“Now, next week I will have legislation out on the floor that ensures that we do have a strategy to deploy the Strategic Petroleum Reserve. When President Bush 1 used it during the first Persian Gulf War, the price of oil went down 33 percent. When Bill Clinton used it in September and October of 2000, the price went down 18 percent. When George Bush 2 used it after Katrina, it went down 9 percent. It is a message to speculators.”
— Rep. Edward Markey (D-Mass.)
High gasoline prices spur politicians to demand action, often against oil companies, oil traders or oil profits. On Capitol Hill Thursday, as House Republicans pushed forward with a bill to require offshore oil and gas lease sales, Markey joined with House Democratic leader Nancy Pelosi (D-Calif.) to demand an end to tax breaks for oil companies. As part of that news conference, he made his remarks about the Strategic Petroleum Reserve.
By the end of the day, oil prices had plunged nearly nine percent, with crude oil falling below $100 a barrel. Had Big Oil been spooked by the tough talk by a largely powerless minority in Congress? Perhaps, though news reports did not mention the news conference, citing instead a strengthening dollar and a weak U.S. employment report. Oil prices had already begun to fall this week, before Pelosi and Markey stood before the cameras.
Thursday’s fall in oil prices demonstrates how difficult it is to pinpoint the cause of commodity price movements. Yet Markey was very definitive about the impact of the petroleum reserve. How valid is his case?
The Strategic Petroleum Reserve was created in 1975 after the 1973-74 Arab oil embargo and huge prices hikes that resulted. It currently holds 726.6 million barrels, in five salt domes in Texas and Louisiana. If ordered by the president, the Energy Department could draw down 4.4 million barrels a day, starting nearly two weeks after the decision is made.
There have been a number of sales or exchanges of oil from the petroleum reserve over the years, partly to raise revenues, but only two emergency sales, by the two Presidents Bush. President George H.W. Bush sold 17 million barrels during the Persian Gulf War; President George W. Bush sold 11 million barrels after Hurricane Katrina. Markey also referred to a 30-million barrel exchange of oil controversially ordered by President Bill Clinton in the midst of the 2000 election.
The numbers cited by Markey are largely correct, though the time periods are not the same. The 1991 drop of 33 percent took place in a day, for instance, while the 2000 figure refers to an eight-day period. But there is little evidence that releasing the petroleum reserve was entirely the cause of those price drops, as Markey suggested.
Bush announced the 1991 sale at the same moment U.S.-led forces began airstrikes against Iraqi defenses in the invasion of Kuwait. The next day, crude oil prices fell $10, to $20 a barrel — the price when Iraq had invaded Kuwait five months earlier.
The Congressional Research Service, in a report on the petroleum reserve, said: “The price drop was attributed to optimistic reports about the allied forces’ crippling of Iraqi air power and the diminished likelihood, despite the outbreak of war, of further jeopardy to world oil supply.” The report added: “The SPR drawdown did not appear to be needed to help settle markets, and there was some criticism of it.”
We reviewed news reports from the period, and some cited the release of the oil as possibly helping to bring down prices, while other reports did not.
Bruce Beaubouef, author of “The Strategic Petroleum Reserve: U.S. Energy Security and Oil Politics, 1975-2005,” which was published in 2007, extensively examines that period and says “even current and former DOE officials had different opinions” about whether the success of the air campaign or the drawdown announcement had a bigger impact. The deputy assistant secretary in charge of the petroleum reserve said the drawdown “had some effect,” but it was “the success of the air war [that] drove the price down.”
Despite the uncertainty, Beaubouef himself credits the drawdown announcement as having a “significant role in bringing prices down” by affecting the “collective psychology” of the markets. But he adds: “It seems inescapable that news of the air war also played a significant role.”
The impact is similarly mixed with the other examples touted by Markey. For instance, regarding Clinton’s 2000 oil exchange to combat heating oil shortages, Markey’s staff cited 2008 congressional testimony by C. Kyle Simpson, who had once been in charge of the petroleum reserve. Simpson credited Clinton’s move as having “an immediately positive psychological effect on the market.”
Melanie A. Kenderdine, another former DOE official, also testified: “The results were immediate, in spite of the fact that oil had not yet moved into the market (demonstrating the psychological impacts on the market when the U.S. signals its intention to act).” She credits the move with cutting oil prices by 34 percent over a four-month period.
But Beaubouef reports: “As before, a number of analysts argued that a deflationary trend had been in place prior to the drawdown announcement, and that the drawdown announcement thus played a small role, at best, in the ensuing price deflation.”
Philip K. Verlanger, an industry analyst instrumental in setting up the petroleum reserve, said that as it has been used in the past, it helped “knock the price down for a few days” because such small amounts of oil were sold. He said it would be effective if a significant amount of oil was sold over a sustained period of time.
Eben Burnham-Snyder, a spokesman for Markey, says the record speaks for itself. “Starting in 1991, following three releases of oil from the Strategic Petroleum Reserve by three different presidents in three different situations, the price of oil went down,” he said. “In a volatile and complicated oil market, that’s not a coincidence, it is a proven record of success.”
The Pinocchio Test
In making the case for acting on the Strategic Petroleum Reserve, Markey stretched the historical facts. While it is correct that oil prices dropped after oil stocks were released — and it is possible the petroleum reserve played a role — analysts still disagree about the effectiveness of those actions. At the very least, other factors were important for the shift in oil prices. We realize that politicians don’t speak with footnotes, but Markey’s claims were too sweeping and lacked context.