Working Paper

Turning Rainy Day Oil into Clean Energy Gold: Funding Mission Innovation with a Strengthened Strategic Petroleum Reserve

Apr 15, 2016 | Heather L. Ross

Summary

Creating a public-private agency to run the Strategic Petroleum Reserve will improve its functioning as an emergency buffer and release public value from the little-used reserve to fund the US Mission Innovation commitment to double clean energy R&D.

Key Findings

  • By paying a fee equal to the social cost of carbon, $16.34, on each barrel of US oil produced and imported, oil companies would acquire the 695 million–barrel reserve—priced at its true cost, including the cost of carbon—in just 5 months.
  • The total purchase value realized, $39.2 billion, would cover 79 percent of the $49.5 billion cost of the United States’ five-year Mission Innovation commitment.
  • If fully passed through to consumers, the $16.34 fee per barrel would increase the price of a gallon of gasoline by 36 cents.
  • Of the 29 International Energy Agency (IEA) members, 26 have industry participation in their strategic stockholdings, the majority using some form of agency.

Abstract

Establishing a public-private agency to operate the US Strategic Petroleum Reserve, a common arrangement in other member nations of the International Energy Agency (IEA), can improve the reserve’s performance as an oil shock buffer in a systemically volatile market by strengthening its coordination with other government and commercial stockholdings and transportation infrastructure. Requiring oil companies to purchase and maintain oil in the reserve sufficient, in concert with other stocks, to meet the IEA’s 90-day strategic stockholding standard can protect the reserve from loss of functionality as a result of future federal budget–driven drawdowns or inadequate operating funds. The fee paid on oil production and imports to purchase the oil in the reserve will introduce an essential price corrective in the domestic oil market. Most important, it will release the large store of value locked in the little-used reserve to combat, through essential clean energy R&D, a monumentally bigger energy threat—climate change.