from Greenberg Center for Geoeconomic Studies

Managing a Smaller U.S. Strategic Petroleum Reserve

Downsizing the U.S. Strategic Petroleum Reserve will have economic and foreign policy consequences that have not been fully considered. U.S. foreign policy should prioritize the management of these consequences.

A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland February 24, 2014 Andy Buchanan/Reuters
Report

More on:

Fossil Fuels

Economics

United States

Geopolitics of Energy

Overview

Comprising roughly 700 million barrels of crude oil stored in caverns throughout Texas and Louisiana, the U.S. Strategic Petroleum Reserve (SPR) was established by Congress in the mid-1970s in response to the 1973–74 Arab oil embargo and ensuing oil price shocks. Its purpose was to insulate the United States from crude oil supply disruptions. In the decades since, despite significant changes in global oil markets, the basic logic and design of the SPR have remained largely unchanged.

The Barack Obama administration initiated a broad review in April 2015 intended to optimize the SPR to serve its stated mandate of “prevent[ing] serious economic harm to the United States in case of energy supply emergencies.” The final report to Congress, released in the fall of 2016, analyzed questions of capacity, size, distribution, composition, and location. However, the report did not address a more fundamental question surrounding the SPR: whether the United States should tailor its reserves to the needs of a global market, where supply risks remain high, or simply to U.S. exposure, as U.S. vulnerability to those risks is diminishing.

The SPR effectively protects the global market, not just the United States, from a supply interruption.

With U.S. exposure to a direct interruption in supply reduced, the Donald J. Trump administration has signaled comfort with a smaller reserve—the 2018 White House budget proposes liquidating some 270 million barrels. This proposed downsizing comes on the heels of an earlier decision under President Obama to sell 58 million barrels as part of an October 2015 budget deal.

Yet the economic and foreign policy consequences of a smaller U.S. reserve have not been fully considered. Downsizing the SPR will exacerbate the current global shortfall in reserve cover, potentially leaving global markets more exposed to supply disruptions than what today’s largest oil consumers, including China, can comfortably tolerate. If China were to replace the United States as the main source of buffer stocks, Beijing could gain an important new source of global influence, because the SPR effectively protects the global market, not just the United States, from a supply interruption.

Thus, managing the consequences of a smaller U.S. reserve should be a U.S. foreign policy priority. U.S. policy should aim for a scenario in which all large oil consumers—China, Europe, India, and Japan—step up to restore global reserve cover back within historical baselines. The United States should also use its newfound producer status to usher in new patterns of energy security cooperation between major consumers and traditional producers.

The recommendations include:

  • The United States should induce major consumers to increase their crude stocks, lest reductions in U.S. stocks exacerbate the growing shortfall in global reserves. Any such effort by the U.S. government would have to involve officials from the White House and Departments of Energy, State, and Defense working together.
  • The existing International Energy Agency (IEA) framework should be overhauled to expand its membership ranks and strengthen its reserve management. The effectiveness of global reserves depends on how they are actually used in a crisis and not just on the size of the stockpile.
  • The United States should use its own growing production to seek ways to bring the traditional producers—many of which are struggling with declining production levels and increasing domestic demands for oil—around to new forms of cooperation.