The Strategic Petroleum Reserve

 The Strategic Petroleum Reserve is a federally controlled oil stockpile, that was created in 1975 as a result of the 1973-1974 oil embargoes. Its purpose is to reduce U.S. vulnerability to any interruptions to the oil supply, regardless of whether they are initiated by one of its supplying OPEC nations or a natural disaster (e.g. Hurricane Katrina).

Procedural Framework for Releasing Oil

The Strategic Petroleum Reserve was originally maintained at 700 million barrels of oil. The Energy Policy and Conservation Act (EPCA) provides the framework for determining when oil can be released:

• Full Draw-down: Ordered by the President of the U.S., these draw-downs occur when it is determined that a possible shortage of oil could jeopardize safety or the U.S. economy.
• Limited Draw-down: As the name implies, this releases a specified amount of oil as a preemptive measure to avoid a lack of oil-related emergency.
• Non-emergency Sales / Test Sales: These are small releases of oil, done either to raise revenues or to develop proficiency in emptying and refilling the reserve.
• Exchanges: These are trades aimed at replacing current reserves with higher quality oil or to aid petroleum companies that are experiencing temporary challenges with delivery.

Economics of the Strategic Petroleum Reserve

Guidelines and procedures were adopted in 2008 directing the U.S. Department of Energy (DOE) to continuously and comprehensively evaluate the oil market to ensure that oil is bought and sold at fair prices, using one of three methods:

• Bought outright from other countries.
• Royalty-in-Kind where the federal government receives oil from the oil companies in exchange for providing the oil companies with land, normally leased, on the U.S. outer continental shelf.
• Oil Deferrals, agreements by the DOE in response to market disruptions, that delay the transport of oil and allow the reserve to purchase oil later at a lower price.

Oil Storage in Salt Caverns

Though the reserve was originally designed to hold 727 million barrels of crude oil, decisions as recently as 2007 have been made to increase that amount to 1.5 billion barrels. This leads right into a discussion of storage.

• The DOE has purchased 62 large salt caverns along the coast of Louisiana and Texas since 1977 for the expressed purpose of storing crude oil, and since the directive to double the amount strorage, has expanded the storage sites in Louisiana and Texas, and started to construct a similar reserve in Mississippi (sheduled for completion by 2020).
• These salt caverns are created by drilling wells into large salt domes and applying freshwater to dissolve the salts. As the dissolved salts are transported via pipelines offshore or into disposal wells, caverns are created that can hold, based on size, between 6 and 35 million barrels of oil. A typical cavern measures 200 feet wide by 2,000 feet high and can hold 10 million barrels of oil.
• The salt caverns have specific characteristics that lend themselves to this application; namely, being 2,000 to 4,000 feet underground, the pressure prevent cracks and subsequent leaking and the natural temperature differences between the top and bottom of the caverns support continued circulation – allows the oil to maintain its quality.
• Oil retrieval occurs by pumping water into the bottom of the cavern. The oil naturally floats on water and simply rises to the surface as the water level is increased.

At its current capacity of 727 million barrels of oil, the strategic petroleum reserve can fuel the U.S. for 35 days, and as this capacity reaches 1 billion barrels, this number will increase to 48 days. As an interesting side note, other nations have their own version of a strategic petroleum reserve; most notably a coalition of 27 countries called the International Energy Agency, where each member “contracts” to maintain reserves of at least 90 days.