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Time to Tap the Strategic Oil Reserves?

By Climate Guest Contributor on February 23, 2012 at 11:36 am

"Time to Tap the Strategic Oil Reserves?"

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President Obama should use the strategic petroleum reserve to lower gasoline prices

by Daniel J. Weiss

Americans are rightly concerned about rising oil and gasoline prices. On February 21 oil closed at $106 per barrel, while the average gallon of gas in the United States cost $3.59. Bloomberg reports that prices could continue to rise:

While gas prices tend to rise through the first half of the year, this is the earliest the average price per gallon has breached the $3.50 mark. If this pace continues, the national average should hit $4 a gallon by May, if not sooner.

This is not good news for consumers or for the economy. High oil and gasoline prices slow economic growth and take a real toll on families’ already-strained budgets. They are difficult to lower in the short run because it is very hard to promptly increase oil supplies. Meanwhile, demand for gasoline does not decrease even as prices increase because most people cannot quickly and significantly reduce the amount they drive.

There is one proven tool for temporary reductions in oil and gasoline prices that can forestall reduced economic growth and help middle-class families: selling oil reserves from the Strategic Petroleum Reserve.

Getting some relief at the pump

President Barack Obama plans to speak about high oil and gasoline prices today in Florida. He will remind Americans that oil production is up and consumption is down, which means that families are saving money on fewer gasoline purchases even though prices are rising. The payroll tax cut extension will provide an average of $40 more per paycheck and will also help ease some of the strain of higher gasoline prices. It is unlikely the president will announce the sale of reserve oil during the speech, but it remains an option if prices continue to climb.

Why are oil and gasoline prices so high?

Oil and gasoline prices are rising now for a myriad of reasons. Growing demand from China and India has boosted consumption, and Libyan production has yet to return to its prewar level of 1.6 million barrels per day. Pat Garofalo of ThinkProgress reports that the price is going up “despite lowest [U.S.] demand [for oil] since 1997.” He cites Tom Kloza, chief oil analyst for the Oil Price Information Service, who says that speculators are helping to drive up oil prices:

Much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” [Kloza] says. “Each of the last three weeks we’ve seen a record net-long position being taken.”

Another major source of high prices is Iran’s threat to cut off oil exports to Western nations that are pressuring it to abandon its nuclear weapons program. On February 19, for instance, Iran announced that it would stop sales to England and France. Although these two nations buy very little Iranian oil, fear that Iran would stop supplying other, more dependent countries boosted the spot price for oil by $3 per barrel overnight. This was also partly driven by speculators taking advantage of fears about future production cuts. And since the price of oil accounts for nearly 80 percent of the price of a gallon of gas, this cost jump will boost gasoline prices too.

What can we do about high oil and gasoline prices?

There are very few policy measures that can rapidly reduce oil and gasoline prices, but selling oil from the Strategic Petroleum Reserve to oil companies can help. The reserve was created in 1975 as a hedge against serious oil supply disruptions such as the Arab oil embargo of 1973–1974. It has a capacity of 727 million barrels of oil and is currently 96 percent full with 696 million barrels.

Presidents have the authority to sell reserve oil under the following circumstances described in the Energy Policy and Conservation Act:

Drawdown and sale of petroleum products from the Strategic Petroleum Reserve may not be made unless the President has found drawdown and sale are required by a severe energy supply interruption or by obligations of the United States under the international energy program.

(2) For purposes of this section, in addition to the circumstances set forth in section 3 (8), a severe energy supply interruption shall be deemed to exist if the President determines that -

(A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;

(B) a severe increase in the price of petroleum products has resulted from such emergency situation; and

(C) such price increase is likely to cause a major adverse impact on the national economy.

There have been reserve oil sales under every president since 1991.

  • President George H. W. Bush sold reserve oil before the first Iraq war in anticipation of supply disruptions that did not materialize.
  • The Republican Congress required two sales of reserve oil in 1996 to reduce the federal budget deficit.
  • President George W. Bush sold oil in 2005 after Hurricanes Katrina and Rita disrupted production in the Gulf of Mexico.
  • Last year President Barack Obama sold 30 million barrels of reserve oil to offset the disruption of Libyan oil production during its civil war. Our partners in International Energy Agency, or IEA, nations sold 30 million barrels of their reserve oil, as well. (The IEA is an intergovernmental organization dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors.)

Reserve oil sales reduce oil and gasoline prices. (see chart below) For instance, last year the administration announced its sale of SPR oil on June 23 with completion on September 30. The IEA sale occurred during this time too. From the time of the announcement to the time of final sale, the price of West Texas Intermediate crude oil dropped by 17 percent, while the price of gasoline fell by 6 percent. Such a decline would reduce $4 per gallon gasoline to $3.76 per gallon.

There is also a legitimate concern about adequate oil reserves in case of a severe Iranian supply disruption, but we have ample supplies in the SPR to withstand it. Iran exports 2.2 million barrels of oil per day worldwide, and none of it comes to the United States. The United States could replace these Iranian exports to other nations for 60 days, and our reserves would still be 80 percent full. And after completely offsetting a 180-day disruption in Iranian oil supplies, the SPR would still be 40 percent full.

Iran has also threatened to cut off the Strait of Hormuz through which 17 million barrels of oil travel every day. This is about one-fifth of worldwide consumption. There is enough oil in the SPR that the United States could replace this oil for three weeks, and its reserves would still be half full. The bigger challenge in that scenario is that the SPR can release no more than 4.4 million barrels per day.

Conservative proposals won’t help

In response to rising oil and gasoline prices, conservatives will trot out a number of tired measures that could benefit Big Oil but won’t provide relief to consumers such as:

  • Approve the Keystone XL pipeline to bring dirty oil sands from Canada to the Texas Gulf Coast. Time magazine concluded that, “Keystone would have little immediate [price] effect.”
  • Expand offshore oil drilling into currently protected areas along the Atlantic and Pacific coasts, though it will take up to seven years to produce any additional oil. The Energy Information Administration found that this would have little impact on prices or supply.
  • Drill for oil in the Arctic National Wildlife Refuge in Alaska, even though it would take 10 years to produce any oil.
  • Suspend the 18-cents-per-gallon gasoline tax, which would reduce funds for badly needed highway repair and transit projects. This would also cost jobs.
  • Waive the summer pollution reduction requirements for gasoline in metropolitan areas with severe smog problems. This would reduce gasoline costs by only a few cents per gallon but would increase smog that harms children, seniors, and others.

Obama adopted long-term measures to reduce oil and gasoline costs

President Obama has overseen a growth in oil supply and a reduction in demand—both of which can reduce prices. Since 2009 there has been a significant increase in U.S. oil production. It now produces a majority of its oil for the first time in 15 years. The Houston Chronicle reports that:

The number of rigs in U.S. oil fields has more than quadrupled in the past three years to 1,272… Including those in natural gas fields, the United States now has more rigs at work than the entire rest of the world.

This domestic production improved our energy security and reduced the amount of money we send overseas for foreign oil. But the aforementioned factors have kept prices high.

As significantly, the president modernized fuel-efficiency standards for vehicles for the first time in more than two decades. By 2025 cars and light trucks will go twice as far on a gallon of gas and will save more than 2 million barrels of oil per day. The improved standards will also save drivers $8,200 in lower gasoline purchases over the life of their vehicle compared to 2010 standards.

High gasoline prices impose real costs on middle- and low-income Americans. President Obama’s plans to increase oil production while improving fuel economy for vehicles will provide real relief. For immediate relief from high gasoline expenses, however, history shows that selling a small amount of oil from the Strategic Petroleum Reserve will lower prices.

Daniel J. Weiss is a Senior Fellow and Director of Climate Strategy at the Center for American Progress. This piece was originally published at the Center for American Progress website.

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34 Responses to Time to Tap the Strategic Oil Reserves?

  1. BillD says:

    If a war with Iran becomes immenent, I could see using the reserves. However, gas prices haven’t really changed that much and there is no “emergency.” By now, Americans should know that oil prices are global and that even doubling US oil production would have little or no effect on US and global oil prices. If US gasoline prices are significantly reduced by selling from the stategic reserves, I expect oil companies to export the cheap gas to Europe.

    • “If US gasoline prices are significantly reduced by selling from the stategic reserves, I expect oil companies to export the cheap gas to Europe.” Hell they are exporting the relatively cheap gas now… energy products including gasoline are now our number 1 export product. http://www.usatoday.com/money/industries/energy/story/2011-12-31/united-states-export/52298812/1

      • Barry Saxifrage says:

        Yep, it seems other nations pay more for gasoline than we do. And our huge burst of cheap natural gas used in refining makes refining cheaper in USA than elsewhere. So global Big Oil is selling “its” gasoline made in USA to the highest bidders elsewhere. What a surprise.

        The media could help educate the public by not calling it “USA oil” or “Canadian oil sands”. It is all owned and controlled by global corporations which are pursuing the maximum profit wherever that comes from.

        • A.J. says:

          The role of refiners is a factor that often seems to be overlooked. Along with reduced capacity from some refineries as they’re repaired or re-tooled, more of the remaining capacity is subject to foreign market demand. And along with crude prices that’s another potential source of speculation.

  2. Ole Sumfleth says:

    Gas price is NOK 16.26 per Liter in Norway. That’s US-$ 10.93 per gallon if Wolfram Alpha is correct.

  3. prokaryotes says:

    “High gasoline prices impose real costs on middle- and low-income Americans.”

    During times of high gasoline prices, alternative energy resources becoming more interesting, more competitive?

    Cheap Natural Gas Won’t Kill Renewable Energy Growth (3 Reasons Why)
    Source: Clean Technica http://s.tt/15NDX

  4. John Mason says:

    Guys,

    Here in Wales, UK – I’ve just run the calculation – it’s 1.45 GBP/litre – or $2.27/litre. Four and a half litres in a gallon – go figure!

    Cheers – John

  5. with the doves says:

    Not sure why you all keep refering to US demand. US demand is not really relevant in setting the price of oil – global demand is.

    Global demand for oil is not declining AFAIK.

  6. Barry Saxifrage says:

    Oil and gasoline are going to continue their relentless rise in price to consumers.

    A study in Nature showed how supply has become inelastic to demand and pricing. So any increase in demand (growing population, China boom) means prices will rise. And any reduction in supply (Iran, Libya, closed refineries in USA) means wild price spikes.

    Every penny the price of gasoline rises grabs an billion dollars out of USA consumers wallets per year.

    Now Europeans pay double or even triple what Americans pay at the pump. Then again they buy half as much because they drive fuel efficient cars and have better public transit.

    Americans that are prepared to pay the $6 to $9 per gallon for gasoline that Europeans pay today will better ride out the coming years. If you have a gas pig and an hour commute you are going to be hurting.

  7. Sasparilla says:

    Something that is important to remember is when the US tapped the SPR last year, the pricing effects were gone in less than a month as the futures markets swamped what should have been a body blow to oil prices at the time.

    At this point I’m with BillD, since tapping the SPR didn’t do much last year, I wouldn’t tap it at this point and save it all in case the situation with Iran and Israel goes over the top and we really need it.

    One has to wonder what the political angle is with Israel (whose political leadership dislikes the current US administration to the extreme) pushing this crisis (and oil prices) to highs with their statements (over something that appears inevitable).

    The oil industry publicly told Obama there would be consequences if he didn’t rubber stamp the original XL proposal and wallah…by coincidence or actions…here are some – about the only thing that could drag the economy down in time for Nov 2012.

  8. Barry Saxifrage says:

    The only way gas prices don’t spiral upwards is if global demand for oil declines. There are two ways people are working to make that happen:

    1) climate policies that reduce global demand for oil

    2) switching transportation to other energy sources

    An MIT study showed that once global demand starts to drop the most expensive forms of oil become uneconomic first. Guess which source goes out early and quickly in their economic modelling? Hint: even if the Keystone XL gets built it might be used for very long.

  9. Barry Saxifrage says:

    An economist on CBC today said it is possible that high gas prices this time might actually boost the economy. The reason is that Americans have decided gas prices are headed upwards now and are buying lots of fuel efficient cars.

    Also the economist said that the public mostly blames oil companies and not politicians right now for high oil prices. But clearly the GOP want to pin it on Obama as an election strategy.

  10. PeterW says:

    My first thought is why is Climate Progress worried about a slight rise in the price of gas. Wouldn’t it be more beneficial for gas prices to be two to three times higher, so people don’t waste it like they do now? It would even be better if a carbon tax was introduced so the profit from the rising price, could be used for something productive, not just increasing oil companies profits. I know, I live in a dream world.

  11. Andrei says:

    We’re paying 8.78 $ (6.6 EUR) per gallon RIGHT NOW in Italy; so the US and everyone should focus more on efficiency, maybe.

    And on a shift to alternative solutions to Oil – which are plenty and technically feasible already NOW!

  12. john atcheson says:

    There is a more effective and permanent fix available to us right now. It used to be that non-market participants were only allowed to bid into commodity futures in very small amounts. Thus, if you bought futures in pork bellies, you had to produce, distribute or sell them. Same for oil.

    This had the effect of stabilizing prices. Buyers and distributors who played in the market had sufficient market power to dampen wild swings due to speculative pressure.

    Non-market participants were limited to less than 10% and were allowed only to assure sufficient liquidity.

    That system worked well.

    Beginning bout 30 years ago, this was increasingly relaxed (by executive action, not legislation) and extreme volatility was the result.

    Want to stabilize oil prices? Get folks like Goldman Sachs — who make money by speculating both long and short — out of the game.

    This would be a permanent fix. Yes, we’d still have the long term price increases associated with peak oil, but the short term wild swings due to speculation would be eliminated.

    • Mulga Mumblebrain says:

      You are quite correct, but how do you remove Goldman Sachs from wherever it wishes to gouge profits, when its apparatchiki dominate the highest levels of the economic superstructure in the Obama administration, and when they have provided the heads of the ECB and Italy’s unelected “prime Minister’? And I’m sure there are others I’m unaware of. Moreover Goldman Sachs is just one cog in the financial machine that controls the West.
      When the GFC started (it’s got a long way to go, yet) the financial grifters who blew up the economy were handed trillions in free money by the Federal Reserve et al. No capitalist liquidation for them, no ‘market discipline’-that is reserved for society, starting with the weakest. What didst they with this largesse? Lend it out to hard-working small businessmen or prospective home-owners? Surely you jest? They kept it to pay yet greater larcenous ‘bonuses’ and to get right back to their favourite sport, speculation. Hence the growing stock market bubble and various commodity bubbles.
      Medium term, perhaps shorter, Peak Oil is the killer. The fall will be precipitous, the geo-political discord enormous. Short-term, speculation by a ruling financial elite running amuk, and the launching of wars of aggression against one country after another in the Middle East make for a witches’ brew. And we have been warned, over and over, and yet nothing has been done to prepare.

  13. John Mason says:

    John – concur. A long-term steady slope can be managed, but when it keeps leaping up like this it becomes extremely difficult to manage.

    Cheers – John

  14. Raindog says:

    I always find it puzzling when this blog has posts complaining about high gas prices.

    Is there a better way to get people to use less gasoline than increasing the price?

    Less gas consumed = less CO2 in the atmosphere.

    High gas prices are one of the most effective ways to get people to change their behavior by driving less and buying more fuel efficient cars.

  15. AA says:

    If Obama taps SPR now it will be rightly denounced as an election year ploy.

    So Climateprogress thinks $4/gal. is too much to pay for gasoline? Now we’re in trouble. As pointed out by other commenters, $4/gal. is incredibly cheap. Climateprogress, of all outlets, should not be perpetrating the myth that large quantities of gasoline need to be so affordable as to make wantonly burning it financially inconsequential.

    It simpler terms: the recent rise in gasoline prices is not really due to a temporary disruption, but rather is reflective of oil’s true value. Lacking any greater justification, Obama should simply leave the SPR alone.

    • Joe Romm says:

      I don’t think its too cheap. I just don’t think it matters at the margin, as I’ve written many times. Nor do I think the SPR serves any value.

  16. rjs says:

    so climate progress advocates oil cheap enough for everyone to use more?

    • with the doves says:

      Makes you wonder.

      Here we are, getting a rising price on at least one fuel, and it’s a problem …. The real problem is our way of life is non-sustainable, and we’re doing too little to change that.

    • Steve says:

      I’m with you folks… here is a website dedicated to hoping all industrial countries rapidly impose a stiff carbon tax to help push the transition to clean energy and reduced resource consumption, and to encourage a rapid break from our domestic and global fossil-fuel addiction to hopefully save the planet from catastrophic climate change…

      Why is a naturally (perhaps even market-manipulated, for that matter) increase in fossil fuel prices a BAD thing in the big scheme of things — forcing changes in lifestyle so as to encourage use of fuel-efficient vehicles, eliminate commuting wherever possible, having families pass on joining the soccer travel teams which log 120 miles each weekend for two 6th-grade kids games, and promoting more and more car-pooling?

      Absurd post for this website, sorry.

      I can understand not openly cheering for price increases at the pump as a strategic messaging tactic and political choice given the needs of everyday people, but the rise in gas prices will do more to advert catastrophic climate change than ad naseaum blogging about whether Revkin, Gleick and whoever else is ethically in the right or not.

      This is what no one seems to get when criticizing the administration for not doing more, not giving state of the climate speeches and all of that… change in lifestyles, climate change adaptation, sacrificing some of the benefits of cheap energy is not as easy to do as everyone assumes.

      As an aside, having 28 years of complex commercial litigation experience… if the Heartland is rattling sabers over threatened litigation, think twice about republishing communications between counsel on on blog or in the press. It’s called the litigation privilege, and the limitations thereof

      Cheers.

    • Joe Romm says:

      I have advocated selling off the reserve and using the money for clean energy. The SPR serves no value.

      • Lollipop says:

        I’m sorry, but what if there is another embargo or other supply disruption? Shouldn’t we have stores of energy just like we do grain and other commodities?

  17. Ken Barrows says:

    I don’t get this site sometimes. Ok, the oil companies make too much profit. We could raise gas prices and probably cut that profit. Instead, we see handwringing over a price much lower than many other countries.

    One cannot be serious about climate change and desire lower gas prices. Period.

    • Joe Romm says:

      Again, the post is quite clear that the fuel economy standards are the key to dealing with our oil addiction. Selling the SPR or not has no impact on long-term or even medium-term prices.

      • Raindog says:

        You’re getting killed on this one Joe. The politics of gas prices are one thing and Obama will certainly benefit from lower gas prices and be hurt by high gas prices. In turn, Obama is better for climate related issues than any republican candidate would be. So I can see an argument to be made there. But in the long run, high gas prices will probably drive conservation and a switch to more fuel efficient cars and trucks faster than any government policy would.

        • Joe Romm says:

          Not. This is irrelevant to the medium run or long run price. There isn’t going to be a gas tax, whether or not you want one. There ideally will be a carbon price sometime. Certainly I have been advocating that for a very long time.

          But gas prices will be driven up over time by peak oil.

      • Steve says:

        Joe, first thanks for letting through the series of dissenting comments on this topic. We seem to think this is a bigger issue than the pros and cons of short-term use of the SPR.

        First, fuel efficiency standards kick in when? — 2020, 2025, I don’t even know, depends upon the state, I suppose. People have to change yesterday, 20 years ago, NOW… they need to bite the bullet, learn to adapt, cut the addiction.

        So, why does your colleague’s subtitle advocate: “President Obama should use the strategic oil reserve to lower gasoline prices”? Is this just an election year tactic, and if so, is it fully thought through? I’d think higher gasoline prices might garner more (outraged?) political support for cutting Big Oil subsidies, no?

        Today, tomorrow, next week, someone is going to choose between buying an SUV, F-150 pickup truck, a mid-range sedan with good fuel efficiency, a hybrid, or even an electric car. That will likely be an investment for that family for the next 3-7 years. Why don’t you want that person very concerned — right now — about escalating gasoline prices when they make that decision?

        On the other issue I confess complete ignorance, but is it a given that sale of the SPR necessarily ends up advancing clean energy as a matter of federal law and policy? Or do you need House GOP help (haha) to link the two issues?

        Thanks.

  18. average price in reserve is $29.76; dumb to use and replace with $100 fuel

  19. George D says:

    A ridiculous post.

    The US already has among the lowest oil prices in the world. Keeping them high will allow the US to transfer towards the kind of demand management that the rest of the world considers entirely normal. And reduce co2 emissions.

    Prices, if anything, are far too low.

  20. kafantaris says:

    Iran is in a serious dilemma. On the one hand it wants to show the world all it’s got and put it at ease, while on the other hand it fears that such show ‘n tell will give its enemies a roadmap to bomb it.
    Saddam Hussein faced a similar dilemma ten years ago. Though he wanted the world to know he had nothing to hide, he also wanted to bluff his archenemy Iran into believing Iraq still had WMD.
    Bluffing did not go well for Saddam, and it might not go well for Ahmadinejad.
    But since the price tag for ridding Saddam proved high, we ought to reflect what we are asking of Iran now. On the eve of a threatened attack, we are asking it to take us to the depths of its arsenal and show us all it’s got.
    Such great expectations are a sign we have been talking to our friends too long and are in need of a broader perspective. Exactly when was the last time we asked Pakistan, India, China or Russia to show us their arsenal?
    “But those countries are not advocating the destruction of Israel.”
    True, but Israel is not a thorn on their side either.
    Surely, however, we can see beyond the hyperboles and figure out their underlying purpose. Or have we forgotten that not all Iranians are thrilled with Ahmadinejad?
    He sure hasn’t.
    Nor has he forgotten that that his countrymen hate Israel even more. So he tells them that Israel will be wiped from the face of the earth. Expectantly, this nonsense unites them against a common enemy. It even becomes a diversion from the misery and isolation brought on by his anachronistic regime.
    Quite clever work by Ahmadinejad — and not a rial spent or a bullet fired.
    So why are we letting the crazy talk about destroying Israel get us all worked-up — to the point of turning the world topsy-turvy again.
    Can we not plainly see the machinations of an unpopular regime trying to hold on to power?