its normative merit may benefit from evaluation relative to the potentially greater economic harm that may befall the United States in the event of a supply disruption.

Second, state governments, the private sector, and other nations cannot fill in absent a robust federal SPR. State government action alone would likely not survive constitutional challenges due to the supremacy of federal law and the likely corresponding preemption of state and local actions.[19]Relatedly, the private sector alone is likely insufficient to dampen the effects of a supply disruption because it cannot economically justify holding sufficiently large oil reserves due to the magnitude of storage costs, long discount periods, and the comparatively low rates of profitability that would accompany a future sale.[20]Other nations are similarly no cure-all because the SPR has exclusively held grades of crude which other nations have not. For example, in response to the 2011 collapse of Libyan oil production, only United States SPR oil could “keep a lid of prices” because of the light sweet crude it contained.[21]It is also important to note that SPR gains are potentially linear because “the more modest global buffer stocks are, the greater the market’s anxiety over potential disruptions.”[22]While the degree to which external actors can solve the problem may be subject to some uncertainty, a robust federal SPR is likely better than either a hobbled or nonexistent SPR.

Third, SPR alterations have the potential to reverberate internationally as other IEA nations have modeled their individual SPR choices on domestic action.[23]Thus, ill-founded domestic choices have the potential to signal and precipitate equally ill-founded international action with substantially multiplied repercussions. Moreover, as the GAO also notes, “when used in conjunction with reserves in other countries, the SPR can replace the oil lost” and can enhance the efficacy of domestic releases.[24]In fact, the United States has a history of releasing oil from the SPR in coordination with IEA countries.[25]Consequently, concerned stakeholders, Congress, and the President, may benefit from evaluating domestic SPR reforms through the lens of potentially reciprocally modelled international actions.

Fourth, the importance of the SPR has historically been bipartisan and the current political climate does not have to inevitably alter that. For example, it is noteworthy that in 2012 Senate Majority Leader Mitch McConnell (R-KY) and six other Republicans sent a letter to then-President Obama cautioning against “deploying this vital strategic asset unless and until a severe oil supply disruption occurs.”[26]Relatedly, influential Senator Lisa Murkowski (R-AK) echoed these sentiments: “[r]ising gas prices are painful for all of us, but the SPR is our nation’s insurance policy against serious oil supply disruptions, not a political lever to be pulled when rising prices at the pump make life uncomfortable for the White House.”[27]Cautionary statements about the SPR were likely wise in 2012 and they may remain so today no matter the occupant of the White House or the outcome of the November elections.

Fifth, perception can become reality and decisionmakers should consider that any proposed change can negatively influence the perceived ability of the President to quickly release oil from the SPR which is essential to “prevent oil prices from skyrocketing” in a manner “capable of sending the economy into a tailspin.”[28]Simply put, any policy change, cannot sacrifice the ability of the United States to back up its words with action in a way that can meaningfully reassure international markets and stave off corresponding economic misfortune.[29]While greater domestic oil production may minimize somewhat the need for the SPR, global oil markets are still interconnected and the United States will benefit from even incrementally lessening the degree to which it is subject to the whims of unstable or otherwise hostile actors.[30]

In sum, policymakers could benefit from considering these five factors before they wholly reform or even just tinker with the SPR. Before the United States cashes in or downgrades its Cadillac oil supply insurance policy, it may be advantaged by additional consideration of the potential effects on one our nation’s most underappreciated national security assets.

[1] S. CONF. REP. No. 94-516, at 202 (1975).

[2]Id.

[3]Commander Bruce L. Peck Jr., The U.S. Strategic Petroleum Reserve: Needed Changes to Counter Today’s Threats to Energy Security, (Mar. 15, 2006) (unpublished MA thesis, U.S. Army War College) (on file with author and available at: http://www.dtic.mil/dtic/tr/fulltext/u2/ a449379.pdf).

[4]Albert Goldson, Geopolitical Risks Could Launch Oil Prices To $130 Per Barrel, Seeking Alpha (Oct. 12, 2018), https://seekingalpha.com/article/4211330-geopolitical-risks-launch-oil-prices-130-per-barrel?page=2.

[5]Javier Blas and Grant Smith, Warnings mount that global growth at risk as oil market enters ‘red zone’, Financial Post (Oct. 12, 2018), https://business.financialpost.com/ commodities/energy/iea-urges-opec-to-open-the-taps-as-oil-market-enters-red-zone.

[6]Ayenat Mersie,Oil rises on supply disruptions, large U.S. crude stock drawdown, Reuters, (July 9, 2018), https://www.reuters.com/article/us-global-oil/oil-rises-on-supply-disruptions-large-u-s-crude-stock-drawdown-idUSKBN1K0029.

[7]James D. Hamilton, Historical Oil Shocks(Handbook of Major Events in Economic History, Working Paper No. 16790, Feb. 1, 2011) (“a correlation between these events and subsequent economic downturns should be viewed as causal”).

[8]Dennis M. Foster, Would President Trump go to war to divert attention from problems at home, Washington Post (Oct. 12, 2018), https://www.washingtonpost.com/news/monkey-cage/wp/2016/12/19/yes-trump-might-well-go-to-war-to-divert-attention-from-problems-at-home/?utm_term=.6c4685a41fce; Mathew J. Burrows & Jennifer Harris, Revisiting the Future:

Geopolitical Effects of the Financial Crisis, 32:2The Wash. Q.27, 38 (2009).

[9]Peck, supranote 3.

[10]Lawrence Haas, Should u.s. remove troops from Middle East, N. Africa?, Tucson daily star (February 25, 2013), https://tucson.com/news/opinion/editorial/should-u-s-remove-troops-from-middle-east-n-africa/article_2ae0e65b-5a01-5677-9a6c-ebd2a51a5df3.html; Walter Russell Mead, Energy Revolution 3: The New American Century, The American Interest, (July 18, 2012)https://www.the-american-interest.com/2012/07/18/energy-revolution-3-the-new-american-century/(“Abundant energy will also promote global economic growth, an effect that strengthens and stabilizes the world system. It is easier for countries to cooperate when their economies are doing well. There is less nationalist pressure inside countries driving political leaders to take confrontational stands, and it is easier to negotiate win-win solutions and build functioning international institutions when all parties are relatively optimistic about their prospects.”).

[11]Tom DiChristopher, Trump’s strategic oil reserve sale: Some call it ‘misguided,’ others say it’s about time, cnbc (May 24, 2017), https://www.cnbc.com/2017/05/24/trumps-strategic-oil-reserve-sale-sparks-debate.html.

[12]Timothy Gardner, U.S. sells 11 million barrels of oil from reserve to Exxon, five other firms, reuters (Aug. 31, 2018), https://www.reuters.com/article/us-usa-oil-reserve/u-s-sells-11-million-barrels-of-oil-from-reserve-to-exxon-five-other-firms-idUSKCN1LG2WT.

[13]John Melloy, Trump blasts OPEC, says cartel is keeping oil prices ‘artificially very high’ and that ‘will not be accepted’, CNBC (Apr. 20, 2018), https://www.cnbc.com/2018/04/20/ trump-says-opec-is-keeping-oil-prices-artificially-very-high-and-that-will-not-be-accepted.html.

[14]Dave Kovaleski, House advances four bills from Energy and Commerce Committee, Daily Energy Insider (Sept. 27, 2018), https://dailyenergyinsider.com/news/15054-house-advances-four-bills-from-energy-and-commerce-committee/.

[15]John Kemp, COLUMN-Despite fiscal cliff, U.S. should not sell SPR, Reuters (Oct. 4, 2012), https://in.reuters.com/article/column-kemp-oil-spr/column-despite-fiscal-cliff-u-s-should-not-sell-spr-kemp-idINL6E8L4GWF20121004(“Rather than realise a one-off gain by selling barrels from the reserve, which would make only a tiny dent in the projected budget deficit, Congress and the president should retain the full volume as an important tool for ensuring the United States is not susceptible to coercion”).

[16]U.S. Gov’t Accountability Off., GAO-06-872, Strategic Petroleum Reserve: Available Oil Can Provide Significant Benefits, but Many Factors Should Influence Future Decisions about Fill, Use, and Expansion(2006) https://www.gao.gov/new.items/d06872.pdf(“During oil supply disruptions, releasing oil from the SPR could greatly reduce damage to the U.S. economy”).

[17]Id.

[18]Current policy related to the Strategic Petroleum Reserve: Canceled Hearing Before the U.S. S. Comm. on Energy and Natural Resources, 110thCong. (2008) (prepared draft statement of Katharine Fredriksen, Office of Policy and International Affairs U.S. Department of Energy).

[19]SeeEarle H. O’Donnell & Laurel W. Glassman, Energy Emergencies: Constitutional Constraints on State Efforts to Control Oil Supplies and Prices, 5 Energy L.J. 77, 85 (1984).

[20]Paul N. Leiby & David Bowman, The Value of Expanding the U.S. Strategic Petroleum Reserve,U.S. Oak Ridge National Laboratory (2000) https://www.researchgate.net/ publication/228983792_The_value_of_expanding_the_US_strategic_petroleum_reserve.

[21]Blake Clayton,Lessons Learned From the 2011 Strategic Petroleum Reserve Release, (Council on Foreign Relations, Working Paper, Sept. 2012), https://cfrd8files.cfr.org/sites/ default/files/pdf/2012/09/CFR_WorkingPaper14_Clayton.pdf.

[22]David L. Goldwyn, Making an Energy Boom Work for the U.S., Brookings (Nov. 12, 2012),

http://www.brookings.edu/research/opinions/2012/11/12-energy-us-goldwyn.

[23]Testimony on S. 967, The Strategic Petroleum Reserve Modernization Act of 2009, and S. 283, A Bill to Amend the Energy Policy and Conservation Act to Modify the Conditions for the Release of Products from the Northeast Home Heating Oil Reserve Account Before the U.S. S. Comm. on Energy and Natural Resources, 111th Cong. (2009) (statement of Mr. Didier Houssin, Director, Energy Markets and Security International Energy Agency).

[24]Kemp, supranote 15.

[25]Haas, supranote 10.

[26]GOP irked by talk of SPR release, upi (Oct. 2, 2012), http://www.upi.com/Business_ News/Energy-Resources/2012/10/02/GOP-irked-by-talk-of-SPR-release/UPI-21501349177429/.

[27]Andrew Restuccia & Ben Geman, Overnight: GOP warns against tapping strategic oil reserve, the hill (Feb. 28, 2012), http://thehill.com/blogs/e2-wire/e2-wire/213105-overnight-energy.

[28]Peck, supranote 3.

[29]SeeBlake Clayton, U.S. Strategic Petroleum Reserve needs fixing – fast, cnn (Sept. 21, 2012),

http://globalpublicsquare.blogs.cnn.com/2012/09/21/u-s-strategic-petroleum-reserve-needs-fixing-fast/.

[30]United States Navy Commander Kirk Lippold (Retired), Comment Proposed Denial of Petitions for Rulemaking to Change the RFS Point of Obligation, EPA-HQ-OAR-2016-0544-0143, February 8, 2017, 1k1-8urs-1re4, (“The dynamics of energy supply and markets continue to pose deleterious consequences for U.S. national security by placing the United States at the whims of unstable, hostile, or unfriendly nations.”).