The Energy Policy and Conservation Act of 1975 (1) authorized the creation of the StrategicPetroleum Reserve (SPR) for the storage of up to 1 billion barrels of crude oil. The federalgovernment began filling the SPR in 1977, mostly with imported oil. By 1992, the SPR held 575million barrels of crude oil, and in May 2003, over a decade later, holds approximately 600 millionbarrels in reserve. Since the creation of the SPR in 1975, debate has periodically focused on theoptimal size of the SPR, specifically whether it should be expanded to 700 million or 1 billionbarrels of oil. In the 108th Congress, legislation passed by the House ( H.R. 6 ) wouldrequire the SPR to be filled to its current capacity of 700 million barrels of crude oil and providesfunding of $1.5 billion to expand the capacity of the SPR to 1 billion barrels. (2) Worldwide concern over the unstable nature of the crude oil market has led other nations to establish emergency oil stocks as part of International Energy Administration (IEA) agreements tomanage supply disruptions. For example, at the end of 1999 Japan held 315 million barrels of crudeoil, OECD Europe held 325 million barrels, South Korea held 43 million barrels, and Taiwan held13 million barrels. The U.S. is the only country in this group where security stocks are totallygovernment owned. In Japan, South Korea, and OECD Europe, the total stock is divided betweengovernment and mandated private stocks. In Taiwan, the stock is completely mandated private. (3) Although decisions on the size of the SPR and private stocks are made through very different decision processes, they are linked by the fact that both may be useful in times of supply disruption. When supply is disrupted, prices rise quickly through active futures, spot, and product markets. Higher prices give businesses an incentive to bring product to market, which mitigates potentialphysical shortages, giving policy makers time to consider an SPR draw-down. If businesses havereduced available inventories to cut costs, their ability to play this role is diminished. For thisreason, the size and availability of private stocks of crude oil is relevant to debates over the optimalsize of the SPR as well as when, and under what circumstances, to use the SPR. The case for the existence of the SPR is usually framed in a benefit/cost framework. (4) Thebenefits are typically defined as avoided costs which are then set against the real resource, oropportunity, costs of maintaining the reserve. The same approach is followed for considering marginal adjustments to the reserve, but with a focus on the additional value of avoided costsimplied by a reserve expansion set against the marginal resource cost of expanding the reserve. Although debate on the size of the SPR is normally framed in terms of millions of barrels of crudeoil held, another measure, consistent with International Energy Agency (IEA) measurement, is thenumber of days of net imports for which the reserve can substitute. Although the primary focus ofSPR usage is concerned with international oil market disruptions, the SPR could also be used intimes of emergency stemming from domestic supply disruption. The benefit of maintaining the SPR lies in avoiding the effects of severe oil price spikes and shortages that might result from supply disruptions. Significant, rapid spikes in the price of crudeoil and actual shortages can have damaging effects on the macroeconomic performance of theeconomy. Reduced economic output, leading to increased unemployment and a reduction in the rateof economic growth are possible consequences. In terms of the balance of payments, higher oilprices will mean a greater expense for oil imports, causing the balance of trade to deteriorate. The costs of the SPR are much like those of other public investment projects. The capital costof the reserve and/or expansion of the reserve, costs associated with providing for the draw of thereserve, the operations and management cost, and the cost of the oil stored in the reserve are all partof total cost. The cost of the stored oil is a real budget cost in the year of acquisition to be recoupedlater when, and if, the reserve is drawn down. Proponents of the SPR see the existence, as well as the use, of the reserve contributing to stability in the oil market. The existence of the reserve could deter some politically or economicallymotivated disruptions. If the reserve is drawn upon, it might allow affected economies time to makeother adjustments to the new market conditions, including diplomacy, which might remedy, ormitigate the underlying cause of the disruption. The existence and/or use of the reserve might calmuncertain oil markets and dampen the effect of underlying market imbalances leading to a moderatedprice spike. Those opposed to market intervention see less benefit associated with the SPR and its use. They believe that the freely functioning market can mitigate most disruptions and that governmentintervention in market processes is unlikely to enhance resource allocation. In this view, friendlysuppliers might expand short term output in case of a disruption, and higher prices will allocateavailable supplies to their most pressing needs, minimizing the effect of the supply disruption. The SPR is not a stand-alone policy for energy security. In the longer term, diversifying energy sources and improving energy efficiency, engaging in productive dialogue with oil producers andenhancing the price responsiveness of consumer demand are all important measures. In the shorterterm, encouraging fuel switching capability and demand reduction can be useful energy securitymeasures. The implicit assumption underlying the SPR debate appears to be that the stock of private oilreserves held by the U.S. petroleum industry is known, unchanging, and available to reach the marketduring a supply disruption. To put the SPR expansion issue in proper context, the optimal size ofthe SPR might be considered as part of the total stock of reserves the nation has to draw upon intimes of emergency. (5) Consider the followingextreme, hypothetical cases. If the private sector wereable, technically and economically, to run the oil production system with zero inventories, or reservestocks, every world oil market supply disruption would be quickly transmitted to the domesticconsumer market, leading to immediate shortages and price spikes. In this case, a large reserve,coupled with quick response usage rules might be required for market stability. At the otherextreme, if the oil industry found it either technologically or economically useful to hold a year'sworth of supply in reserve which it was willing to draw down as needed, there might be little needfor any government reserve. If, in reality, we are somewhere between these extremes, so might bethe requirement for the SPR, and, as a corollary, if the capability of privately held stocks varies, somust the capability of the SPR if our overall ability to meet market challenges is to remain constant. In fact, the behavior of private levels of crude oil stocks have not been constant, they have been declining. Crude oil stocks, excluding the SPR, stood at 285.1 million barrels on May 16, 2003. One year ago the stock stood at 325.6 million barrels, which implies a reduction of 12.4 percent instocks held by the nation's oil industry. (6) Figure 1 , computed by the IEA, shows the behavior of totalU.S. oil stocks, measured as days of net imports. (7) Figure 1 shows a decade long decline in the ability of industry stocks, alongwith the SPR, to replace imported oil. Several forces are at work in Figure 1 . First,the increasing dependence of the U.S. on imported oil makes a stock of any size lesscapable of replacing imports. Even if the actual stocks shown in the figure wereconstant, days of imports would decline if the quantity of oil we import rises. Table1 shows that net imports of crude oil have increased from approximately 5.7 millionbarrels per day on average in 1989 to approximately 9.0 million barrels per day onaverage in 2002. (8) This increased dependency hascontributed to the downward trendof Figure 1 . Table 1. Net Imports of Petroleum, 1989-2002 (in thousands of barrels per day) Source: U.S. Energy Information Administration. Monthly Energy Review, March2003 , p. 43. Secondly, as noted above, in the short term, stocks of privately held oil have declined. Figure 2 shows the behavior of U.S. stocks, measured in billions ofbarrels, in the longer term, from 1973-2002. The figure shows that non-SPR crudeoil stocks have experienced a long term decline since their peak in the mid 1970's,even though in the last two decades imports and consumption have risen. Figure 2also suggests some increased volatility in the level of privately held stocks since themid 1990's. This behavior might be expected if firms were optimizing theirinventory holdings. Additions to stock when prices of crude oil are low and drawdowns from inventory when prices are high enhance profit opportunities. (9) Trends similar to those observed in crude oil have also occurred in petroleum products. The Petroleum Industry Research Foundation, Inc. calculates that finishedgasoline stocks fell from a 30 day stock in 1985 to an 18-19 day stock in 2001. Thistranslated into a 41 million barrel decline in gasoline stocks over the period. Anadditional complication is that gasoline is not as fungible as it once was. Differentblends of gasoline to satisfy differing air pollution standards in various parts of thecountry put further strain on a system that is reducing stocks. (10) Finally, not only privately held stocks have declined, but the privately held capacity to hold stocks has also declined. In 1990, the capacity of refineries in theU.S. to hold stocks of crude oil was 204 million barrels; by 2002 this capacity haddeclined to 183.3 million barrels, a reduction of over 10 percent.