Experts Suggested Several Points to Consider When Making Decisions about SPR Use

Despite the lack of clear consensus regarding previous decisions to use the  SPR, experts in our group suggested several points that policymakers  should consider when deciding whether to use the SPR: (1) that recent  increases in the size of the SPR should result in a greater willingness to use  it during a disruption, (2) that more extensive experience with the SPR  during oil supply disruptions may enable better understanding of the  features of each disruption that determine whether SPR use is warranted,  and (3) that using the SPR without delay when it is needed will minimize  economic damage. Additionally, several factors beyond the SPR’s ability to  replace oil could decrease or increase the economic benefit of the reserve,  such as the compatibility of SPR oil with some U.S. refineries. The difference between the estimates with and without reserve use is the  avoided damage to GDP resulting from use of the reserve. Other Factors, in Addition to the SPR’s Ability to Replace Oil, May Affect the Extent to Which the SPR Can Protect the U.S. Economy from Damage

The purpose of the SPR is to protect the economy from harm during oil  supply disruptions by replacing the disrupted oil. Releasing Oil from the SPR Is Less Helpful If U.S. Crude oil must be processed in refineries to be useful. A Larger SPR Is Warranted If Demand for Oil Grows as Expected

If demand for oil in the United States increases as expected, a larger SPR  will be necessary to maintain the economy’s present level of protection  from oil supply disruptions. In  addition, a recent study prepared for DOE shows that the benefits of  expanding the SPR to as much as 1.5 billion barrels would exceed the costs  over a range of future conditions, although expanding the reserve to this  size would take approximately 18 years. However, factors influencing the  SPR’s ideal size are likely to change over time, including factors such as oil  demand and the likelihood of oil supply disruptions. The SPR contained  enough crude oil in 2005 to offset about 58 days of imports. Predicting future demand is difficult because it depends on many factors,  including the rates of economic growth, the price of oil, policy choices, and  technology changes. Therefore, as time passes  and oil markets change, periodic reassessments by DOE of the appropriate  size of the SPR could be helpful as part of the nation’s long-term energy  security planning. Our work shows that the SPR,  particularly in conjunction with reserves held by the other countries of the  International Energy Agency, can replace the oil lost during all but the most  catastrophic disruption scenarios and, thus, can reduce the negative  consequences of oil supply disruptions on the U.S. economy. Specifically, the Secretary should:  Study how to best implement experts’ suggestions to fill the SPR more   acquiring a steady dollar value of oil for the SPR over the long term,  rather than a steady volume, to ensure a greater volume of fill when  prices are low and a lesser volume of fill when prices are high and   providing industry with more flexibility in the royalty-in-kind  program to delay oil delivery to the SPR during times when supply  and demand are in tight balance and current prices are higher than  expected future prices. Scope and Methodology

We addressed the following questions during our review: (1) Based on past  experience, what factors do experts recommend be considered when filling  and using the Strategic Petroleum Reserve (SPR)? (2) To what extent can  the SPR protect the U.S. economy from damage during oil supply  disruptions? (3) Under what circumstances would an SPR larger than its  current size be warranted? Modeling of Economic Impacts

We used two DOE models to estimate the economic effects of our six  disruption scenarios. Their cost-benefit approach uses a simple model of the oil market and the  U.S. economy to (1) assess the potential causes and likelihood that oil  supply disruptions will occur, (2) account for the size of existing strategic  oil stocks and expected degree of international cooperation on their use,  (3) estimate the cost to the U.S. economy of oil supply disruptions and the  incremental ability of additional SPR stocks and drawdown capability to  reduce these costs, (4) estimate the costs of buying and storing oil in the  SPR, and (5) determine the net benefit and efficient size of the SPR.
Why GAO Did This Study

Congress authorized the Strategic Petroleum Reserve (SPR), operated by the Department of Energy (DOE), to release oil to the market during supply disruptions and protect the U.S. economy from damage. The reserve can store up to 727 million barrels of crude oil, and currently contains enough oil to offset 59 days of U.S. oil imports. GAO answered the following questions: (1) What factors do experts recommend be considered when filling and using the SPR? (2) To what extent can the SPR protect the U.S. economy from damage during oil supply disruptions? (3) Under what circumstances would an SPR larger than its current size be warranted? As part of this study, GAO developed oil supply disruption scenarios, used models to estimate potential economic harm, and convened 13 experts in conjunction with the National Academy of Sciences.

What GAO Found

The group of experts recommended a number of factors to be considered when filling and using the SPR. They generally agreed that filling the reserve by acquiring a steady dollar value of oil over time, rather than a steady volume of oil over time as has occurred in recent years, would ensure that more oil will be acquired when prices are low and less when prices are high. Experts also suggested allowing oil producers to defer delivery of oil to the reserve at times when supply and demand are in tight balance, with oil producers providing additional oil to the SPR to pay for the delay. Regarding use of the SPR, experts described several factors to consider when making future use decisions, including using the reserve without delay when it is needed to minimize economic damage. During oil supply disruptions, releasing oil from the SPR could greatly reduce damage to the U.S. economy, based on our analyses and expert opinions. Particularly when used in conjunction with reserves in other countries, the SPR can replace the oil lost in all but the most catastrophic oil disruption scenarios we considered, lasting from 3 months to 2 years. DOE uses one model to estimate the optimal size of the SPR and another to estimate the economic effects of oil supply disruptions. Both models predict positive effects from using the SPR, but the magnitude of such benefits differ. The substantial differences between the results of these two models could lead DOE to provide inconsistent advice about expanding and using the reserve. Furthermore, factors beyond the SPR's ability to replace oil affect the extent to which the SPR can protect the U.S. economy from damage. For example, SPR crude is not compatible with all U.S. refineries. During a disruption of heavy sour crude oil, refineries configured to use this type of oil would have to reduce production of some petroleum products when refining the lighter oil in the SPR, decreasing the reserve's effectiveness at preventing economic damage. If demand for oil increases as expected, a larger SPR would be necessary to maintain the existing level of protection for the U.S. economy. The Energy Information Administration recently projected increases in U.S. demand for petroleum of approximately 12 percent by 2015 and 24 percent by 2025, compared with the 2005 level. In this regard, a 2005 study prepared for DOE found that the benefits of expanding the reserve to 1.5 billion barrels exceed the costs over a range of future conditions. However, many factors that influence the SPR's ideal size are likely to change over time. For example, although projections show increasing oil demand, the level of demand depends on many factors, including rates of economic growth, the price of oil, policy choices related to alternatives to oil, and technology changes. Consequently, periodic reassessments of the SPR's size in light of new information could be helpful as part of the nation's energy security planning.