	Background

The United States is the largest consumer of crude oil and petroleum  products. Except for the 1998 report, DOE  concluded that including refined petroleum products as part of the SPR  was unnecessary and too expensive. Although this reserve is considered separate from the  SPR, it is authorized to contain 2 million barrels of heating oil and  currently holds nearly that amount. Some of the Arguments For and Against Including Refined Petroleum Products in the SPR

Some of the arguments for including refined petroleum products in the  SPR are: (1) the United States’ increased reliance on foreign imports and  resulting exposure to supply disruptions or unexpected increases in  demand elsewhere in the world, (2) possible reduced refinery capacity  during weather related supply disruptions, (3) time needed for petroleum  product imports to reach all regions of the United States in case of an  emergency, and (4) port capacity bottlenecks in the United States which  limit the amount of petroleum products that can be imported quickly  during emergencies. Some of the arguments against including refined  petroleum products in the SPR are: (1) the surplus of gasoline in Europe,  (2) the high storage costs of refined products, (3) the use of ‘boutique’  fuels in the United States, and (4) policy alternatives may diminish U.S.  reliance on oil. For  example, petroleum product prices still increased dramatically following  Hurricanes Katrina and Rita, in part because many refineries are located in  the Gulf Coast region and power outages shut down pipelines that  refineries depend upon to supply their crude oil and to transport their  refined petroleum products to consumers. Some of the Arguments Against Including Refined Petroleum Products in the SPR

First, a key impetus for global trade in petroleum products has been a  structural surplus in production of gasoline and a deficit in production of  diesel in Europe. According to DOE, stockpiling oil in salt caverns costs about $3.50 per  barrel in capital costs. The Energy Policy Act of 2005, as amended, directs the Secretary  of Energy to establish a program that includes grants to automobile  manufacturers to encourage domestic production of these vehicles. Lessons Learned from the Management of the Existing SPR that May Be Relevant to Refined Petroleum Products

The following three lessons learned from the management of the existing  crude oil SPR highlight some of the issues that may need to be considered  in acquiring refined petroleum products. Select a cost-effective mix of products. To fill the SPR in a more cost- effective manner, we recommended in August 2006 that DOE include in  the SPR at least 10 percent heavy crude oils, which are generally cheaper  to acquire than the lighter oils that comprise the SPR’s volume. For example, if DOE  included 10 percent heavy oil in the SPR as it expands to 1 billion barrels,  that would require DOE to add 100 million barrels of heavy oil, or about  one-third of the total new fill. If this price  difference were to persist over the duration of the new fill period, DOE  would save about $1.2 billion in nominal terms by filling the SPR with 100  million barrels of heavy oil. Similarly, refined petroleum products  included as part of the SPR may comprise a number of different types of  products (e.g., gasoline, diesel, and jet fuel) and possibly different blends  of products (e.g., different grades and mixtures of gasoline); DOE will  need to determine the most cost-effective mix of products in light of  existing legal and regulatory requirements to use specific blends of fuels. Consider using a dollar-cost-averaging acquisition approach. Also in our  August 2006 report, we recommended that DOE consider filling the SPR  by acquiring a steady dollar value of oil over time, rather than a steady  volume as has occurred in recent years. This “dollar-cost-averaging”  approach would allow DOE to take advantage of fluctuations in oil prices  and ensure that more oil would be acquired when prices are low and less  when prices are high. We would  expect a dollar-cost-averaging acquisition method to also provide positive  benefits when acquiring refined petroleum products. Maximize cost-effective storage options. According to DOE, salt  formations offer the lowest cost, most environmentally secure way to  store crude oil for long periods of time. In comparison, storing oil in above-ground  tanks can cost $15 to $18 per barrel. Similarly, for those refined petroleum  products that can be stored below ground, salt formations may offer a  cost-effective storage option.
Why GAO Did This Study

The possibility of storing refined petroleum products as part of the Strategic Petroleum Reserve (SPR) has been contemplated since the SPR was created in 1975. The SPR, which currently holds about 700 million barrels of crude oil, was created to help insulate the U.S. economy from oil supply disruptions. However, the SPR does not contain refined products such as gasoline, diesel fuel, or jet fuel. The Energy Policy Act of 2005 directed the Department of Energy (DOE) to increase the SPR's capacity from 727 million barrels to 1 billion barrels, which it plans to do by 2018. With the possibility of including refined products as part of the expansion of the SPR, this testimony discusses (1) some of the arguments for and against including refined products in the SPR and (2) lessons learned from the management of the existing crude oil SPR that may be applicable to refined products. To address these issues, GAO relied on its 2006 report on the SPR (GAO-06-872), 2007 report on the globalization of petroleum products (GAO-08-14), and two 2008 testimonies on the cost-effectiveness of filling the SPR ( GAO-08-512T and GAO-08-726T). GAO also reviewed prior DOE and International Energy Agency studies on refined product reserves.

What GAO Found

Since the SPR, the largest emergency crude oil reserve in the world, was created in 1975 a number of arguments have been made for and against including refined petroleum products. Some of the arguments for including refined products in the SPR are: (1) the United States' increased reliance on imports and resulting exposure to supply disruptions or unexpected increases in demand elsewhere in the world, (2) possible reduced refinery capacity during weather related supply disruptions, (3) time needed for petroleum product imports to reach all regions of the United States in case of an emergency, and (4) port capacity bottlenecks in the United States, which limit the amount of petroleum products that can be imported quickly during emergencies. For example, the damage caused by Hurricane Katrina demonstrated that the concentration of refineries on the Gulf Coast and resulting damage to pipelines left the United States to rely on imports of refined product from Europe. Consequently, regions experienced a shortage of gasoline and prices rose. Conversely, some of the arguments against including refined products in the SPR are: (1) the surplus of refined products in Europe, (2) the high storage costs of refined products, (3) the use of a variety of different type of blends of refined products--"boutique" fuels--in the United States, and (4) policy alternatives that may diminish reliance on oil. For example, Europe has a surplus of gasoline products because of a shift to diesel engines, which experts say will continue for the foreseeable future. Europe's surplus of gasoline is available to the United States in emergencies and provided deliveries following Hurricanes Katrina and Rita in 2005. The following three lessons learned from the management of the existing SPR may have some applicability in dealing with refined products. (1) Select a cost-effective mix of products. In 2006, GAO recommended that DOE include at least 10 percent heavy crude oil in the SPR. If DOE bought 100 million barrels of heavy crude oil during its expansion of the SPR it could save over $1 billion in nominal terms, assuming a price differential of $12 between the price of light and heavy crude, the average differential from 2003 through 2007. Similarly, if directed to include refined products as part of the SPR, DOE will need to determine the most cost-effective mix of products. (2) Consider using a dollar-cost-averaging acquisition approach. Also in 2006, GAO recommended that DOE consider acquiring a steady dollar value--rather than a steady volume--of oil over time when filling the SPR. This would allow DOE to acquire more oil when prices are low and less when prices are high. GAO expects that a dollar-cost-averaging acquisition method would also provide benefits when acquiring refined products. (3) Maximize cost-effective storage options. According to DOE, below ground salt formations offer the lowest cost approach for storing crude oil for long periods of time--$3.50 per barrel in capital cost versus $15 to $18 per barrel for above ground storage tanks. Similarly, DOE will need to explore the most cost-effective storage options for refined products.