Since the creation of the SPR in 1975, debate has periodically focused on theoptimal size of the SPR, specifically whether it should be expanded to 700 million or 1 billionbarrels of oil. In the 108th Congress, legislation passed by the House ( H.R. 6 ) wouldrequire the SPR to be filled to its current capacity of 700 million barrels of crude oil and providesfunding of $1.5 billion to expand the capacity of the SPR to 1 billion barrels. Although debate on the size of the SPR is normally framed in terms of millions of barrels of crudeoil held, another measure, consistent with International Energy Agency (IEA) measurement, is thenumber of days of net imports for which the reserve can substitute. The benefit of maintaining the SPR lies in avoiding the effects of severe oil price spikes and shortages that might result from supply disruptions. The capital costof the reserve and/or expansion of the reserve, costs associated with providing for the draw of thereserve, the operations and management cost, and the cost of the oil stored in the reserve are all partof total cost. Role of Private Stocks

The implicit assumption underlying the SPR debate appears to be that the stock of private oilreserves held by the U.S. petroleum industry is known, unchanging, and available to reach the marketduring a supply disruption. In fact, the behavior of private levels of crude oil stocks have not been constant, they have been declining. oil stocks, measured as days of net imports. (7)
Figure 1 shows a decade long decline in the ability of industry stocks, alongwith the SPR, to replace imported oil. (10)
Finally, not only privately held stocks have declined, but the privately held capacity to hold stocks has also declined. It would be consistent with this trend for the petroleum sectorto follow a similar strategy. The IEA data arebased on total stocks of crude oil which ignores the lower operational inventoryconstraint for industry and, therefore, may overstate the ability of combined stocksto actually meet emergency needs. At those timesthere were no additional crude oil reserves in the private sector in a practical sense. Net stocks of privately held crude oil, in many ways the first buffer between an international oil supply disruption and U.S. consumer markets, were reduced to verylow levels during the recent disruptions to the oil markets. Industry holds less stockin 2003 than it did a decade ago, even though U.S. dependence on crude oil importshas risen.
Periodically, since the inception of the Strategic Petroleum Reserve (SPR) in 1975, debate has occurred concerning its optimal size. In the 108th Congress, the House has passed energy legislation( H.R. 6 ) which would require the SPR to be filled to its current capacity ofapproximately 700 million barrels and would authorize funds to further expand the capacity of thereserve to 1 billion barrels.
Analysis of the SPR issue has been carried out in a benefit/cost framework in which benefits, the avoided cost to the national economy of a supply disruption, are set against the real resourcecosts associated with investing in the SPR. The role of the privately held stock of crude oil has beenlargely static in these analyses. The data show, however, that private stock behavior has beenchanging. Industry holds less crude oil, and has less capacity to hold crude oil, than a decade ago.These changes reflect a decade long strategy of reducing operating costs to remain competitive.However, oil markets face greater exposure to supply disruption today because our dependence onimported crude oil has risen substantially since 1992. The effectiveness of the SPR in providingsecurity from crude oil supply disruptions may be primarily a function of its size, but may also bedependent on the underlying stocks of crude oil held by the private sector.
The International Energy Agency (IEA) has studied the behavior of crude oil stocks in the U.S. since 1989. It finds that our total stocks, measured as days of net imports that can be replaced bystock draw-down, have been declining. This trend results from the interaction of increasing importdependency, the essentially constant size of the SPR over the period, and the declining size ofprivately held stocks. The IEA concludes that with no change in any of these factors, the U.S. willno longer be able to replace ninety days of net imports from domestic stocks in 2006.
Because the IEA focuses on total reserves, its analysis may overstate the ability of U.S. stocks to mitigate oil supply disruptions. This is because not all privately held oil stocks can be drawn uponwithout disrupting the functioning of the system itself. Once these lower operational inventory levelsare considered, the thinness of privately held stocks is apparent. As a result, the ability of privatelyheld stocks to provide a buffer to supply disruptions is reduced.
This report will be updated as events warrant.