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Cato Institute Says Shut Down Strategic Petroleum Reserve

Posted on: Wednesday, 18 January 2006, 03:03 CST

By Haines, Leslie

Has filling the nation's Strategic Petroleum Reserve (SPR) to 700 million barrels of oil been worth it? Will it protect taxpayers (consumers) as it was intended, if there is an oil-supply disruption?

The Cato Institute says no on both counts, and recommends in a November report that the SPR not be increased in size. In fact the Washington think tank says the federal government should cut its losses, sell the oil in the SPR and shut the program down.

"The United States has had quite a bit of experience with the SPR by now and the experience is clear - the program costs more than the benefits it provides," say the authors, Jerry Taylor and Peter Van Doren.

A conservative estimate finds that the U.S. has spent at least $41.2 billion (in 2004 dollars) or at least $64.64 per barrel, to fill the reserve during the past 30 years. The premium associated with this form of "insurance" has thus been high relative to market prices in the period. "The cost of maintaining the SPR exceeds oil prices that we observe even during [market] shocks."

The recently enacted Energy Policy Act of 2005 calls for the SPR to be expanded by another 300 million barrels to hold 1 billion barrels. The Cato Institute says the SPR is unlikely to pay off in the future and says policy-makers should resist plans to increase its size.

Congress created the SPR in 1975 in response to the 1973 Arab oil embargo that devastated the U.S. economy. It is the largest government-owned and -operated crude-oil stockpile in the world. Its drawdown capacity is about 4.3 million barrels a day, slightly larger than the daily production of Iran.

The SPR has been tapped three times: in January 1991 during the Gulf War between the U.S. and Iraq (and some five months after the world lost oil production from Kuwait and Iraq); September 2000, when President Clinton "loaned" 30 million barrels to the market to dampen price volatility; and in response to Hurricane Katrina in September 2005, when 11 million barrels were sold and 12.6 million barrels were loaned to traders and refineries.

"None of the three releases were particularly large and it's unclear what effect, if any, they had on oil prices," the Cato Institute says.

The report indicates the combined public crude oil reserves of the U.S., Western Europe and Japan equal about 20 days of world consumption.

-Leslie Haines

Copyright Hart Energy Publishing, LP Jan 2006

Source: Oil & Gas Investor

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