Forty years ago the United States government began stockpiling crude oil, creating the Strategic Petroleum Reserve (SPR). Enacted to counter the OPEC cartel’s attempts to drive up oil prices, the purpose of the SPR was to stockpile oil and release it onto the domestic market to lower domestic oil and gasoline prices should they rise too high. Now the Trump Administration would like to sell some of that oil bring in additional revenue for the government. Is that a good idea?
Calming Effect on Oil Markets
The SPR currently consists of around 700 million barrels of oil held in salt caverns along the Gulf coast of Texas and Louisiana. Proponents of maintaining the SPR believe that it has a calming effect on oil markets. Just knowing that the reserve is there, they say, is enough to keep oil companies from becoming concerned about disruptions to oil supplies.
Of course, the SPR has hardly ever been used as it was intended. Oil was released in response to the First Gulf War, after Hurricane Katrina, and in response to disruptions in the Libyan oil industry in 2011, but those were relatively minor releases to combat short disruptions. A release in response to an oil embargo or dramatically rising oil prices has never occurred.
Has the Strategic Petroleum Reserve Outlived Its Usefulness?
And that’s why many people want to get rid of the SPR entirely. Because there is no rule for when to release oil from the reserve, it is left entirely to the discretion of the President. And if the President is distracted by other issues, then oil prices will continue to rise and the SPR will remain untouched.
Stockpiling oil is also something that can be done by oil refiners. But stockpiling oil means an additional cost to oil companies as that oil just sits there not doing anything. That’s why oil companies would prefer that the government operate the SPR, essentially transferring the insurance against oil supply disruptions from private companies to American taxpayers. To date, the SPR has cost taxpayers almost $26 billion, between providing the storage facilities and purchasing the oil. That is $26 billion of subsidies to oil companies.
Still, maybe right now isn’t the best time to draw down the SPR. With a glut of oil on world markets and oil prices depressed, the government wouldn’t be able to make nearly as much money as it could in the future. Perhaps it might be wise to wait until oil prices recover a bit before winding down the SPR. But that’s a purely pragmatic approach to winding down the SPR. The SPR is just another example of a government program that never quite lived up to its billing. It’s time to get rid of it and let oil companies deal with the responsibility of protecting themselves against supply disruptions.