In the Tank

Making the Most of Strategic Oil Reserves

Courtesy Reuters

Since the Arab oil embargo of the early 1970s, the United States has spent nearly $50 billion (in today's dollars) to build and maintain a huge strategic stockpile of crude oil. Stored in underground salt domes along the coasts of Louisiana and Texas, the U.S. Strategic Petroleum Reserve (SPR) now holds more than 700 million barrels of oil. Other major oil importers -- notably European countries and Japan -- have spent heavily to accrue their own reserves, and many are evaluating whether they should build even larger ones. In his January 2007 State of the Union address, President George W. Bush urged increasing the country's stocks to 1.5 billion barrels in the near future. With the price of crude oil likely to continue to rise above $100 per barrel, the venture could cost between $70 billion and $100 billion. Congress has authorized boosting the SPR to one billion barrels but has not yet appropriated the necessary funds. (And in May, motivated by high oil prices and election-year politics, it temporarily blocked efforts by the Bush administration to keep filling the SPR.) After the military resources spent to keep oil supplies flowing reliably from the Persian Gulf and other significant oil-producing regions, the SPR is the United States' costliest investment in energy security.

The theory behind the effort is that a well-coordinated system of oil stocks can buffer the country against foreign and domestic shocks to the world oil market. Strategic reserves allow governments to relieve the pressure of unexpected interruptions in oil supplies by releasing some of their stocks on the market. They can help the governments of oil-importing countries dampen the effects of crises in oil-exporting regions or along critical supply routes, such as the Strait of Hormuz, through which about one-third of all the world's oil exports pass. Strategic reserves reduce dependence on pivotal suppliers prone to using oil as a bargaining chip when the market is tight, such as Iran and Venezuela. And they may reduce (at least a bit) the massive revenues that

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