News Release

November 21, 2005

Media Contact: (202) 789-5200

Snake Oil: Eliminating the Strategic Petroleum Reserve
Oil reserve is too costly and counterproductive

WASHINGTON -- Thirty years ago, the Strategic Petroleum Reserve (SPR) was established to guard against disruptions in the nation's oil supply. However, according to a new study by the Cato Institute, there is little evidence to suggest that the SPR is necessary in protecting the U.S. against oil supply emergencies.

In the Policy Analysis "The Case against the Strategic Petroleum Reserve," Cato senior fellows Jerry Taylor and Peter Van Doren argue that the SPR has become costly and counterproductive, claiming that so far the costs of the reserve have greatly exceeded the benefits of the program and will almost certainly continue to do so in the future.

Taylor and Van Doren's research shows that as of 2004, the price of the SPR is between $42-51 billion, or roughly $64.5-79.6 per barrel of oil. Compared to the annual average world cost of oil, "the cost of the oil stockpiled in the SPR is greater than the highest annual average cost of oil ever encountered in world markets." In other words, the SPR oil is more expensive.

Public managers also have a poor track record when it comes to the deployment of SPR oil, the authors say. The government has proven an incompetent manager of the inventory and is unlikely to improve on past performance.

Oil disruptions, furthermore, have been less frequent, less dramatic, and arguably less important from an economic standpoint than proponents of the SPR once feared. Accordingly, a public insurance policy against such disruptions is less important than many think, particularly since private insurance is readily available to those who want it.

Finally, Taylor and Van Doren point out that the SPR is not large enough -- and cannot ever be large enough -- to hedge effectively against catastrophic disruption scenarios. While smaller and temporary disruptions might arguably be mitigated by the SPR, private market actors can mitigate the impact of those events without government assistance.

Taylor and Van Doren recommend selling all of the oil within the SPR and shutting down the reserve.

Policy Analysis no. 555: http://www.cato.org/pub_display.php?pub_id=5197

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Contact:

Jerry Taylor, senior fellow, jtaylor@cato.org
Peter Van Doren, senior fellow, pvandoren@cato.org
Greg Garner, media relations manager, 202-789-5263, ggarner@cato.org
Evans Pierre, director of broadcasting, 202-789-5204, epierre@cato.org