Background Changing Petroleum  Markets Oil and petroleum products markets have changed substantially in the  years since the establishment of the SPR. Specifically, U.S. domestic  crude oil production has generally been increasing, consumption has  been relatively stable, and crude oil and petroleum products markets  have become increasingly global. Additionally, U.S. crude oil production is  projected to rise further in the future, according to EIA and IEA  projections, further reversing a decades-long decline. Recent  technological improvements have made onshore production from shale  formations economically viable, and domestic crude oil production began  to rise in about 2008. The combination of increasing production and  relatively stable consumption has resulted in declining net crude oil and  petroleum products imports, from a high of about 12 million barrels per  day in 2005 to fewer than 4 million barrels per day in 2017. Since these trends are expected to continue, the IEA and EIA both project  net U.S. crude oil and petroleum products imports will decline to zero  sometime in the late 2020s and the United States will become a net  exporter shortly thereafter. Since the IEA 90-day reserve obligation is  based on a country’s net imports, there is no such obligation for net  exporters; therefore, the United States would have no 90-day reserve  obligation as long as it is a net exporter, though it would still be obligated  to release reserves in response to supply disruptions. Over the longer  term, EIA’s projections show U.S. net exports peaking in 2037 and the  United States again becoming a net importer between 2040 and 2050. At the time of the Arab oil embargo, price controls in the United States  prevented the prices of oil and petroleum products from increasing as  much as they otherwise might have, contributing to a physical oil shortage  that caused long lines at gasoline stations throughout the United States.  In addition, in the 1970s, oil prices were often set in long-term contracts,  which meant that prices would not automatically rise in the face of greater  scarcity. This generally reduced incentives for producers to expand  production and sales as well as for consumers to reduce consumption in  the face of greater scarcity caused by a supply disruption. Now that crude  oil and petroleum product markets are global, the prices of these  commodities are determined in the world market, primarily on the basis of  supply and demand. In the absence of long-term contracted prices or  price controls, scarcity from a supply disruption is generally expressed in  the form of higher prices, as purchasers are free to bid as high as they  are willing to pay to secure oil supply. In a global market, a large enough  supply disruption anywhere in the world raises prices everywhere. This  creates incentives for producers unaffected by the disruption to increase  their production and release existing inventories and for consumers  everywhere to reduce consumption in the ways they find most efficient  and least disruptive. While it can take time for some of these actions to  affect crude oil and petroleum product markets—according to DOE  officials, it can take approximately 6 months from when a producer drills  an oil well until oil production comes on line—all these actions tend to  mitigate the effects of supply disruptions. Strategic Petroleum  Reserve The Energy Policy and Conservation Act of 1975 authorized the creation  of the SPR, partly in response to the Arab oil embargo of 1973-1974 that  caused a shortfall in the international oil market. The purposes of the  SPR are, among other things, to reduce the impact of disruptions in  supplies of petroleum products and to carry out obligations of the United  States under the international energy program. Specifically, the 1974  International Energy Program Agreement, a joint strategy and treaty,  established the IEA to address oil security issues on an international  scale. The SPR is owned by the federal government, managed by  DOE’s Office of Petroleum Reserves, and maintained by Fluor Federal  Petroleum Operations LLC. The SPR stores crude oil in underground  salt caverns along the Gulf Coast in Louisiana and Texas. The SPR  currently maintains four storage sites—Bayou Choctaw, Big Hill, Bryan  Mound, and West Hackberry—with a design capacity of 713.5 million  barrels. Under conditions prescribed by the Energy Policy and Conservation Act,  as amended, the President has discretion to authorize the release of  petroleum products from the SPR to minimize significant supply  disruptions. When oil is released from the SPR, it is distributed through  commercial pipelines or on waterborne vessels to refineries, where it is  converted into gasoline and other petroleum products, and then  transported to distribution centers for sale to the public. According to DOE documents, well-functioning infrastructure is  fundamental to the SPR’s ability to maintain operational readiness and  meet mission requirements. However, most of the critical infrastructure for  moving SPR oil has exceeded its serviceable life, which has led to  increasing maintenance costs and decreasing system reliability.  Specifically, the reserve relies on a complex system of salt caverns,  pipelines, wells, and pumps, with other infrastructure and equipment. Any  failures, such as ruptured pipelines, could affect the readiness of a site for  an oil release. According to DOE officials, a growing backlog of major  maintenance needs raises concerns about the ability of the system to  operate as designed. In addition, there have been equipment failures that  have rendered parts of the system temporarily inoperable. For example,  the SPR has experienced at least five major equipment failures since  fiscal year 2013, including the Big Hill site pipe failure shown in figure 1. Regional Petroleum  Product Reserves The United States has two regional petroleum product reserves—the  Northeast Home Heating Oil Reserve and the Northeast Gasoline Supply  Reserve. The Northeast Home Heating Oil Reserve, which is not part of the  SPR, holds 1 million barrels of ultra low sulfur distillate, a petroleum  product essentially equivalent to diesel fuel but that is also used for  heating oil. The Northeast United States is heavily dependent on the  use of heating oil in winter months. The distillate is stored in leased  commercial tank storage in terminals in Connecticut, Massachusetts,  and New Jersey. In 2000, the President directed the creation of the  reserve to hold approximately 10 days of inventory, the time required  for ships to carry additional heating oil from the Gulf of Mexico to New  York Harbor. The Northeast Gasoline Supply Reserve, a part of the SPR, holds 1  million barrels of gasoline for consumers in the northeastern United  States. According to DOE’s website, this region is particularly  vulnerable to gasoline disruptions as a result of hurricanes and other  natural events. For example, Hurricane Sandy caused widespread  gasoline shortages in the region in 2012. DOE conducted a test sale  of the SPR in 2014 and used a portion of the proceeds from the sale  to create the reserve. The gasoline is stored in leased commercial  tank storage in terminals in Maine, Massachusetts, and New Jersey. IEA Obligations The SPR helps the United States meet its IEA obligation to hold the  equivalent of 90 days of net imports of crude oil and petroleum products.  In order to meet the IEA 90-day reserve obligation, countries, including  the United States, can count existing private reserves of crude oil and  petroleum products in addition to public reserves (in the United States,  the SPR). In most years, the United States has met its 90-day reserve  obligation with a combination of SPR and private reserves. The days of  import protection may vary based on actual net U.S. crude oil and  petroleum products imports as well as the inventory levels of the SPR and  private reserves. As discussed previously, because the IEA 90-day  reserve obligation is based on a country’s net imports, there is no such  reserve obligation for countries that are net exporters of crude oil and  petroleum products. The United States also relies on the SPR to meet its IEA obligation to  release reserves in the event of a collective action to respond to a supply  disruption. Countries contribute to an IEA collective action based on their  share of IEA oil consumption, and they can meet their obligation by  whatever measure they choose, including release of public or private reserves, or demand restraint. IEA collective actions are designed to  mitigate the negative effects of sudden supply shortages by making  additional crude oil and petroleum products available to the global market  through a combination of emergency response measures, which include  increasing supply and reducing demand. In the event of a global market  disruption, IEA member countries can call for a collective action after  reaching consensus on whether a response is needed. DOE stated that  the collective action IEA obligation is more relevant to the SPR’s mission  of protecting the U.S. economy from severe petroleum supply  interruptions than the 90-day reserve obligation. The United States has  participated in each of the three IEA collective actions. In 1991, with the  commencement of Operation Desert Storm, DOE released 17.3 million  barrels of SPR crude oil. After Hurricane Katrina in 2005, DOE released  11 million barrels of SPR crude oil. Most recently, in June 2011, in  response to crude oil supply disruptions driven by hostilities in Libya,  DOE released 30.6 million barrels of crude oil from the SPR. The Libya  collective action is an example of how, in practice, member countries  participate according to national circumstances. After consultations with  IEA member countries, all IEA member countries agreed to the Libya  collective action, under which 12 of the 28 members at that time  contributed to the action. In addition to the three IEA collective actions,  the SPR has been used 10 times in response to U.S. domestic supply  disturbances that were not IEA collective actions, most notably in  response to severe weather events. In Contrast with the  United States, Most  IEA Members Rely on  Private Reserves to  Meet Reserve  Obligations and Hold  Significant  Proportions of Their  Reserves as  Petroleum Products In terms of how they meet their IEA obligations, most other IEA members  differ from the United States in two basic ways. Specifically, as of  December 2017, most IEA members rely at least in part on private rather  than public reserves to meet their obligations, and most hold significant  proportions of these reserves as petroleum products rather than as crude  oil. In December 2017, before Mexico joined the IEA in early 2018, there  were 29 member countries. Of these 29 countries, 25 IEA members had  two common attributes: (1) as net importers, they had a 90-day reserve  obligation and met that obligation, and (2) they had formal processes for  holding and releasing these reserves. As of December 2017, 18 of these  25 members relied entirely or in part on private reserves to meet their  reserve obligations. Specifically, based on IEA data as of December  2017, these 18 countries met their 90-day reserve obligation through  private reserves and either had no public reserves or had public reserves  of less than 90 days. According to a 2014 IEA report, some of these  countries require industry to hold reserves and, when needed, release  them. For example, according to a 2014 IEA report and documentation  provided by government officials, the United Kingdom meets its entire  obligation by requiring private industry to hold reserves. In contrast,  New Zealand had publicly held reserves amounting to 26 days of net  imports, according to IEA data as of December 2017. According to a 2014  IEA report, New Zealand relied on industry reserves held for commercial  purposes to meet the rest of its 90-day reserve obligation, although New  Zealand does not formally require industry to hold reserves specifically for  this purpose. Unlike the 18 countries that rely at least in part on private reserves, as of  December 2017, the United States and 6 other IEA members met the 90- day reserve obligation exclusively through public reserves. Specifically,  according to IEA data on member reserves, Estonia, Finland, Germany, Hungary, Ireland, Japan, and the United States held public reserves  equal to 90 days or more of net imports. Although the United States  currently meets its IEA 90-day reserve obligation solely with public  reserves, for most of the SPR’s existence, public reserves were  insufficient to meet this obligation, so the United States also had to rely  on private reserves. Specifically, according to EIA data, the United States  has relied, at least in part, on private reserves together with the SPR to  meet the 90-day reserve obligation with the exception of two time periods  (1984-1987 and 2012-present), when the United States has relied solely  on the SPR. The United States does not require industry to hold reserves  for the purposes of meeting IEA obligations. Figure 2 compares the  United States’ reserves in days of net imports to the IEA’s 90-day reserve  obligation. According to a 2014 IEA report, most IEA members hold at least a third of  their reserves as petroleum products, such as gasoline and diesel fuel,  rather than as crude oil. Holding petroleum products can be  advantageous during certain disruptions because such reserves can be  directly distributed to consumers, whereas crude oil must first be refined  and turned into products, adding response time. According to the IEA’s  2014 report, Germany’s stockholding agency holds 55 percent of its  reserve as petroleum products. Similarly, France holds only petroleum  products that are distributed geographically across the country so that the  reserves can be used quickly in the event of a supply disruption. In  contrast, more than 99 percent of the SPR (665.5 million barrels as of  March 2018) is held as crude oil, all of which is stored at the four storage  sites in Louisiana and Texas. The exception is the Northeast Gasoline  Supply Reserve, which, as mentioned previously, is a 1 million barrel  gasoline reserve in terminals in Maine, Massachusetts, and New Jersey  that was established in 2014 after Hurricane Sandy and that is considered  part of the SPR. According to DOE officials, there are several reasons the  SPR holds predominantly crude oil, including that it is more costly to store  petroleum products than crude oil and that the United States has the  largest refining capacity of any IEA member country. Because of the large  U.S. refining sector, crude oil from the SPR can be domestically refined  into petroleum products to meet demand. Some IEA member countries store some of their reserves abroad, though  the United States does not. According to a 2014 IEA report, some IEA  member countries allow part of their reserves to be stored abroad to  leverage spare storage capacity or more cost-effective storage by utilizing  available storage space or excess private reserves in other countries.  For example, approximately 30 percent of Ireland’s reserves are held in  other European Union countries. In some of these cases, countries use  short-term contracts, also known as tickets, instead of directly acquiring  and storing oil and petroleum products. For example, according to  documents provided by government officials, since 1995 the United  Kingdom has increased its reserves held under ticket agreements outside  of the country from around 10 percent of its total reserves to more than 25  percent. In addition, unlike the United States, some IEA countries specify the size  of their public or private reserves in terms of net imports or consumption,  rather than a specific volume. In the United States, the total volume of  crude oil and petroleum products held in the SPR is the result of amounts  historically purchased to fill the reserve and subsequent sales as  mandated by Congress or released in response to a supply disruption.  According to DOE, it cannot otherwise reduce or increase volumes held in  reserve without congressional action—either through requirements to  purchase additional oil or laws authorizing or mandating sales. On the  other hand, some IEA countries have tied their reserves’ volumes of  crude oil and petroleum products to a metric such as days of net imports  or a percent of consumption. For example, according to documentation  provided by government officials, in 2015 Japan changed how it specifies  its target reserves from a specified amount to days of net imports. In  specifying the size of reserves in this way, the amount held is adjusted as  market conditions change—for example, if net imports change and  require more or fewer reserves to meet the IEA 90-day reserve obligation,  or when other underlying factors affecting a nation’s energy security  needs change. DOE Has Not  Identified the Optimal  Size for the SPR or  the Potential Need for  Regional Product  Reserves While DOE has examined a range of sizes for the SPR, it has not  identified the optimal size for the SPR to meet U.S. energy security needs  and IEA obligations, and DOE’s analysis of SPR sizes was limited in  three ways. DOE also has not identified whether additional regional  petroleum product reserves should be part of the SPR in U.S. regions  identified as vulnerable to fuel supply disruptions. DOE Examined a Range  of Sizes for the SPR but  Has Not Identified the  Optimal Size for SPR and  the Agency’s Analysis Was  Limited in Three Ways DOE has not identified the optimal size for the SPR and though the  agency examined a range of SPR sizes, its analysis was limited in at  least three ways. In response to direction from Congress and  recommendations from GAO and the DOE Inspector General, DOE  developed and published a long-term strategic review of the SPR in  August 2016. In DOE’s 2016 review, the agency examined the expected  economic benefits of SPR sizes ranging from 430 million to 695 million  barrels of oil over a 25-year time horizon (2016 through 2040), but it did  not recommend an optimal size for the reserve. DOE’s review did not identify the optimal size for the SPR because of  three limitations: DOE did not fully evaluate implications of market fluctuations  and estimate needs. DOE did not fully evaluate the implications of  falling net imports of crude oil and petroleum products with respect to  meeting IEA obligations to hold the equivalent of 90 days of net  imports and to respond to collective actions. As mentioned previously,  the United States is expected to become a net exporter of crude oil  and petroleum products by the late 2020s. Since the IEA 90-day  reserve obligation is based on a country’s net imports, this means that  at that point the United States would not have a 90-day reserve  obligation. However, even as a net exporter, the United States would  still have to meet the IEA obligation to respond to a collective action.  Yet, DOE’s analysis did not evaluate the SPR’s configuration as it  relates to projected fluctuations in net imports or estimate the minimal  amount of reserves needed to meet potential future collective actions.  Without considering projected fluctuations in net imports or providing  an analysis of how much oil is estimated to be needed to meet IEA  collective actions, DOE cannot fully advise Congress on the optimal  size of the SPR. DOE did not consider private-sector response. DOE’s analyses in  its 2016 review focused on the publicly held reserves in the SPR as  the only means to respond to oil supply disruptions and did not  consider a response from the private sector or through consumers  reducing demand. According to DOE’s 2016 review, the underlying  analysis for the benefits of the SPR did not consider a response from  the private sector for three reasons: (1) while U.S. commercial stocks  could conceivably address part of a supply disruption, private industry  could also hold oil inventories in a crisis instead of releasing them; (2)  unlike most other IEA member countries, the United States does not  require private-sector response; and (3) research on the exact nature  of private-sector response during a disruption is needed. DOE officials  told us the agency has not studied the extent to which SPR releases  of crude oil displace what would otherwise have been private releases  of inventories. As we reported in September 2014, changing market conditions— most importantly the significant increase in domestic production of  oil—have implications for the SPR’s size because increased  production has led to increasing private reserves. According to IEA  data as of December 2017, U.S. private reserves held the equivalent  of 194 days of net import protection coverage, up from about 59 days  in 2006. Further, private reserves in the United States consist of both  crude oil and petroleum products with more than half in the latter  category. For example, as of January 2018, total private reserves of  crude oil and petroleum products were about 1.215 billion barrels, of  which about 420 million barrels were in the form of crude oil and 795  million barrels were petroleum products, according to the EIA. As of  2013, these private reserves were distributed across the entire  country in more than 1,400 terminals, according to the EIA. As we reported in December 2007, international trade in oil and  petroleum products has expanded significantly over the past 2  decades, making markets for gasoline and other petroleum products  increasingly global in nature. In such a global oil market, higher  levels of private reserves can benefit the United States and the rest of  the world by helping mitigate a supply disruption. Most experts and  stakeholders we interviewed generally agreed that the private sector  is in a better position to respond to supply disruptions than they were  when the SPR was created. With regard to demand response, DOE  officials told us they do not consider this because there is no  mechanism to require industry to respond to supply disruptions or  consumers to reduce demand in response to a supply disruption.  However, DOE has not studied how voluntary response to changes in  petroleum product prices affects the need for or efficacy of strategic  releases. Without conducting an analysis of how private parties  respond to supply disruptions, DOE cannot advise Congress on the  optimal size of the SPR because it cannot know how effective such  private responses could be in mitigating supply disruptions. DOE did not fully examine costs of differently sized reserves. DOE’s review of the expected economic benefits of differently sized  reserves did not fully examine the corresponding costs of those sizes.  According to DOE officials, there was no requirement or need to  conduct a formal cost benefit analysis of the SPR because the SPR’s  oil acquisition and initial capital costs to create the reserve are sunk  costs and the ongoing operational costs to maintain the reserve are  minimal in comparison. However, this does not take into account the  opportunity cost to the government that holding reserves represents;  as Congress has mandated several times recently, crude oil from the  reserve can be sold to fund other federal priorities. Without additional  analysis, such as of the costs and benefits of SPR’s size, DOE cannot  fully advise Congress on the optimal size of the SPR. When we reviewed the SPR in 2006 and 2014, we found that DOE had  not periodically re-examined the strategic reserves. In 2006, we  recommended that the Secretary of Energy reexamine the appropriate  size of the SPR. In its response to our recommendation, DOE stated that  its reexamination had taken the form of more “actionable items,” including  not requesting expansion funding in its 2011 budget and canceling and  redirecting the prior year’s expansion funding to general operations of the  SPR, based on the Administration’s decision that the SPR’s current size  at the time was adequate. Similarly, as previously mentioned, in 2014 we  found that changing market conditions have implications for the size,  location, and composition of the SPR, but DOE had not reexamined the  SPR’s size since 2005. Accordingly, we recommended that the Secretary  of Energy undertake a comprehensive reexamination of the appropriate  size of the SPR. In response to our recommendation, the 2014 DOE  Inspector General recommendation mentioned previously, and the  Bipartisan Budget Act of 2015, DOE published its 2016 review. As previously mentioned and reported, crude oil and petroleum markets  are constantly changing, but DOE conducted its full evaluations of the  SPR more than a decade apart. According to DOE officials, there is no  formal policy to periodically reevaluate the SPR. We previously found that  federal programs should be reexamined if there have been significant  changes in the country or the world that relate to the reason for initiating  the program. In that report, we found that many federal programs and  policies were designed decades ago to respond to trends and challenges  that existed at the time of their creation. Moreover, the Office of  Management and Budget Circular A-94 for benefit-cost analysis of federal  programs includes guidelines that apply to any analysis used to support  government decisions to initiate, renew, or expand programs or projects  that would result in a series of measurable benefits or costs extending for  3 or more years into the future. Given changing market conditions and  future projections, without conducting additional analysis to supplement  its 2016 review and thereafter periodically reexamining the SPR to take  into account changes in market conditions and include a thorough  consideration of the costs and benefits of a wide range of SPR sizes,  DOE cannot provide information to Congress to inform decisions about  the appropriate size of the SPR and risks holding too much or too little in  the SPR to meet the United States’ evolving energy security needs and  IEA obligations. DOE Has Not Identified  Whether Additional  Regional Petroleum  Product Reserves Should  Be Part of the SPR DOE has also not fully identified whether additional regional petroleum  product reserves should be part of the SPR. Because the SPR stores oil  nearly exclusively along the Gulf Coast, the SPR is configured primarily to  respond to global oil supply disruptions. However, as we reported in  November 2017, the SPR has primarily been used in response to  domestic disruptions. The SPR is limited in its ability to respond to  domestic disruptions because reserves are almost entirely composed of  crude oil and not refined petroleum products, which may not be effective  in responding to disruptions that affect the refining sector. For example,  as we reported in November 2017, Hurricanes Harvey, Irma, and Maria  damaged infrastructure and property, caused the loss of life, and  disrupted the operations of refineries representing at least 15 percent of  the nation’s refining capacity. DOE has identified regions subject to  product supply vulnerabilities as shown in Figure 3. The Quadrennial Energy Review of 2015 recommended that the agency  analyze the need for additional or expanded regional product reserves by  undertaking updated cost-benefit analyses for all of the regions of the  United States that have been identified as vulnerable to fuel supply  disruptions. In response to this recommendation, DOE studied the costs  and benefits of regional petroleum product reserves in the West Coast  and Southeast Coast. According to DOE officials, weather events in the  Southeast Coast are of higher probability but lower consequence, and  events in the West Coast are of lower probability but higher consequence.  DOE did not finalize its 2015 studies on regional petroleum product  reserves and make them publicly available. However, the draft 2015  studies concluded that a product reserve in the Southeast would provide  significant net economic benefits to the region and the United States,  particularly in the event of a major hurricane, while further analyses are  needed to determine the potential benefits of a reserve on the West  Coast. A prior DOE study also suggests that petroleum product  reserves merit consideration—in 2011, DOE carried out a cost-benefit  study of the establishment of a refined product reserve in the Southeast  and estimated that such a reserve would reduce the average gasoline  price rise by 50 percent to 70 percent in the weeks immediately after a  hurricane landfall, resulting in consumer cost savings, according to the  Quadrennial Energy Review of 2015. According to DOE officials, the  agency has no plans to conduct additional studies. DOE’s 2016 review of  the SPR did not fully assess whether there is a need for additional  regional product reserves in other U.S. regions identified as vulnerable to  fuel supply disruptions, as recommended by DOE’s studies and the 2015  Quadrennial Energy Review. Without completing studies on the costs and  benefits of regional petroleum product reserves for all the vulnerable U.S.  regions and publicly releasing the results, DOE cannot ensure that it and  Congress have the information they need to make decisions about  whether additional regional product reserves are needed. DOE Has Taken  Steps to Update Its  Modernization Plans,  But Is Hindered by  Uncertainty  Regarding the SPR’s  Long-term Size  DOE Has Taken Steps to  Update Its Modernization  Plans for Currently  Mandated Sales DOE has taken steps to take into account the effects of congressionally  mandated oil sales in its plans for modernizing the SPR, though DOE’s  current plans are based on information largely developed prior to the  most recent congressionally mandated oil sales. According to DOE, the  SPR modernization program is focused on a life extension project to  modernize aging infrastructure to ensure the SPR will be able to meet its  mission requirements for the next several decades. The project’s scope of  work has undergone several revisions since its inception in response to  changing conditions and requirements, according to the agency. DOE  has estimated the total cost for the SPR’s modernization at up to $1.4  billion. DOE raised about $323 million for modernization through the sale  of SPR oil in fiscal year 2017, and the Consolidated Appropriations Act of  2018 provided that DOE is to draw down and sell an amount of crude oil  not to exceed $350 million for modernization in fiscal year 2018. As of  the end of February 2018, DOE has spent $22 million on modernization  efforts and the additional funds will allow DOE to continue moving forward  with the project, according to agency officials. According to DOE’s  modernization plans, the first major construction is scheduled for fiscal  year 2019. However, these plans are largely based on information DOE  analyzed before recent congressionally mandated sales of an additional  117 million barrels of oil. Since the most recent mandated sales, DOE has taken steps to update  its modernization plans and has changed its assumptions for SPR’s  modernization. For example, DOE now assumes that the reserve will hold  about 405 million barrels of oil and that one of the four SPR sites may  close after congressionally mandated sales are completed at the end of  fiscal year 2027, according to agency officials. However, DOE has not  fully updated the SPR’s modernization plans based on these  assumptions. According to DOE officials, in March 2018, DOE  commenced a study—the SPR post-sale configuration study—to examine  potential future reserve configurations. This study is to take into account  the effects of congressionally mandated sales on the reserve and its  modernization, and is targeted for completion in October 2018, according  to agency officials. Information from the study will inform DOE’s updates  to the SPR’s modernization plans, according to DOE officials. As part of its post-sale configuration study, DOE plans to examine how  the agency may handle the potentially excess SPR facilities created by  the mandated sales. In January 2017, the SPR had a design capacity to  hold 713.5 million barrels of oil and actually held 695 million barrels. As  shown in figure 4, without action by DOE to reduce the SPR’s design  capacity or otherwise use SPR facilities, congressionally mandated sales  will cause excess storage capacity to grow to 308 million barrels or more  by the end of fiscal year 2027—meaning that about 43 percent of the  SPR’s total design capacity to store oil would be unused. DOE plans to explore some options to use these potentially excess SPR  assets in its ongoing post-sale configuration study. In withdrawing oil to  meet congressionally mandated oil sales currently in place (290 million  barrels through fiscal year 2027), DOE could close at least one SPR site  based on our analysis of projected excess storage capacity. For example,  if DOE were to close the smallest SPR site, Bayou Choctaw, the agency  could also explore selling the connected pipeline and marine terminal,  which are currently being leased to a private company. DOE could also  consider leasing excess storage capacity to other countries so that they  could store oil at the SPR. DOE has not entered into any such leases  with other countries and has not considered such leases because,  according to DOE, the SPR has historically lacked capacity to store  additional oil. DOE has not proposed any of these options or explored the  revenue the agency could generate by selling or leasing these assets.  According to DOE officials, the agency will examine the feasibility of such  options in the ongoing SPR post-sale configuration study. Uncertainty Has  Hampered DOE’s Efforts  to Account for Potential  Future Mandated Sales As DOE takes steps to plan for the SPR’s modernization, ongoing  uncertainty regarding the SPR’s long-term size and configuration have  complicated DOE’s efforts. According to DOE officials, this uncertainty  makes it extremely difficult to effectively perform any mid-to long-range  planning efforts for the SPR’s modernization project, including the  execution of major maintenance projects. Congress has generally set the  SPR’s size by mandating purchases or sales of oil, and has established  and amended the minimum size of the SPR as it pertains to the release of  oil for emergency protection. Since 2015, Congress has, across six  pieces of legislation, mandated 290 million barrels in additional oil sales.  However, DOE developed its modernization plans in 2016. DOE officials  told us they do not know whether additional sales will be mandated over  the next 10 years or whether other changes may be required to the  configuration of the reserve. Any additional congressionally mandated  sales or direction to pursue additional petroleum product reserves would  require DOE to again revisit its modernization plans and assessments of  the potential uses of any excess SPR assets. Oil market projections also  have implications for the future of the SPR. Under current projections, the  United States may fluctuate between being a net importer and net  exporter over the next several decades. Specifically, the United States is  projected to become a net exporter by the late 2020s and would then no  longer have a 90-day reserve obligation, but it is projected to return to  being a net importer between 2040 and 2050. These projected  fluctuations could affect the desired size of the SPR in the future. This  uncertainty creates risks for DOE’s modernization plans, as DOE may  end up spending funds on facilities that later turn out to be unnecessary  should Congress ultimately decide on a larger- or smaller-sized SPR than  DOE anticipates. Having a long-term target for the size and configuration of reserves helps  other IEA member countries manage their reserves. For example, as  previously discussed, unlike the United States, some other IEA members  have specified in dynamic terms the amount of reserves to be held, such  as days of net import protection or days of consumption, rather than  specifying a specific static volume amount. Under such approaches, the  amount held varies over time as entities managing the reserve acquire or  sell reserves in order to meet the target. Setting a long-term target for the  size and configuration of the SPR—taking into account projections for oil  production, consumption, and IEA obligations—could better position DOE  to ensure that funds spent on the SPR’s modernization do not modernize  a system that is no longer needed and that DOE is able to adequately  plan for potentially excess SPR assets. In the course of our work, we also identified other options for handling  potentially excess SPR assets that DOE is not planning on examining,  largely because DOE does not currently have the authority to pursue  them, according to agency officials. First, DOE could explore leasing  storage capacity to private industry. U.S. oil production has generally  increased over the last decade. As a result, the private sector may want  to lease excess SPR capacity, which may be cheaper than above-ground  storage, according to a representative of a private company we spoke  with. Fees for doing so could help defray public reserve storage costs.  However, officials told us that the Energy Policy and Conservation Act  gives DOE authority to lease underutilized storage to other countries, but  not to the private sector. Second, if Congress determines that the SPR  holds oil in excess of that needed domestically, DOE could explore selling  contracts or tickets for the excess oil rather than selling the oil outright.  Australian and New Zealand officials told us that if DOE were to sell  tickets for SPR oil, tickets would help these countries meet their IEA 90- day reserve obligations. Australian officials told us they have discussed  this option with DOE. Currently the United States and Australia have  agreed, through an arrangement, to allow Australia to contract for  petroleum stocks located in the United States and controlled by  commercial entities. According to DOE officials, the arrangement would  permit Australia to receive credit from the IEA for tickets it purchases from  the U.S. private sector. While the arrangement does not cover  government-owned oil in the SPR, if it did, based on our analysis, DOE  could generate up to approximately $15 million annually if Australia  purchased the maximum allowable amount of oil specified in an  arrangement through tickets for excess SPR oil. However, although the  Energy Policy and Conservation Act allows DOE to lease underutilized  storage to other countries, DOE lacks the authority to sell tickets and  does not plan to seek this authority, according to DOE officials. DOE  officials told us that they do not plan to examine these options. According to DOE’s real property asset management order, the agency is  to identify real property assets that are no longer needed to meet the  program’s mission needs and that may be candidates for reuse or  disposal. Once identified, the agency is to undertake certain actions,  including determining whether to dispose of these assets by sale or lease.  As part of its SPR post-sale configuration study, DOE plans to determine  whether it is appropriate to close SPR facilities, and the relative benefit of  any closures would be informed by potential lease revenues from  maintaining sites so they could be leased, according to officials. However,  without examining a full range of options in the post-sale configuration  study, DOE risks missing beneficial ways to modernize the SPR while  saving taxpayer resources. Conclusions Given changing crude oil and petroleum product market conditions and  the constrained budget environment, it is important that DOE ensures the  SPR is effective at meeting U.S. energy security needs and IEA  obligations while being managed and maintained in an efficient manner.  In response to congressional direction and recommendations from GAO  and DOE Inspector General, DOE conducted a long-term strategic review  of the SPR in 2016 after its last comprehensive examination in 2005. In  its review, DOE did not determine an optimal size for the SPR, and its  analysis was limited in several ways. In particular, DOE did not fully  consider recent and expected future changes in crude oil and petroleum  market conditions such as the implications of projected fluctuations in  U.S. net imports or the role that increased levels of private reserves could  play in responding to supply disruptions. DOE also did not perform a full  cost-benefit analysis of holding different volumes of reserves. Without  supplementing its 2016 strategic review by conducting additional analysis, and periodically conducting such analyses going forward, DOE cannot  provide information to Congress to inform decisions about the appropriate  amounts of crude oil and petroleum products to hold in the SPR and risks  holding too much or too little in the SPR to meet the United States’ energy  security needs and international obligations. Such information is needed  on a timely basis, to reflect the pace of change in oil and petroleum  markets and other relevant factors that affect the optimal size of the SPR. Though the SPR has primarily been used in response to domestic supply  disruptions, such as hurricanes, the reserve is limited in this role because  it is almost entirely composed of crude oil, and not petroleum products. In  this regard, the Quadrennial Energy Review of 2015 recommended that  DOE analyze the need for additional regional product reserves for U.S.  regions that have been identified as vulnerable to fuel supply disruptions.  DOE has not identified whether additional regional product reserves  should be part of the SPR or completed studies of all vulnerable U.S.  regions, and it has no plans to do so, according to DOE officials. Without  conducting or completing studies for all the vulnerable U.S. regions and  releasing the results, DOE cannot ensure it and Congress have the  information they need to make decisions about potential additional  regional product reserves. In the face of declining net U.S. imports, Congress has taken repeated  steps to reduce the size of the reserve. Given that net imports are  projected to continue to decline through the late 2020s and fluctuate in  the future, there may be additional congressionally mandated SPR oil  sales. This has created long-term uncertainty regarding the future size  and configuration of the SPR. Congress could address this uncertainty by  identifying a long-term target for the size of the SPR—either by volume or  in terms tied to factors, such as consumption or net import protection, that  affect the country’s energy security needs and IEA obligations. Setting  such a long-term target could better position DOE to ensure the efficiency  and efficacy of federal funds spent on the reserve. DOE has recently begun to study the potential effects of congressionally  mandated sales on its modernization plans. As part of its SPR post-sale  configuration study, DOE plans to determine whether it is appropriate to  close SPR facilities, and the relative benefit of any closures would be  informed by potential lease revenues from maintaining sites so they could  be leased, according to officials. However, we identified other options for  handling potentially excess SPR assets that DOE is not planning to  examine in its study, inconsistent with the agency’s order on real property  asset management. Although DOE does not currently have the authority  to implement these options, according to officials, examining their  potential use, including possible revenue enhancement, could inform  Congress as it examines whether it should grant such authority. Without  examining a full range of options in the post-sale configuration study for  handling potentially excess SPR assets, DOE risks missing beneficial  ways to modernize the SPR while saving taxpayer resources. Matter for  Congressional  Consideration We are making the following matter for congressional consideration:  Congress may wish to consider setting a long-range target for the size  and configuration of the SPR that takes into account projections for future  oil production, oil consumption, the efficacy of the existing SPR to  respond to domestic supply disruptions, and U.S. IEA obligations. (Matter  1) Recommendations for  Executive Action We are making four recommendations to DOE:  The Secretary of Energy should supplement the agency’s 2016 long-term  strategic review by conducting an additional analysis that takes into  account private-sector response, oil market projections, and costs and  benefits of a wide range of different SPR sizes. (Recommendation 1) The Secretary of Energy should take actions to ensure that the agency  periodically conducts and provides to Congress a strategic review of the  SPR that, among other things, takes into account changes in crude oil  and petroleum product market conditions and contains additional  analysis, such as the costs and benefits of a wide range of different SPR  sizes. (Recommendation 2) The Secretary of Energy should conduct or complete studies on the costs  and benefits of regional petroleum product reserves for all U.S. regions  that have been identified as vulnerable to fuel supply disruptions, and the  Secretary should report the results to Congress. (Recommendation 3) The Secretary of Energy, in completing DOE’s ongoing study on the  effects of congressionally mandated sales, should consider a full range of  options for handling potentially excess assets and, if needed, request  congressional authority for the disposition of these assets.  (Recommendation 4) Agency Comments  and Our Evaluation We provided a draft of this report to DOE for review and comment. DOE  provided written comments, which are reproduced in appendix I. Of the  four recommendations, DOE agreed with two, partially agreed with one,  and disagreed with one. Regarding our recommendation that DOE supplement its 2016 long- term strategic review with an additional analysis that takes into  account private sector response, oil market projections, and costs and  benefits of a wide range of different SPR sizes, the agency partially  agreed with the recommendation. DOE agreed to conduct an  additional analysis to assess the purpose, goals, and objectives of the  SPR, taking into account private sector response, oil market  projections, and any other relevant factors, that will lead to an  evaluation of possible optimal sizes of the SPR in the future. In  response to taking into account the costs and benefits of a wide range  of different SPR sizes, DOE stated that the agency determined the  projected benefits of a wide range of different SPR sizes ranging from  430 million barrels of oil to 695 million barrels of oil in its 2016 review.  However, the minimum SPR size considered by DOE is greater than  the projected SPR size after congressionally mandated sales have  occurred. Further, the SPR size after congressionally mandated sales  is projected to be far in excess of the IEA obligation to hold a  minimum of 90 days of net imports. DOE must also consider the  minimum size needed to meet its IEA obligations in the event of a  collective action. In conducting additional analysis, DOE should  consider a smaller lower bound, in line with congressionally mandated  sales, for the size of the SPR, and more fully consider the size  needed to meet the IEA 90-day net import and collective action  obligations. Regarding our recommendation that DOE conduct periodic reviews of  the SPR, the agency agreed with the recommendation. DOE stated  that a 5-year time interval between reviews would strike an  appropriate balance between the need to periodically conduct a  strategic assessment and evaluation of the SPR and the limitations on  resources to plan and conduct such a review. Regarding our recommendation that DOE conduct or complete  studies on the costs and benefits of regional petroleum product  reserves, the agency disagreed. DOE stated that it is the agency's  position that government owned and operated regional petroleum  product reserves are an inefficient and expensive solution to respond  to regional fuel supply disruptions. DOE further stated, based on  studies done in 2015 that DOE officials told us were pre-decisional  and therefore could not be reported, that there are additional concerns  associated with government-owned and operated regional refined  petroleum product reserves, including little to no storage capacity for  lease in commercial terminals and high costs for government owned  and operated regional product reserves. However, these same  studies took these concerns into account, and concluded that a  product reserve in the Southeast would provide significant net  economic benefits (benefits minus costs) to the region and the United  States in the event of a major hurricane. These studies also  concluded that additional analyses are required to inform decisions  regarding the potential benefits of a similar reserve on the West  Coast. Further, the Quadrennial Energy Review of 2015  recommended that similar analyses be completed for other areas  deemed by DOE to be vulnerable to fuel supply disruptions.  Therefore, we continue to believe that conducting these analyses, as  recommended in the Quadrennial Energy Review of 2015, will provide  Congress with information needed to make decisions about regional  product reserves. Regarding our recommendation that DOE consider a full range of  options for handling potentially excess assets, DOE agreed with the  recommendation. DOE stated that in its ongoing study, the agency will  include an assessment of disposition options for any potential excess  or underutilized SPR assets, to include the need for new legislative  authority, as necessary, for the disposition of assets. DOE expects  this study to be completed in October 2018. DOE also provided technical comments, which we incorporated, as  appropriate. As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Energy, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov. If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix II. Appendix I: Comments from the Department  of Energy Appendix II: GAO Contact and Staff  Acknowledgments GAO Contact Staff  Acknowledgments In addition to the individual named above, Quindi Franco (Assistant  Director), Nkenge Gibson (Analyst-in-Charge), Philip Farah, Ellen Fried,  Cindy Gilbert, Greg Marchand, Celia Mendive, Patricia Moye, Camille  Pease, Oliver Richard, Dan Royer, Rachel Stoiko, and Marie Suding  made key contributions to this report.
More than 4 decades ago, Congress authorized the creation of the SPR to reduce the impact of disruptions in supplies of petroleum products. DOE manages the SPR. As a member of the International Energy Agency, the United States is obligated to maintain reserves equivalent to at least 90 days of the previous year's net imports (imports minus exports). The SPR's storage and related infrastructure is aging, and DOE has plans to modernize these facilities. Since 2015, Congress has mandated crude oil sales. As of March 2018, the SPR held about 665 million barrels of crude oil. GAO was asked to examine the SPR's ability to meet U.S. energy security needs. This report examines, among other things, the extent to which (1) DOE has identified the optimal size of the SPR, and (2) DOE's plans for modernizing the SPR take into account the effects of congressionally mandated crude oil sales. GAO reviewed DOE's plans and studies, and interviewed agency officials and nine experts selected based on prior work, referrals, and a literature review. The Department of Energy (DOE) has not identified the optimal size of the Strategic Petroleum Reserve (SPR). In 2016, DOE completed a long-term strategic review of the SPR after its last comprehensive examination conducted in 2005. The 2016 review examined the benefits of several SPR sizes, but it did not identify an optimal size and its review was limited in several ways. In particular, DOE did not fully consider recent and expected future changes in market conditions, such as the implications of falling net imports, or the role that increased levels of private reserves (reserves held by private companies for their own purposes) may play in responding to supply disruptions. These changes have contributed to SPR and private reserves reaching historically high levels on a net imports basis (see figure). These changes are expected to continue to evolve—according to government projections, the United States will become a net exporter in the late 2020s before again becoming a net importer between 2040 and 2050. GAO has found that agencies should reexamine their programs if conditions change. Without addressing the limitations of its 2016 review and periodically performing reexaminations in the future, DOE cannot be assured that the SPR will be sized appropriately into the future. DOE has taken steps to take into account congressionally mandated sales of SPR crude oil in its $1.4 billion modernization plans for SPR's infrastructure and facilities. The SPR is projected to hold 405 million barrels of oil by the end of fiscal year 2027. However, DOE's current plans are based on information analyzed prior to recently mandated sales. According to DOE officials, the agency began a study in March 2018 to assess the effects of these sales on the SPR's modernization. However, this study is not examining all options for handling any excess SPR assets that may be created by currently mandated sales or any additional sales that may be mandated in the future, inconsistent with an agency order on real property asset management that calls for identifying excess assets. For example, DOE does not plan to examine the potential to lease unused SPR storage capacity to the private sector because DOE is not currently authorized to enter into such leases, according to agency officials. If authorized, leasing capacity could generate revenues that could help offset the costs of modernization. By not examining a full range of options, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources.