The SPR explained

@CNNMoney June 23, 2011: 3:13 PM ET
The Department of Energy will release oil from the SPR in an effort to offset lost supply from Libya.

The Department of Energy will release oil from the SPR in an effort to offset lost supply from Libya.

NEW YORK (CNNMoney) -- On Thursday, the Obama administration said it would release 30 million barrels of oil from the nation's emergency oil stockpile -- the Strategic Petroleum Reserve.

Insiders call it the SPR for short. But what is it exactly?

The SPR is located in man-made underground salt domes in Texas and Louisiana. It holds a record 727 million barrels of oil. That's enough to cover U.S. oil imports for 85 days, or most of the oil exported from the Persian Gulf for 48 days.

The 30 million barrel draw, which will play out over a few months, is less than 5% of the total reserve.

The U.S. reserves are the largest emergency oil stockpile in the world. The government has $17 billion worth of oil stashed in the SPR, according to the U.S. Department of Energy.

The DOE began storing oil in the SPR in the wake of the 1973-74 Arab oil embargo, when oil producing nations in the Middle East halted exports. The resulting oil and gasoline shortages roiled the U.S. economy.

The last time the government tapped the SPR for emergency purposes was in 2005, when President George W. Bush authorized the sale of 11 million barrels after Hurricane Katrina wreaked havoc on production in the Gulf of Mexico.

The only other emergency release from the SPR was in the early 1990s, when the government sold over 20 million barrels of oil after exports from Iraq were disrupted by Operation Desert Storm.

Libya: Why the oil market is nervous

In 1996, the U.S. sold about 23 million barrels of oil from the SPR to reduce the federal budget deficit. The sales raised nearly $500 million in revenues for the U.S. Treasury.

The government has also exchanged crude from the SPR with oil companies on 11 occasions over the last few decades.

In 2004, for example, the government delivered 5.4 million barrels of oil to five companies, including Shell (RDS.A) and Conoco Phillips (COP, Fortune 500), after Hurricane Ivan hit the Gulf. The oil was returned within six months, along with a premium of over 200,000 extra barrels.

Why now? The latest release is "in response to the ongoing loss of oil, in particular light sweet crude, and the effect that is having on economic growth both here and abroad," a senior administration official said.

The U.S. is tapping the SPR as part of a coordinated effort with the International Energy Agency, a group representing 28 nations that was established to guard against energy supply shocks.

All told, the group will pump 60 million barrels of oil onto the world market.

The goal is to offset supply disruptions stemming from the conflict in Libya, which has removed 132 million barrels of oil from the global market as of the end of May.

The oil stored in the SPR is similar to the valuable light crude produced in Libya, which is the main ingredient in retail gasoline.

Gas prices surged earlier this year, with the national average rising to nearly $4 a gallon, as turmoil spread across North Africa and the Middle East.

While oil and gas prices have eased significantly since May, the government says it wants to make sure the oil market is well supplied ahead of the summer driving season, when gas prices typically rise.

"We're not making predictions about market prices that go up and down," the senior administration official said. "This is about addressing the supply disruption."

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Political fallout. The timing has raised some questions.

"This decision would have been more timely if made when the disruption in Libyan oil supplies first occurred," said Jeff Bingaman, the Democratic chairman of the Senate energy and natural resources committee chairman.

"However, I hope it helps deflate speculative froth in the markets and further settles prices back to levels where most experts believe they should be," he added.

In February, three House Democrats urged Obama to tap the SPR as oil prices spiked over $100 a barrel. The lawmakers wrote in a letter to the president that oil prices fell 33% when reserves were released in 1991.

However, the 60 million barrel infusion announced Thursday comes at a time when oil prices have already been falling. And it is unclear how much of an impact the additional supply will have on prices.

Oil prices have tumbled some 15% since May, and were down another 4% on Thursday to about $91 a barrel.

Gas prices have also declined. The national average price for a gallon of regular gas was $3.61 on Thursday, according to AAA. That's down from a 2011 high of $3.98 in early May.

Drilling dilemma: Oil industry leases untapped

Senator Charles Schumer of New York praised the decision to release oil from the SPR, saying "it can only help in combating the all-too-high price consumers face at the pump, and is a needed shot in the arm for our economy.'

Schumer called on the White House to "keep a watchful eye" on oil prices and release additional oil from the SPR if necessary.

Representative Doc Hastings, a Republican from Washington, criticized the move as an attempt to "achieve short-term political gain."

Hastings argued that the SPR should not be used unless the nation faces a dire energy shortage. Instead, he called on the Obama administration to ease restrictions on domestic drilling for oil and gas to help bring down gas prices.

"Rather than tap the SPR, weakening our domestic security should a real supply disruption occur, we should look to develop our true oil reserves in the Gulf, Alaska, the Outer Continental Shelf and our public lands in order to create jobs, lower prices, reduce our dependence on unstable foreign energy, and strengthen our national security," said Hastings.  To top of page

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