Ldubs wrote:
Will the photo optimization not occur until it's full?
To your original question, the "Optimizing Storage" doesn't happen until it's necessary. Photos will keep full sized images on your Mac until the free space gets low. That's pretty clever, really, because it makes editing and some other operations faster. As storage space gets thin, Photos will begin to keep only screen-sized versions of images as needed.
How much space does your Library take up? You can look in the Pictures folder to see. And how much space do you have left on your internal drive? There has to be enough "turn around room" for Photos to complete its operations.
You have an external backup, and that's good. But if space is really at a premium, you can move your Library to an external drive-- but it shouldn't be the same one as your backup. There's information about using a Library on an external drive here:
Move your Photos library to save space on your Mac - Apple Support
Let us know how it goes....