The Strategic Petroleum Reserve: Possible Effects on Gasoline Prices of Selected Fill Policies

Publication Date: September 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

The Strategic Petroleum Reserve (SPR), authorized by the Energy Policy and Conservation Act (P.L. 94-163), was originally intended to provide a domestic stock of crude oil to be used in emergency situations when the supply of crude oil to the United States is disrupted. In November 2001, President Bush ordered that the SPR be filled to its current capacity with royalty-in-kind (RIK) oil, the government's share of oil produced from federal leases. In the face of high prices for crude oil and gasoline, the policy has been challenged as a contributing cause of higher prices. Some policymakers have been urging suspension of RIK deliveries to the reserve, arguing that it would help to lower the cost of gasoline. RIK deliveries are currently scheduled through April 2005, notwithstanding loans of some crude to refiners adversely affected by Hurricane Ivan in September 2004.

This report examines the factors that are currently influencing crude oil and gasoline prices, and reviews the extent to which prices might be correlated with SPR fill policy. If RIK oil were released to the market, gasoline prices might be affected. Since crude oil is a raw material in the production of gasoline, a reduction in the price of oil might pass through to the price of gasoline. To the extent that the capacity to refine additional barrels of crude directed to the market exists, and the diverted RIK oil is not offset by reduced crude oil imports, consumers might benefit. However, the amount of RIK oil, relative to the total market when it is operating normally, is small, and when coupled with other market dynamics, the effect of changes in SPR fill policy on crude and product prices could be only minimal. In instances where there is an actual interruption in deliveries -- as experienced by some refineries in the Gulf Coast in the wake of Hurricane Ivan -- the effect of SPR use may be different.

Conditions in the gasoline market, including strong demand, high refinery capacity utilization rates, fragmented regional gasoline specifications, and scarce, high-cost imports, as well as the need to build inventories, point to the continuation of high gasoline prices even if oil prices decline somewhat. Although the price of oil influences, and is a component of, the price of gasoline, a complex interaction of many factors determines price.

A drawdown of the SPR -- in addition to a deferral of RIK fill -- is a further policy option, but is not analyzed in depth here. Benefits might vary, depending upon the ability of refineries to absorb additional crude, and the amount of additional crude made available. However, if one considers that refining capacity is already strained and unlikely to benefit from extra crude supply, any softening in oil prices from a drawdown would be unlikely to be passed along in full to consumers. This report will be updated as events warrant.