The Case against the Strategic Petroleum Reserve

Publication Date: November 2005

Publisher: Cato Institute

Author(s): Jerry Taylor; Peter Van Doren

Research Area: Energy

Type: Report

Abstract:

The Strategic Petroleum Reserve has been almost uniformly embraced by politicians and energy economists as one of the best means to protect the nation against oil supply shocks. This study finds little evidence for the proposition that government inventories are necessary to protect the country against supply disruptions. Absent concrete market failures, government intervention in oil markets is unlikely to enhance economic welfare.

A conservative estimate finds that the SPR has cost taxpayers at least $41.2-$50.8 billion (in 2004 dollars), or $64.64-$79.58 per barrel of oil deposited therein. Accordingly, the "premium" associated with the insurance provided by the SPR is quite high relative to market prices for oil, even during 2005.

The SPR has been tapped only three times, and in each of those instances, the releases were too modest and, with the exception of the 2005 release related to Hurricane Katrina, too late to produce significant benefits. Accordingly, the costs associated with the SPR have been larger than the benefits thus far.

The SPR insurance policy is unlikely to pay off in the future either. First, major oil supply shocks are much rarer than many observers believe. Second, the executive branch has been unwilling to use the reserve as quickly and robustly as economists recommend. Third, the benefits from a release are almost certainly overstated.

Policymakers should resist calls to increase the size of the reserve and instead sell the oil within the SPR and terminate the program.