Oil is vitally important to the world and U.S. economy, accounting for nearly 40 percent of world primary energy consumption. As shown in figure 1, although world oil consumption has increased significantly over the past 20 years, oil’s share of primary energy consumption has remained fairly constant. EIA projects similar trends for the next 20 years, with total world energy consumption increasing 2 percent annually through 2025 and oil comprising about 38 percent of all energy consumption in 2025. Oil is also the largest primary source of energy in the United States, accounting for about 40 percent of all energy consumed in 2004. As shown in figure 2, two-thirds of the oil consumed in the United States is used for transportation. About 96 percent of energy used for transportation in the United States comes from oil. The transportation sector is almost exclusively dependent on oil because there are no significant competitive alternatives. EIA projects that transportation will comprise an even larger part of U.S. oil use in the future, about 72 percent in 2030, because it expects the growth in demand for transportation to far exceed increases in fuel efficiency. As shown in figure 3, the United States’ demand for imported crude oil increased rapidly after 1970, when domestic crude oil production peaked. Although the percentage of imported crude oil decreased from about 45 percent in 1977 to about 26 percent in 1985 due to a reduction in demand for oil, imported crude oil increased again to 65 percent by 2004 due to a combination of increases in consumption and decreases in domestic production. The United States created the SPR because the country’s reliance on oil imports makes it vulnerable to disruptions in oil supply. Strategic oil reserves like the SPR are particularly important now because oil market cushions, such as excess oil production capacity and private inventories, have decreased in recent years. Although estimates of spare production capacity are uncertain, experts believe that spare production capacity dropped to around 1 million barrels per day in 2004, close to a 20-year low. Additionally, private inventories of oil and oil products have been on a long- term declining trend, in part because of a trend toward just-in-time inventory. The absence of these market cushions means that less oil is available in the market to mitigate price spikes during oil supply disruptions. Thus, a supply disruption that takes even a small amount of oil off the market could cause the price of oil to rise dramatically. One factor limiting excess oil production capacity is recent steep increases in world consumption of oil. Together, the United States and Western Europe accounted for 44 percent of the 80 million barrels of oil per day of world oil consumption in 2003. The United States is the world’s largest oil consumer, accounting for about 25 percent of the world’s oil consumption, despite having only 5 percent of the world’s population. In addition to the high levels of consumption in the United States and Western Europe, oil consumption has also been rising rapidly in Asia and Oceania, as shown in figure 4. For example, according to a recent study by the International Monetary Fund, China and India accounted for 35 percent of incremental oil consumption between 1993 and 2003, even though they accounted for only 15 percent of world economic output over the period. China has overtaken Japan as the second largest oil consumer in the world, second to the United States. Since 1976, the United States has spent about $26.3 billion—$45.2 billion when valued in year 2005 dollars—to build, maintain, fill, and manage the SPR. The largest cost has been the cost of filling the reserve. Since filling began in 1977, $20.0 billion has been spent to obtain oil ($35.1 billion in 2005 dollars). This amount includes $15.7 billion of oil purchased with funds appropriated from 1977 through 1992, and $4.3 billion of oil received in lieu of government royalty payments since 1999. Since 1999, oil for the SPR has been obtained through the royalty-in-kind transfer program, in which royalties from government oil leases in the Gulf of Mexico are taken in the form of oil, rather than in cash. The Department of the Interior’s Minerals Management Service, which collects the royalties, contracts for delivery of the royalty oil to designated market centers. Because the oil delivered to these market centers often does not meet SPR quality specifications and is distant from the SPR storage sites, DOE awards complementary contracts to exchange royalty oil at the market center for SPR-quality oil delivered to the SPR facilities. However, the logistics of Gulf of Mexico oil production from federal leases limits the rate at which royalty oil can be economically delivered to the SPR sites. The SPR oil is stored in salt caverns at the following four facilities: Bayou Choctaw and West Hackberry in Louisiana, and Big Hill and Bryan Mound in Texas. These caverns range in size from 6 million to 35 million barrels and were created by solution mining, in which water injected into an underground salt formation dissolves the salt and creates a cavern. According to DOE, salt caverns offer the lowest cost, most environmentally secure way to store crude oil for long periods of time. Storing oil in aboveground tanks generally costs 5 to 10 times as much. Also, because the salt caverns are 2,000 to 4,000 feet below the surface, geologic pressure will seal any crack that develops in the salt formation, ensuring that no crude oil leaks from the cavern. An additional benefit is the natural temperature difference between the top of the caverns and the bottom, which keeps the crude oil continuously circulating in the caverns, ensuring that the oil in the cavern is of consistent quality. Areas near the Gulf of Mexico were a logical choice for locating the SPR. In addition to the more than 500 salt domes concentrated along the Gulf Coast, many U.S. refineries and distribution points for tankers, barges, and pipelines are available. The four SPR storage areas are connected via pipelines to the Gulf Coast and the Midwest refining regions. Oil can be transferred via tanker to the Louisiana Offshore Oil Port, which is a major facility in the Gulf of Mexico that is connected via pipeline to over 50 percent of the United States refining capacity. The location of the SPR is less advantageous for distributing oil to or receiving it from the western United States. Past drawdowns of the SPR have occurred for a wide variety of reasons. The SPR has sold oil twice under emergency conditions, 17.3 million barrels in 1991 at the beginning of Operation Desert Storm and 11.0 million barrels in 2005 after Hurricane Katrina. In response to problems ranging from a blocked pipeline to a potential shortage of commercial heating oil stocks, exchanges of crude oil from the SPR with private companies have occurred eight times, ranging in size from 500,000 barrels to 30 million barrels. The largest exchange occurred in the fall of 2000 in response to concerns about low inventories of heating oil in the Northeast. In these exchanges, the borrowing parties returned the amount of oil borrowed plus additional volumes of oil as interest. In two cases, conducted for operational reasons, the SPR exchanged 11.0 million barrels of lower quality oil for 8.5 million barrels of higher quality oil and 2.7 million barrels of crude oil for 2.0 million barrels of heating oil. DOE has also conducted two test sales to demonstrate the readiness of the SPR, in 1985 and 1990. In addition, sales to reduce the federal deficit occurred mainly in 1996. Recent concerns about filling the SPR and long-standing concerns about its use can be addressed in ways that improve SPR effectiveness, according to numerous energy and oil market experts. A number of persons have raised questions because they believe that recent efforts to fill the SPR during tight oil supply conditions put upward pressure on oil prices. Others have expressed concerns that the SPR has not been used in disruptions where its use was warranted and, when used, has not been used early enough after a disruption has occurred. In addressing these concerns, experts with whom we spoke suggested alternative practices to consider when filling the SPR to reduce fill costs, as well as various points to consider when deciding whether to use the SPR. While early SPR fill activity focused on establishing an oil reserve large enough to be useful during a supply disruption, more recent fill activity has focused on maximizing long-term protection against disruptions. Although several oil analysts and experts believe that filling the SPR from late 2001 through 2005 during a time of tight supply and demand conditions caused the price of oil to increase by several dollars per barrel, most of the experts with whom we spoke believe that filling the SPR at that time had minimal impact on oil prices because the volume was so small compared with world oil demand. Experts suggested SPR fill practices that could reduce the cost of filling the SPR. They recommended that DOE acquire a fixed dollar value of oil per time period, rather than a fixed volume of oil per time period, and allow industry more flexibility in the timing of oil deliveries to the SPR. Prior to 1984, several pieces of legislation set forth minimum fill rates for the SPR, in an effort to increase the volume of the reserve to a level large enough to be useful during an oil supply disruption. However, the actual rate of fill often fell short of these goals. Several studies completed around this time reported that, given the SPR’s small size, it should be reserved for severe disruptions since it is a one-time source of crude oil, which must be replenished after a drawdown. They advised that only after the SPR contained a minimum of 250 million to 500 million barrels of oil would it be advisable to use it. In a September 1981 report, we echoed this concern, believing that DOE should not suspend SPR fill, except during severe disruptions, until the SPR reached a minimum threshold size. Furthermore, we stated that, given the importance of the SPR, filling it should be considered a part of U.S. base demand and should not be cut back under tight market conditions. Figure 5 shows the progress in filling the SPR since its inception in 1975.