U.S., allies to release 60 million barrels from oil reserves
By Steven Mufson and Zachary A. Goldfarb,
The United States and other industrial nations said Thursday that they will release 60 million barrels of crude oil from strategic stockpiles in aneffort to reduce the price of fuel and to jolt the stalling economic recovery.
The United States will sell 30 million barrels from its Strategic Petroleum Reserve over the next 30 days, the largest release ever from the nation’s emergency energy stockpile. The International Energy Agency said its other members will draw down an equal amount.
The announcement led to a debate in Congress about the appropriate use of the strategic reserve. Some analysts noted that the drawdown would amount to less than what the world consumes in a single day and that its effect would be fleeting.
If successful, though, the release could lower oil prices over the summer and signal that governments stand ready to intervene and limit petroleum price increases. The announcement drove down the cost of the benchmark West Texas Intermediate-grade crude oil by nearly 5 percent, to $91.02 a barrel, a four-month low. The share prices of oil companies also tumbled.
The Obama administration, which secretly dispatched senior economic officials to the Middle East last month to coordinate with three oil exporting countries, said the stockpile release was designed to offset the loss of oil exports created by unrest in Libya and the Middle East. The release comes just as the summer driving season begins, traditionally the period of highest petroleum consumption.
President Obama’s decision — a reversal of his earlier position — also comes amid partisan sniping about the administration’s energy policies. Moreover, a new poll from the Associated Press finds that 63 percent of the public disapproves of the job Obama is doing handling gas prices, while only 34 percent approve. His ratings for handling gas prices have been below 40 percent all year and are among the lowest of any of his job measures in the new survey.
Earlier, Obama had rejected calls to tap the 727 million-barrel Strategic Petroleum Reserve, which is kept in salt caverns in Louisiana and Texas. At a March news conference, he said that the reserve exists for “a severe disruption in supply.”
He suggested that high oil prices were being driven by “uncertainty in the oil markets” and demand in recovering economies and fast-growing emerging markets, such as China, India and Brazil.
But high prices have been taking a steady toll on consumer confidence and spending. In a note to clients, Eurasia Group analyst Greg Priddy called the stockpile release “ ‘stimulus’ by other means.” With a key Federal Reserve program that bolsters the economy coming to an end, he said, “it seems policymakers in the executive branch, in the U.S. and elsewhere, have decided to pull another arrow from their quiver.”
The president’s decision surprised many energy analysts and provoked a sharply partisan response on Capitol Hill, where most Democrats applauded the prospect of lower gasoline prices and most Republicans condemned what they called a politically motivated move that would compromise national security.
“With our economy teetering on the brink of a double-dip recession, and American families still struggling during peak driving season, this is the one tool America has at her disposal to immediately help drive down prices at the pump,” said Rep. Edward J. Markey (D-Mass.), who has been calling on Obama to release some of the reserves.
Republicans took the opposite view.
“The Strategic Petroleum Reserve was designed for energy emergencies, not political convenience,” Rep. Fred Upton (Mich.), chairman of the Energy and Commerce Committee, said in a statement. “Releasing our reserves to calm the market is emblematic of an administration whose energy policy is irrational and counterproductive.”
Upton renewed his call for opening up more federal land for additional domestic drilling.
House Speaker John A. Boehner (R-Ohio) said Obama was “using a national security instrument to address his domestic political problems.”
Tim Miller, spokesman for GOP presidential candidate Jon Huntsman Jr., said that tapping the reserves “will provide little to no relief for Americans at the pump. The federal government needs to pursue — and should have been pursuing — a comprehensive energy policy that removes bureaucratic regulations, increases domestic drilling, encourages new technology, and expands the use of nuclear energy and natural gas.”
By late April, the president’s economic advisers, led by National Economic Council Director Gene Sperling, had come to view a release as a buffer against financial speculation, which many people blamed for high oil prices, administration officials said.
By early May, Obama decided that he probably would tap the energy reserves, but was concerned about the reaction of major oil-export nations, especially Saudi Arabia. If it viewed the U.S. action as something at odds with Saudi goals, the kingdom could slash its output and drive prices back up.
So Obama initiated a series of secret diplomatic meetings, dispatching Deputy Treasury Secretary Neal Wolin, deputy national security adviser Michael Froman and Deputy Energy Secretary Daniel B. Poneman to Saudi Arabia, the United Arab Emirates and Kuwait. The president also made calls to Saudi King Abdullah and other Arab leaders to enlist their support, administration officials said.
In early June, the Organization of the Petroleum Exporting Countries met and deadlocked over whether to increase quotas for the cartel members. Afterward, however, Saudi Arabia said it would increase output to meet the needs of the global oil market. Obama administration officials said they expected Saudi Arabia and a few other exporters to raise supplies by about 1.5 million barrels a day.
On Thursday, the administration said it would consider taking additional steps to bring down the price of oil at the end of the 30 days. But it did not say what those steps might be.
“The U.S. stands ready to do more, and if necessary, to address this issue,” the administration official said.
Energy Secretary Steven Chu said that “as we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”
Recent data on the nation’s economic recovery have been grim, with the unemployment rate around 9 percent. This month gasoline prices have eased, but from record levels in many parts of the country. The increase in oil supply could bring some relief to motorists.
U.S. and IEA officials said that unrest in Libya has taken 140 million barrels off the market so far this year, virtually all of it the high-quality type of oil that is easiest to refine and turn into gasoline. The IEA said that “although there are huge uncertainties, analysts generally agree that Libyan supplies will largely remain off the market for the rest of 2011.”
Some analysts said the effect of the oil-reserve release will be short-lived.
“It’s important to put 60 million barrels into context,” said Pavel Molchanov, an oil analyst with Raymond James. “This is less than one day of global oil demand, currently near 87 million barrels a day. It is also less than the oil volumes shut in in Libya over a two-month period.”
Moreover, Molchanov said, “the war in Libya has already lasted more than three months and shows few signs of ending anytime soon.”
But Goldman Sachs said the international stockpile release could reduce its forecast of crude oil prices by $10 to $12 a barrel over the next three months, and by $5 to $7 a barrel in 2012.
The Strategic Petroleum Reserve was created in 1973 after Arab oil nations refused to export to the United States in an embargo. It now contains 727 million barrels of oil in four storage sites in Louisiana and Texas.
The government has released oil from the reserve at least four times in the past – after Hurricane Katrina in 2005, to reduce the budget deficit in the mid-1990s, during the 1991 Persian Gulf War, and during a test sale in 1985.