Could Obama tap our strategic reserves to lower gas prices?

at 01:51 PM ET, 02/23/2012

As oil and gas prices soar — due, in part, to tensions with Iran — many Democrats have called on President Obama to tap into the nation’s Strategic Petroleum Reserve to moderate the shock. But would this move actually work? That’s not so clear.


Is the Strategic Petroleum Reserve the answer to all our gas woes? (Associated Press)
A new policy brief (pdf) by Philip Verleger of the Peterson Institute for International Economics lays out how the United States might use its crude reserves to blunt the effects of the new oil sanctions on Iran. Verleger starts by noting that it’s still uncertain whether the U.S. and E.U. embargo will actually raise oil prices in the long run. (One alternate scenario is that Iranian oil will go to refiners in India, who would sell at a discount.) But if oil does keep getting pricier, Verleger writes, then the United States could try to sell some of its surplus crude on the world markets — say, 500,000 barrels a day for up to 18 months — to avoid serious economic damage.

The United States certainly has some oil to spare. By Verleger’s calculations, the United States now has 276.4 million barrels of crude sitting in its Strategic Petroleum Reserve (SPR). If anything, he notes, the United States is storing far more oil than is required under international agreements, because domestic production has risen and U.S. gasoline demand has fallen. “The decline in U.S. net imports,” Verleger writes, “frees up significant amounts of SPR stocks.” In other words, because our domestic supply has become more secure, we have more oil to send to Europe to ease the crunch there.

The big question, though, is whether the United States should use its strategic reserves right now, and whether a release would actually tamp down gasoline prices. In theory, says James Hamilton, an oil expert at the University of California San Diego, the Strategic Petroleum Reserve is only supposed to be used when there’s a sudden and severe loss of oil supply — as happened after Hurricane Katrina, when 25 percent of U.S. production in the Gulf of Mexico went offline. “That was a short-term, temporary disruption,” Hamilton said. “With Iran, we don’t know the endgame yet. There are still too many uncertainties.”

The last time the White House released oil from the strategic reserve — in coordination with Japan, South Korea and the E.U. — was in June 2011, after fighting in Libya had taken some 132 million barrels of light, sweet crude off the market. Participating countries released 60 million barrels from reserves, but it’s still debatable how much impact the move actually had. On the day the release was announced, Nymex oil futures dropped $4 (which translates into a roughly 10-cent drop in the price of U.S. gasoline). But some analysts quibble that oil was heading down anyway — and that the release had little long-term effect on prices.

Democrats and think tanks such as the Center for American Progress have suggested that a release of oil from the SPR could discourage speculators who are driving up the price of oil. But Hamilton disagrees, noting that oil traders are doing exactly what you’d expect them to be doing right now. “If there’s a risk that we could be facing a significant disruption in supply, we’d want to store a little more oil right now to prepare for that,” he says, which would drive up prices. “That’s what speculation amounts to.”

For its part, the White House hasn’t ruled out a release from the strategic reserves. But even if this move could knock down gas prices a bit, that’s hardly a long-term strategy for a world where oil supplies remain tight and high prices have become the norm. Obama seems to agree, telling a Georgetown University crowd last spring: “So here’s the bottom line: There are no quick fixes. Anybody who tells you otherwise isn’t telling you the truth.”

 
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