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The Strategic Petroleum Reserve Becomes a Political Football (Yet Again)

by | published February 27th, 2012

With the prices of both crude oil and gasoline racing higher, it was just a matter of time before the cries began sounding to open up the Strategic Petroleum Reserve (SPR).

The White House is now under renewed pressure to combat rising gas prices by releasing that oil.

The problem is that the SPR was not created to deal with our current crises.

Following the Arab oil embargo in 1973, which resulted in long lines at the pump in the U.S. and alternate fueling days (based on your license plate), Washington made the decision to establish the national reserve.

The original rationale, offsetting a loss of imported oil, is no longer valid. The American market will never again face such an embargo.

But we have found plenty of other reasons to tap it.

The Reserve was designed to store 727 million barrels of oil – or enough to meet all U.S. domestic needs for more than a month. It becomes a target during times of unusual stress on the oil market.

Today, the SPR contains 695.9 million barrels – 262 million of “sweet” (low sulfur content) and 433.9 of “sour” (higher sulfur content) crude.

And it has been used before to balance the domestic oil market.

On 11 occasions between 1996 and 2008, there have been “loans” of crude oil to companies, ranging from a low of 500,000 barrels to a high of 30 million barrels. The latter was to address a Northeast U.S. heating oil shortage in 2000. In each case, those consignments were later returned to the reserve by the companies.

However, we normally think of three times when Washington released the crude in direct response to a crisis. These are the precursors considered these days as the administration decides whether or not to release additional volume.

It happened first in response to the Iraqi invasion of Kuwait in 1991 (a release of 21 million barrels), then in the aftermath of Hurricane Katrina in 2005 (11 million barrels), and finally after the loss of Libyan crude last summer (30 million barrels).

In each of those cases, however, the impetus was a result of events beyond the control of the West.

Not so this time around.

Growing Concerns Over Iran

The current concerns stem, at least in part, from an embargo. Only this time, the embargo is by the European Union (EU) against imports of Iranian crude, set to begin on July 1.

U.S. Treasury Secretary Timothy Geithner said on Friday (February 24) there was “a case” developing for releasing oil from the SPR “in some circumstances.” Yet during the meeting of the G20 nations (the 19 most developed global countries and the EU) in Mexico City over the weekend, the U.S. did not make a formal request for a coordinated release from strategic reserves.

Nonetheless, this indicates the changing nature of using oil reserves to offset price changes. This is a global oil market, and the pricing dynamics are certainly not confined to the American economy.

Last summer, it was a coordinated effort by both the Paris-based International Energy Agency (IEA) and Washington to release 60 million barrels. Unilateral U.S. moves are no longer either enough or well conceived to deal with what is a global economic issue.

That move hit while I was dealing with other matters in Athens. I criticized it as badly timed and certain to provide no improvement in the oil situation following the Libyan uprising.

As I predicted then, the experiment did end in failure. But it did indicate that the U.S. recognized a joint effort was required.

In hindsight, the Obama Administration rightly concluded the move last June was ill-advised.

It accomplished nothing, unless the combined U.S.-IEA approach was committed to releasing at least 60 million barrels per month for a longer period of time.

This makes Geithner’s statement on Friday significant.

For a government that concluded the release last summer was a bad idea, this is a rather significant change of heart. The fact that there was no follow up in Mexico City means nobody is prepared to pull the trigger.

There are a number of reasons for this.

There’s Limited Upside to Any Release

First, there is no indication that pricing would respond favorably to a release now. There is substantial reason to believe the prices for both oil and oil products will be moving even higher. A release now, therefore, would have limited effect.

Remember, if everything goes wrong, the SPR holds one month’s supply.

No more.

Then there is the primary issue. We are still more than four months away from the embargo taking effect. Absent a change in that policy decision, the current trajectory up is not likely to change – whether SPR and other worldwide reserves are employed or not.

In addition, the crisis would remain, and the oil traders know it. As I wrote last summer on the use of SPR in the Libyan situation, “the actual price of the crude oil will now encompass the reserve injections, with traders setting new risk approaches that include the artificially determined volume. It will further distort the actual trading market without providing significant benefit. That’s because this additional supply will not drive the price of crude down to a level that will result in substantial savings to end-users.”

Nothing will change this time around.

The energy folks I know in the current administration certainly understand this.

But it is also an election year. And you know what that means.

It’s Time to Bite the Bullet

Nothing can derail a reelection bid quicker than spiking gasoline prices.

And as a result, crude oil is once again a political football.

Using the SPR is not a solution for anything. Yet we are not looking for a solution here; we need a temporary fix (again).

All the better solutions are longer range and won’t help us in the current situation.

We need to bite the bullet here.

As we approach Memorial Day and crude oil is selling for $125 a barrel on NYMEX and gasoline is well over $4 a gallon everywhere in the country, then maybe tapping the SPR would make some sense in a limited move.

Because by that point, the market will not be able to correct itself by moving anywhere but up.

Don’t kid yourself. This is not far off.

WTI closed trading on Friday at almost $110 a barrel, while Brent is approaching $127 in London.

Gasoline prices are exceeding $6 a gallon in Alaska, over $5 already in Los Angeles, hitting $4 in Chicago… Prices now stand nationally at an average $3.69… an all-time record for this time of the year.

Yes, at some point, the rise in prices will depress demand. But there is also nothing to prevent this from recurring, in more volatile and frequent cycles.

In attempting to offset the effect of oil prices on an economic recovery, the question of whether to tap the SPR may soon be the least of our worries.

Sincerely,

Kent

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  1. Sailor Jo
    February 27th, 2012 at 13:54 | #1

    Completely agree. The reserve is for emergencies and not for the government to use it as a carrot. Deal with it. The quantity is to small to have a real impact. Then, replenishing the supply gets even more expensive. There is no rationale to justify this.

  2. Barbara R
    February 27th, 2012 at 14:00 | #2

    Even if the Obama administration releases from the SPR, he will still be the President who pushed back the Keystone pipeline approval after HIS State Dept. spent 3 years looking it over and was set to approve it until he interfered. He is the President that has sat on the Natural Gas bill for almost 4 years without doing anything about it. He is the one who wasted millions on Solyndra. He is the one who is either supposed to present an energy policy or get out of the way and let the public markets determine what that policy should be and he has done NEITHER. Some will say that this problem has been going on a long time and it has. However, we have a President that bashes business and oil every chance he gets and gives environmentalists carte blanche (taking sides and picking winners and losers) and still hasn’t come to grips with our energy dilemma. Even Boone Pickens (an oil man) is further along the curve than this President.

  3. George
    February 27th, 2012 at 14:23 | #3

    I believe that we are seeing the results of the Obama administration’s energy policies. (“GREEN”) El Presidente gets on TV to brag that during his administration, gasoline production is at an all time high. I also understand that this is a result of the previous administrations policies, not the present. IMHO, we do need alternate energy sources, but it needs to brought online as the technology allows, not just shut down our existing sources. During the previous presidential campaign, Obama stated that he wanted to get gas prices on par with the European nations, and his vision is coming true. Also he stated that electric prices will necessarily skyrocket, and that is becoming true. He is stiffeling the use of coal, which is our greatest natural energy source. And WHY are WE selling gasoline to other countries while WE are paying astronomical prices for gas??

  4. Alan Scott
    February 27th, 2012 at 15:52 | #4

    All of what we see around us today that we do not like, is entirely our own damn fault(s)! Human life and time are relatives –birth to death, night to day, etc. WE had the choice, way back about 1968 to project a MAJOR PROBLEM ahead and start working on a solution then. We did not. So about 5 years later, we got a huge shock and wake-up call from OPEC (when the shut down our Economy in 1973). The CAUSE of that economic shudown was the knowing by 1968 that we would soon have to depend on outsiders to keep our Economy running smoothly (as we would have to buy FUEL not found from inside our own borders (or possibly Mexico’s and/or Canada’s). The 1973 shut-down should have taught US that if that could happen once, it could probably happen twice! And any good leadership would have told the American people that we had to Crash Program our way back to energy INdependence ASAP!

    Instead, the minute that OPEC act (really, they were doing us a favor by waking us up!) was solved, we should have learned that lesson and immmediately started a Crash Program to get ourselves back to energy INdependence. Visualize a fork in the road. That OPEC situation should have told us CLEARLY that we did NOT want to take fork A (ignore what OPEC had done to us and could do again), we should take fork B (back asap to energy independence). So all that we see around us today that we do not like (including 10 years of war in the Middle East) is our own damn fault(s)! Even if it took us 10 years (from 1968 when we shifted across from energy INdependence) to solve that MAJOR POTENTIAL PROBLEM, if we had taken that fork B and done that, there never would have been a “911” because we would have been in our own hemisphere minding our own business, energy INdependent, no need for any so-called “terrorists” to have US in THEIR sites as the bad guys –they could have stayed in the Middle East because we never would have needed go there, so thought given to us by them! We also would not be broke because we would have never have spent ourselves toward bankruptcy (at least not so badly). Our KIDS adults of these last 2 generations have moved farther and farther away from reality AND we have also used up our kids freedoms on ourselves (and to hell with the kids and our Constitution and individual freedoms). What kind of leaders would have ever allowed us to get here today where we continue to borrow 40% of our spending when we are already broke and most out here either don’t give a damn or are just plain selfish and/or stupid and with no sense of survival, let alone our kids survivals! There are now 7 BILLION humans here! And a couple BILLION more coming in the next 40 years! Does no one ever look at the big picture! Life is gooing to change, like it or not, because the last time I looked, our planet had not change size to accomodate more and more humans –it has a fixed amount of natural assets and more and more human demand on those! Last time I looked, when people get in a box, they do NOT start cooperating, they start getting more and more selfish! There is a little experiment that I saw a long time ago where in the lab, they had put several mice (male and female) and they then fast-worwarded as offspring arrived, and pretty soon there were 8 or 10 mice and all was placid but in fast forwarding some more, suddenly there was no more space and as it moved along, mice were walking on mive below them and then it got worse and worse until mice began to fight for survival and soon there was chaos in that cage! Does no one see that is ahead for humans, too, UNLESS we wise up and fast adn start looking at the real problem here –survival of the planet! If we do not start looking at the Big Picture, FIRST, it is only going to get worse and worse because we have become more and more selfish and self-oriented and with false values overwhelming higher values (like staying alive and having decent living conditions, not worse!
    Alan Scott

  5. Michele
    February 27th, 2012 at 18:21 | #5

    I agree maybe the Green Obama should double the oil subsidy to 10 billion ,so Big Oil can have more corporate welfare to line their pockets with, it’s not like we keep any of the oil we drill for in this country anyway , most of it goes to Europe, considering that the 5 billion a year subsidy was supposed to be for new industries, and well Big oil has been around for like a century , no way we want to explore the options of developing Lifp04 battery technology , considering the electric motor is 70 % more efficient than the ICE engine they might as well continue to burn the unlimited supply of fossil fuel that we have, it’s not like the oil lobbyists will ever let the USA advance beyond the Otto engine anytime soon,

  6. Colin
    February 27th, 2012 at 18:57 | #6

    As long as a select minority of green tree huggers have the ear of a leftist radical sitting in the white house, it is no surprise that we have the energy mess in this country. A decade ago congress was debating more drilling, with the outcome being that it would take at least a decade to get any relief. We could be enjoying the fruits of our labors for the last two years. I say full speed ahead with drill baby drill, and frac…. lest we all end up riding bicycles and sitting around camp fires in mud huts…

  7. February 27th, 2012 at 21:10 | #7

    sir: is the SPR the same as the old Navel reserve established way before the embargo of the 70’s.if they are seperate reserves, how much is in the Navel reserve? thanks carleton

  8. Buz Davis
    February 27th, 2012 at 21:40 | #8

    @Barbara R
    Well said.

  9. mark noeth
    February 27th, 2012 at 23:11 | #9

    I highly suggest the reading of “The Oil Card” by James R Norman. If what was done in the 80’s & 90’s achieved stated goals; why would we think current events are purely a result of market forces? Answer: Its easier to contemplate, albeit erroneous. Pride sometimes requires sticking with the wrong answer.

  10. Jim mclennan
    February 27th, 2012 at 23:38 | #10

    This is totally uncalled for! Osma told us when he got elected! He would bring all prices sky high! Fuel first! Then comes the food! I own a small bbq joint in texas! He is about to destroy me! Electric! Fuel cost for my deliveries! Wow! My customers are staying home! There scared again! All i can tell mr osama! Is! Stay outta rural texas! My food cost has doubled! And more! Hes promised and he has delivered!

  11. phillip e. constantin
    February 28th, 2012 at 06:55 | #11

    wht is the best way to purchase crude/gasoline futures on line?
    p. constantin

  12. February 28th, 2012 at 10:43 | #12

    @Alan Scott
    Alan, regretfully, you’re right. Only small portion of Americans are politically active – as once Germain Chancellor Bismark (not sure though it was him to say first this) said”every nation deserves the government it has”.

  13. neil braddy
    February 28th, 2012 at 23:35 | #13

    hope folks wake up to the reality that free maket economics doesnt work for items like oil, there are not enough independant oil producers to make a market…there is only the place to come to buy oil at the price they want. its their way or no way, big guys getting bigger at the expense of of the smaller weaker segments of the economy. hope folks wake up to the idea that oil producers are only entitled to the cost of production, plus a reasonable profit…not what ever they can get..remember jfk,s fight with us steel in 1960? and besides, its a ridiculous cycle, they raise the price of oil… the price of everything follows, going up so at the end of the day everyone is at the same relative place, only after some economic pain and discomfort. let stop the stupidity.

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