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Is it time to release oil from the strategic reserves?

at 02:27 PM ET, 03/29/2012

With oil prices still in the stratosphere, the rumblings are getting louder that the world’s nations may release some of the crude they have saved up in their strategic reserves. On Thursday, French Prime Minister Francois Fillon said there was a “good chance” that the United States and Europe will tap those reserves.


Oil rigs in China's Heilongjiang province. (Anonymous/AP)
But experts remain sharply divided over whether now is the right time for countries to sell off oil from their stockpiles. The U.S. has 696 million barrels of crude sitting in its Strategic Petroleum Reserve, stored in salt caverns near the Gulf of Mexico. That’s enough to supply the country for 36 days. Similarly, the 28-country International Energy Agency has said that it remains “ready to act if market conditions so warrant.” Yet the IEA has also maintained that the reserves should only be tapped in the event of a severe supply disruption — and not merely to combat high prices.

The Strategic Petroleum Reserve has only been tapped three times in its 37-year history, first during Operation Desert Storm against Iraq under President George H.W. Bush, then during Hurricane Katrina, and again last year when civil war in Libya took about 2 percent of the world’s oil off the market.

This time around, however, there’s no single disruptive event to point to. Prices are high because supplies are tight and tensions with Iran are making markets skittish. “Those were all short-term, temporary disruptions,” said James Hamilton, an oil expert at the University of California San Diego, in a recent interview. “With Iran, we still don’t know the endgame yet. There are still too many uncertainties.” For that very reason, the Economist recently editorialized that crude should only be released in a “genuine emergency” — say, if Iran shut down the crucial oil shipping lanes in the Strait of Hormuz.

Other experts disagree. If the IEA were to release oil in the next few weeks, there are plenty of places it could point to where supply disruptions are taking place. Recent events in South Sudan, Yemen, and Syria have removed about 600,000 barrels of oil from the market. Japan has shut down 53 of its 54 nuclear reactors following the disaster in Fukushima, and the country is now ramping up its purchases of low-sulfur sweet crude to generate electricity.

“One could say that this is the sort of disruption that the Strategic Petroleum Reserve was built for,” says oil analyst Philip Verleger. He notes that much of the oil in the U.S. reserves is light sweet crude — the sort in high demand by Japan right now. Yet most of the U.S. refineries that process light crude have shut down recently, leaving facilities like the massive Port Arthur refinery that are able to handle the heavy stuff. “We don’t need that sweet crude, Japan can use it, and that would take a lot of pressure off the oil markets.”

Verleger recently wrote a policy brief (pdf) for the Peterson Institute for International Economics arguing that the United States should use its reserves to blunt the impacts of the new oil sanctions on Iran. The United States, he notes, could sell some of its surplus crude on the world markets — say, 500,000 barrels a day for up to 18 months — to persuade other countries not to buy Iranian oil and to avert serious economic harm.

Of course, the biggest question of all is how much an impact on prices a strategic release would actually have. Back in June 2011, the United States, Japan, South Korea, and the E.U. released some 60 million barrels of oil, after fighting in Libya had taken about 132 million barrels off the market. 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.

For now, however, there still seems to be some disagreement among IEA countries as to whether and how to make a release. A rumor in mid-March that Britain and the United States would agree to cooperate on a release was quickly denied by the Obama administration. France, for its part, is facing record high fuel prices and an upcoming presidential election. Germany and Italy have said they are opposed to selling off any oil right now. The United States and a few willing allies could certainly go it alone, but oil observers say they would likely prefer to seek consensus within the IEA.

 
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