My Kingdom For; Let's Say 30 Million Barrels Of Oil

The U.S. Department of Energy announced today that it would release 30 million barrels of crude oil from the Strategic Petroleum Reserve (SPR), the country’s emergency energy storage facility, over the next month. The release is being conducted in concert with other developed states of Europe and East Asia that will collectively match the American release. The SPR is stored in a series of massive underground salt domes on the U.S. Gulf Coast, immediately adjacent to several internal energy transport hubs. The oil released will be used almost exclusively in the United States.

The move raises a number of questions; the economics and the politics underlying the issue are questionable. I believes there is no pressing need for the release — at least according to the legislative guidelines that govern the reserve.

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Officially, the release has been billed by the Department of Energy as a response to the disruptions in Libya’s oil supply. The ongoing conflict there has resulted in the removal from global markets of roughly 1.6 million barrels per day of light, sweet high-quality crude oil — a total of more than 150 million barrels displaced since the conflict began. Hardly any of that crude ever makes it to the United States — it is consumed mostly in Europe, specifically in Italy and France — but loss of that supply has indeed strained global sourcing. The Energy Department also noted that U.S. oil demand normally peaks in July and August, the height of American vacation season, and that the release should help alleviate the seasonal price spike somewhat. However, oil was priced at $95 a barrel just before the release was announced, well below the $115 per barrel it reached at the onset of the Libyan conflict and much less than the $140 per barrel in mid-2008. Prices quickly plunged by $5 per barrel following the announcement.

This is the first time the SPR has been tapped explicitly in response to high prices. Normally the SPR is an emergency account, only used when there are genuine, direct interruptions to U.S. energy interests. It has therefore traditionally been tapped only in the aftermath of major hurricanes or during military conflicts. There are a few exceptions, most of which are tied to domestic political developments, such as budget talks in Washington or technical shifts in the SPR’s makeup — shifting its fill to higher-grade crude, for example. We do not see this release as related to current budget talks because there are similar releases from 28 other countries. The expected proceeds from this release would only be sufficient to fund the U.S. federal government for one day.

The U.S. Congress recently altered the SPR’s regulations, empowering the administration to take a somewhat more liberal stance as to what constitutes an emergency situation, explicitly noting that high oil prices could justify releases. Currently the SPR is the fullest it has ever been, with 727 million barrels of mostly light, sweet crude in storage. The objective of the current legislation is to, in time, increase that volume to 1 billion barrels.

Oil prices are indeed uncomfortably high, but they are not straining the U.S. economy, especially compared to the price activity of the past three years. Gasoline prices are indeed at record highs, but crude oil accounts for less than half of gasoline prices — and this release is international in nature, so it is not likely tied to a U.S. domestic issue either. Any effort to modify global prices over a sustained period will most likely fail without substantial changes in the mechanics of supply and demand. As large as the SPR and other similar reserves elsewhere in the developed world are, they are necessarily finite, and they do not equate to fresh production.

The economics and the politics behind the issue do not make sense. That the entire developed world is involved suggests that this is neither a domestic American issue nor one that requires any degree of secrecy, rendering the reasons behind the move unclear.