Oil: Should President Obama Tap the Strategic Petroleum Reserve?

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Are British Prime Minister David Cameron and President Obama planning on releasing oil reserves?

Barack Obama likes to say that as President of the United States, he doesn’t “bluff” when it comes to foreign policy. But when it comes to energy, it looks like Obama might be willing to try the occasional fake out.

Yesterday Reuters reported that Obama and British Prime Minister David Cameron discussed the possibility of releasing emergency oil reserves during a meeting on March 14. Opening up the reserves would presumably help reduce oil prices — which have stayed well over $100 a barrel in part because of concerns over conflict with Iran — and take some of the political pressure off President Obama, whose poll numbers have wavered as gas prices have risen. While talk of using the Strategic Petroleum Reserve (SPR) — the 696-million-barrel oil stockpile stored along the Gulf Coast — has buzzed among energy analysts for the past few weeks, the Reuters report was the first concrete sign that a release could be coming, and it was enough to force oil prices down for the third time in four days.

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Or maybe not so concrete. White House Press Secretary Jay Carney later denied the report. But many analysts believed White House officials may have put out the news as a possible trial balloon to see what impact even the hint of a release would have on oil markets. The response makes it that much more likely that Obama — for the second time in his Administration — will turn on the taps of the SPR. But should he?

The SPR was created in 1975 as a hedge against severe oil supply disruptions like the 1974–75 Arab oil embargo that preceded the reserve’s creation. The idea is simple: if there is a sudden reduction in oil supply, the U.S. can release oil from its stockpiles to smooth out the global markets and reduce the risks of major price spikes. So far it’s been tapped five times:

  • President George H. W. Bush released reserve oil during the runup to the first Gulf War in anticipation of supply disruptions from Operation Desert Storm.
  • In 1996 the Republican-controlled Congress required two separate sales of reserve oil to raise money to reduce the federal budget deficit.
  • President George W. Bush released oil in 2005 after Hurricanes Katrina and Rita badly damaged offshore production in the Gulf of Mexico.
  • And last year President Obama released 30 million barrels of oil from the reserve to offset supply disruptions due to the Libyan civil conflict. That move was done in conjunction with the release of another 30 million barrels from the stockpiles of the nations that make up the International Energy Agency (IEA).

Here’s the question: do gas prices — now inching towards $4 a gallon — that have been goosed by fears of a conflict with Iran justify releasing oil from the SPR? After all, there haven’t been any severe supply disruptions yet. Essentially traders are pricing in a risk premium to crude now, knowing that any war with Iran could lead to a sudden loss of 2.2 million barrels of oil a day, the amount that Iran exports. That would send prices skyrocketing, and if Iran were to somehow block the Strait of Hormuz, through which 17 million barrels of oil flows each day, that would be even more catastrophic. But those are possible events. Right now, the oil is still flowing.

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Nonetheless, Daniel Weiss of the liberal think tank Center for American Progress thinks Obama should open up the taps:

Reserve oil sales reduce oil and gasoline prices. For instance, last year the administration announced its sale of SPR oil on June 23 with completion on September 30. The IEA sale occurred during this time too. From the time of the announcement to the time of final sale, the price of West Texas Intermediate crude oil dropped by 17 percent, while the price of gasoline fell by 6 percent. Such a decline would reduce $4 per gallon gasoline to $3.76 per gallon.

There’s little doubt that tapping the SPR would reduce gas prices in the short term, if only because it would sting speculators who’ve been betting billions on continued high prices. And since Obama is coming under a lot of pressure from both the public and Republicans to do something about gas prices, it’s probably inevitable that he’ll tap the SPR, if only because he otherwise has virtually no tools at his disposal. That’s what Steve Levine of Foreign Policy thinks:
Look for President Barack Obama to order a significant release of oil from the Strategic Petroleum Reserve, the emergency stockpile held by the federal government. At most, it may trigger a short-lived drop in today’s high gasoline prices. But Obama is battling history: Since Richard Nixon, gas prices have snuck up and startled otherwise occupied presidents, and led them into a flurry of actions that, while usually ineffective, have the virtue of making them look like they are doing something. Now is Obama’s turn at the rite.
The truth is, though, a release from the SPR is a short-term solution — and just that. Oil prices have been rising because of worry over the Middle East, but demand from fast-growing developing countries like India and China is also pushing up the price. Even with new sources like U.S. shale crude, the global oil industry will struggle to keep pace with demand into the future, which means we could be facing elevated prices for the foreseeable future. There are solutions — improved efficiency to blunt the impact of high prices, greater production from new sources — but as Obama himself has said repeatedly, “there is no silver bullet.” And that’s not a bluff.
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