“Compared to Ford and Carter, the SPR experienced a ‘Reagan Revolution’ – although hardly of the free-market variety. Two reasons explained Reagan’s bullish SPR [buy and fill] policy. First, the reserve was the centerpiece of Reagan’s ‘free market’ energy policy, which precluded the need for standby price and allocation controls to deal with future emergencies. Second, the reserve was an instrument of foreign policy should U.S. intervention and confrontation lead to reprisals by oil-exporting countries as it had in 1973 and 1979.”
“With the Reagan acceleration at a time of record crude prices, the reserve program became a major cost item, and with budget deficit problems, a group of proposals came forth to reduce cost while maintaining fill rates. Global settlements with refiners accused of product price overcharges was one tapped source.”
The fill rate of the reserve has never been far from controversy. The political desire to reach ambitious targets has been tempered by storage capacity, cost, world events, and international relations. Oil injections began in July 1977, but aforementioned problems soon put the program behind schedule. The plan of Carter and energy-czar James Schlesinger to accelerate Ford’s targets by two years to reach 500 million barrels by 1980 soon was out of reach. [1] On December 22, 1978, the deadline for 150 million barrels, less than 69 million barrels were in place.
In November 1979, Carter suspended purchases because of escalating crude prices in the wake of the Iran crisis. The stoppage continued with the summer shortages of 1979. Resumption of purchases in late 1979 was slowed by a threat that Saudi Arabia would retaliate by initiating a new round of OPEC price increases. A visit to Saudi Arabia by DOE head Charles Duncan in March 1980 reconfirmed the possibility. [2]
Congress, however, was less intimidated, and on June 30, the Energy Security Act was enacted to require minimum fill rates of 100,000 barrels per day or else production from the Naval Petroleum Reserves, averaging 160,000 barrels per day, would be put into the reserve or shut-in. [3]
The restart, against the wishes of the Carter Administration, was led by Senator Robert Dole (R-Kan.) and freshman colleague Bill Bradley (D-N.J.). Purchases resumed on September 23, 1980, at 100,000 barrels per day, which coincided with an embarrassment of oil riches elsewhere. Industry inventory of crude and products was 260 million barrels over DOE-defined “prudent” levels, and the Army was holding 100 million barrels and end-users 200 million barrels more. [4] The market, not the reserve’s eight-day supply of imports, was prepared for a supply emergency five years into the program.
Despite the checkered performance to the reserve program, high fill rates were good politics. The 1980 Republican platform called for “rapid filling” to avoid being “made hostage to the whims of foreign governments.” [5] Reagan endorsed this view, and in August 1981, he signed the Omnibus Budget Reconciliation Act into law, which included a target fill rate of 300,000 barrels per day. [6]
The average fill rate for fiscal 1981 was 292,000 barrels per day, which dwarfed previous rates of 4,000 barrels per day in 1980, 88,000 in 1979, 131,000 in 1978, and 3,000 in 1977. [7]
Compared to Ford and Carter, the SPR experienced a “Reagan Revolution” – although hardly of the free-market variety. Two reasons explained Reagan’s bullish SPR policy. First, the reserve was the centerpiece of Reagan’s “free market” energy policy, which precluded the need for standby price and allocation controls to deal with future emergencies. Second, the reserve was an instrument of foreign policy should U.S. intervention and confrontation lead to reprisals by oil-exporting countries as it had in 1973 and 1979.
On August 3, 1982, the Energy Emergency Preparedness Act was approved, which required fill rates at 300,000 barrels per day or more until 500 million barrels was reached. This ambitious goal was subject to funding and could be reduced by “a finding by the President in his discretion for good cause that compliance with such rate would not be in the national interest.” [8]
With declining oil prices and growing fiscal pressures, Reagan on December 1 of the same year made such a finding to reduce fill rates to 220,000 barrels per day, which was again reduced to 186,000 barrels on October 1, 1983. A fiscal-year 1985 request by the President for 145,000 barrels per day was increased to 159,000 barrels by Congress. Average fill rates turned out to be 179,000 barrels per day in fiscal 1982, 228,000 barrels in fiscal 1983, and 191,454 barrels in fiscal 1984.
On April 5, 1982, Phase I’s target of 250 million barrels was reached. The inventory was composed of Saudi, Mexican, Egyptian, Amon, North Sea, Dubai, and U.S. oil at 5 sites in Texas (1) and Louisiana (4). In early 1983, the 300 million barrel plateau was reached, and in mid-1984, 400 million barrels was in place.
Phase II of 500 million barrels is anticipated by 1986, and the final phase of 750 million barrels, a 6 month import supply, is scheduled for 1990, although growing uncertainty from a changing world oil market and fiscal pressures may modify these goals.
Financing Policy
Relative to expenditure, SPR appropriations were liberal during the Ford and Carter regimes. Through 1979, over $2.2 billion went unspent. [9] With the Reagan acceleration at a time of record crude prices, the reserve program became a major cost item, and with budget deficit problems, a group of proposals came forth to reduce cost while maintaining fill rates. Global settlements with refiners accused of product price overcharges was one tapped source.
Settlements with Chevron, Conoco, and Champlin yielded over $50 million of in-kind crude payments to the SPR. A proposal to transfer funds from the dormant Synthetic Fuels Corporation was rejected. Another revenue proposal by Sen. Nancy Kassebaum (R-Ka.) to force oil companies to set aside a percentage of imports for the reserve also was blocked. A different approach was suggested by Rep. Phil Gramm (D-TX.) to sell “oil bonds” to speculators that could be redeemed for oil in an emergency or after 10 years. [10]
The chosen solution was to go off-budget. In May 1981, the program was entirely refinanced through U.S. borrowing, which conveniently removed the $3.9 billion cost item from the fiscal 1982 budget to “reduce” the deficit. Freed from budget scrutiny and deficit ceilings, the SPR received a 5-year borrowing authority of $21.9 billion. To Senate sponsor Bennett Johnston (D-La.) going off-budget was “the direct dishonest thing to do.” [11] The SPR had gone underground. [12]
[1] Public Law 95-70, 91 Stat. 275 (1977).
[2] Congressional Quarterly, Energy Policy, p. 101.
[3] Public Law 96-294, 94 Stat. 611 (1980). The Naval Petroleum Reserve’s output provided annual revenue of over $2 billion, which was reason enough to observe the minimum fill rate.
[4] Juan Cameron, “Washington’s Ill-Starred Efforts to Stash Crude,” Fortune, September 8, 1980, p. 66.
[5] “1980 Republican National Convention Platform,” Congressional Record, 96th Cong., 2nd sess., July 31, 1980, pp. 24.
[6] Public Law 97-35, 95 Stat. 357 (1981). President Reagan would later state: “We continue a firm policy of filling the reserve as fast as permanent storage can be made available.” OGJ, August 9, 1982, p. 72.
[7] 1984 Annual Report, Strategic Petroleum Reserve, p. 4.
[8] Public Law 97-229, 96 Stat. 248 at 249 (1982).
[9] Congressional Quarterly, Energy Policy, p. 231.
[10] For a discussion of Kassenbaum’s Strategic Petroleum Reserve Amendments of 1981 (S. 707) and Gramm’s Private Equity Petroleum Reserve Act (H.R. 2304), see Weimer, The Strategic Petroleum Reserve, pp. 72-76.
[11] Houston Post, May 13, 1981, p. 8B; Wall Street Journal, May 11, 1981, p. 4.
[12] For an overview of off-budget government expenditures and commitments, see James Bennett and Thomas DiLorenzo, Underground Government (Washington, D.C.: Cato Institute, 1983).
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NOTE: This week, MasterResource is reviewing the history of state and federal oil (and natural gas) storage regulation and ownership. Part I examined early (pre-SPR) regulation. Part II the prehistory and beginnings of the SPR; Part III the early problems with the Federal storage program. Part V concludes with an overall critical examination of the SPR from the vantage point of its first decade (mid-1980s).