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

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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The original rationale, offsetting a loss of imported oil, is no longer valid.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

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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