WASHINGTON—The US Strategic Petroleum Reserve (SPR) is considered a key tool for dampening or eliminating price shocks associated with oil supply disruptions. The reserves have been released, along with other countries strategic stocks, on three major occasions: during the 1991 Gulf War, during Hurricane Katrina in 2005, and during the 2011 Arab Spring. The Trump administration has recently proposed selling nearly half—270 million barrels—of the remaining reserve, taking to a new level a recent tendency to use the SPR for budget relief. A new study posted today by Resources for the Future (RFF) considers how much SPR releases can affect crude oil prices and spreads, and how policymakers can incorporate market-based information into release decisions. The study says that policymakers involved in SPR decisions still typically rely on “back-of-the-envelope estimates” and “counting barrels,” which do not incorporate market information about the persistence of supply disruptions or the relationship between private oil inventories and prices.
However, the new study, Informing SPR Policy through Oil Futures and Inventory Dynamics, examines how information based on expected future prices for crude oil derived from market prices can be used to inform whether to draw down or contribute to the SPR.
In it, authors RFF President Richard G. Newell and RFF Fisher Dissertation Fellow Brian C. Prest use a statistical model to estimate the dynamic relationship between oil spot prices, price spreads, and commercial inventories of crude oil. This relationship illustrates the magnitude of the impacts of SPR releases, with implications for whether to release oil in times of supply disruption, and if so, how many barrels.
The estimates suggest that SPR releases—modeled as surprise inventory shocks—can have substantial effects on oil prices and spreads, temporarily reducing spot prices by about 2–3 percent and mitigating backwardation by about 0.8 percentage point for each 1 percent (about 10 million barrels) addition to commercial inventories. Simulations suggest that past releases may have mitigated increases in oil prices on the order of about 15–20 percent and prevented approximately 5 percentage points of spread between future and current prices.
The authors conclude, “These estimates can guide policymakers in determining how many barrels to release from the SPR in times of supply disruption to achieve specified market impacts.”
Read the full paper: Informing SPR Policy through Oil Futures and Inventory Dynamics.