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Save It for a Rainy Day—Strategic Reserves for Crude and Refined Products

Many in the Northeast are digging out from what turned out to be a typical snowstorm – not a “Superstorm”.  Thanks to worse crises in the past, however, a federal Northeast Home Heating Oil Reserve was set up in 2000 and--thanks to Superstorm Sandy--federal and New York gasoline strategic reserves were put in place much more recently. The winter propane crisis of 2013-14 also sparked talk of a possible strategic reserve for propane. The theory behind establishing these stockpiles is that in markets that depend heavily on steady, reliable flow of energy products it’s important to have a cushion, a squirreled-away supply to avoid the price spikes and near-panic that can follow the words, “Sorry folks, we’re all out.” Today we examine what’s been done, how it’s worked, and what might be next.

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There are three sure-fire ways to spur interest in establishing a strategic reserve of hydrocarbons: people waiting in long lines at the gas pump, people shivering in unheated homes in the dead of winter, or prices spiking in times of shortage. (Provide two or, better yet, all three of these and action will be swift and bi-partisan!) The granddaddy of all strategic reserves, of course, is the Strategic Petroleum Reserve (SPR), which was set up 40 years ago after the 1973-74 oil embargo. The idea of stockpiling crude for an emergency was first floated during World War II; it was considered again in the 1950s and in 1970, but the huge market and economic dislocations caused by the oil embargo soon thereafter finally made the SPR happen. It took a few years for the feds to buy and fill the four underground salt dome storage facilities along the Gulf Coast that now hold a total of about 692 MMBbl of crude (see Figure #1 for a summary of SPR sites and pipeline connections to refining centers). An expansion of the SPR (current capacity, 727 MMBbl) to 1 BBbl by 2018 was authorized by the Energy Policy Act of 2005, but no funding is in place to make the expansion a reality.

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