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Strategic Petroleum Reserve: Options to Improve the Cost-Effectiveness of Filling the Reserve

Congressional Testimony

The Strategic Petroleum Reserve (SPR) was created in 1975 to help insulate the U.S. economy from oil supply disruptions and currently holds about 700 million barrels of crude oil. The Energy Policy Act of 2005 directed the Dept. of Energy (DoE) to increase the SPR storage capacity from 727 million barrels to 1 billion barrels, which it plans to accomplish by 2018. Since 1999, oil for the SPR has generally been obtained through the royalty-in-kind program, whereby the gov¿t. receives oil instead of cash for payment of royalties on leases of fed. property. This testimony focuses on: (1) factor that DoE should consider when filling the SPR; and (2) the cost-effectiveness of using oil received through the royalty-in-kind program to fill the SPR.

Importantly, the royalty-in-kind effort to fill the SPR creates, essentially, a “blind
spot” where neither DOE nor Interior, the two agencies responsible for running
the joint program, systematically examines whether exchanges of millions of
barrels of royalty oil have been a cost-effective approach to filling the reserve.
DOE does conduct a prospective analysis to estimate whether the value of the oil
it will receive in the exchanges will be at least as valuable as the royalty oil it will
exchange.