By Steven Mufson
Washington Post Staff Writer
Monday, March 7, 2011; 9:47 PM
Is $100-a-barrel oil a national emergency?
Some Democratic lawmakers say yes, and assert that now is the time for the United States to dip into its Strategic Petroleum Reserve, which is brimming with 727 million barrels of crude.
"We encourage you to consider utilizing the Strategic Petroleum Reserve (SPR) now," Rep. Edward J. Markey and two other House Democrats said in a letter sent to President Obama on Monday. They called the reserve "the only tool we possess which can counter supply disruptions and combat crippling price spikes in the short term."
"From my perspective, it certainly would make sense for the president to begin selling oil from the SPR," Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) said Monday, citing soaring prices and fighting in Libya.
But the Obama administration has been noncommittal. White House chief of staff Bill Daley said on NBC's "Meet the Press" on Sunday that "we're looking at the options" but noted that past releases had happened only on "rare occasions." On Monday White House spokesman Jay Carney was even more circumspect, saying "it is an option we are considering, and again, within the broader context of the system that exists to deal with a major disruption, should that occur."
The political temptation to tap the U.S. reserve is great. The strife in Libya has taken about 1 million barrels a day of supplies off the world market and U.S. pump prices have climbed to a nationwide average of $3.51 a gallon for regular gasoline, an increase of nearly 39 cents in one month.
On Monday, the price of crude oil rose again, increasing 1 percent to $105.44 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 26, 2008. Another key benchmark, Brent crude oil, slipped 0.8 percent to $115.04 a barrel on the London-based exchange.
The U.S. reserve's stockpile is equal to 485 days of Libyan oil exports and about 60 days of total U.S. oil imports.
Even a modest release of oil from the stockpile could lower prices, some experts say. A release from the big U.S. strategic reserve could sway market psychology, though the change in prices would be hard to quantify.
"I think the main thing would be to deter those investors who think there's only upside risk on this price," said Guy Caruso of the Center for Strategic and International Studies.
In the past, some oil experts have even recommended letting the SPR function like the Federal Reserve, seeking to smooth out bumps in the markets and preventing panics without trying to alter long-term trends. It could dampen expectations and prevent hoarding.
That isn't the way the reserve was conceived. President Gerald Ford signed the Energy Policy and Conservation Act in 1975 to establish an oil reserve of up to 1 billion barrels in vast salt caverns near the Gulf Coast. The act did not set a "trigger" for tapping reserves but left the president to determine whether a drawdown would be required by "a severe energy supply interruption" or by U.S. obligations as part of the International Energy Agency (IEA).
The legislation defines a "severe energy supply interruption" as one which 1) "is, or is likely to be, of significant scope and duration, and of an emergency nature"; 2) "may cause major adverse impact on national safety or the national economy" (including a spike in oil prices); and 3) "results, or is likely to result, from an interruption in the supply of imported petroleum products, or from sabotage or an act of God."
Many economists and policy makers caution against using the reserve simply to lower prices.
N. Gregory Mankiw, a Harvard University economics professor, said that "release from the SPR makes some sense if the market thinks prices are temporarily high. But if the market thinks we are in for permanently high prices, we might as well live with the high prices, as there is little we can do to ameliorate a permanently higher price."
On the New York Mercantile Exchange on Monday, the monthly prices through April 2013 were essentially flat, ranging from $103 to $108 a barrel.
White House spokesman Carney said, "I wouldn't look to a price threshold. The issue here is disruption, is there a major disruption in the flow of oil?"
Administration officials have been monitoring moves by Saudi Arabia, which has said it would boost output. In addition, because most Libyan exports went directly to Europe, the IEA could order releases of the minimum stockpiles it requires private companies in Europe to maintain in case of emergency.
For most members of Congress, price hikes and supply disruptions are intertwined.
Bingaman said, "I think that there's been a pretty dramatic run-up in the price of oil worldwide because of concerns about supply disruption - and there has been a supply disruption to some extent as a result of the fighting in Libya."
Bingaman suggested that the Energy Department move up its planned sale of six to seven million barrels of oil from the SPR because of work that needs to be done on one of the storage sites.
Markey unambiguously says his goal is to "mitigate the runaway increase in prices that we saw in the summer of 2008."
He added that "releasing oil from the SPR has a proven record of driving down prices."
The President George H.W. Bush dipped into the reserve in late 1990, after Saddam Hussein invaded Kuwait. Bush authorized small sales of 5 million (a "test") and 4 million barrels. Prices dropped, then continued to rise along with political tensions. On Jan. 16, 1991, the day the Persian Gulf War began, he authorized the sale of up to 33.75 million barrels more. The sales, combined with victories in the war, pushed oil prices down. In the end, the government sold only about half that much.
In September 2000, President Clinton ordered the release of 30 million barrels from the reserve to dampen prices, despite the misgivings of his Treasury secretary, Lawrence Summers. Companies agreed to "exchange" those barrels for oil they would return the following year. Prices fell from about $37 to about $32 a barrel.
President George W. Bush was pressed to draw from the reserve when unrest halted Venezuelan exports in late 2002, but senior officials, worried that the looming war with Iraq would cause much bigger supply chaos, wanted to save the reserve.
In the end, Obama's decision could rest on public opinion as much as market sentiment.