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The United States and Britain have apparently been discussing a joint release of strategic petroleum stockpiles.
The U.S. Strategic Petroleum Reserve was intended to be used in the event of a "severe energy supply interruption" whose legal definition is as follows:
a severe energy supply interruption shall be deemed to exist if the President determines that-- an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; a severe increase in the price of petroleum products has resulted from such emergency situation; and such price increase is likely to cause a major adverse impact on the national economy.
Historical experience has shown that seemingly temporary supply disruptions can have very long-lasting consequences. Libyan oil production in November was still only about a third of what the country had been producing in January 2011 prior to last year's disruptions. Iraqi production still has not returned to the average value seen in 1989 prior to the First Persian Gulf War. Iranian production has never returned to the average values achieved in 1977 prior to its revolution.
The U.S. SPR currently holds 696 million barrels of crude oil, of which 62% is sour and 38% sweet. If we relied on this stockpile to replace Iran's current 4 million barrels of daily production, the SPR would be drained in less than half a year.
The SPR is likely to be most effective as a short-term device to help bridge a temporary supply shortfall until other sources can become available. Is there a conception of our current situation in which the primary challenges are short term in nature?
Europe has been trying to get by with less oil from Libya and has been drawing down its private stockpiles, and is looking for alternative suppliers to replace imports from Iran. This market tightness is the key factor in the current price of Brent.
If one believed the Libyan problems will soon be resolved, an SPR release might make sense as a temporary assistance measure, though it is hard to find a basis for similar optimism for a near-term resolution of issues with Iran. Another development that could ease the situation in Europe will be completion by the end of the year of additional pipeline infrastructure to help transport crude from the central U.S. to the coast, which will relieve some of the competition with European refiners for buying international crude currently coming from U.S. refiners on the coast. However, some analysts worry that the added deliveries from the new pipelines will end up using some of the same limited distribution capacity required by an SPR release. And if the justification for the SPR release were just to buy time until more U.S. pipeline capacity can be added, surely the more sensible step would have been to speed up the regulatory review process.
I'm led to conclude that a more important rationale for another SPR release was expressed in the following report from Thursday's Wall Street Journal:
A number of influential lawmakers, including Rep. Ed Markey (D., Mass.), have called on the president to tap the strategic reserve to deflate rising prices. "Releasing even a small fraction of that oil could once again have a significant impact on speculation in the marketplace and on prices," Mr. Markey wrote last month in a letter to the president.
If that sounds familiar, it should. Here is what Representative Markey wrote in a letter to the President dated February 24, 2011:
Right now, the Strategic Petroleum Reserve holds 727 million barrels and is filled to capacity. Releasing even a small fraction of that oil could have a significant impact on speculation in the marketplace and on prices.
In fact we ran that exact experiment last year, which is the reason that Representative Markey would need to paste over "727" with "696" and cross out "is filled to capacity" if he wanted to re-issue the same letter this year as he did the previous year. Specifically, the IEA announced on June 23, 2011 that the OECD countries would release 60 million barrels from their joint stockpiles, half of which came from the U.S. Strategic Petroleum Reserve. There was an initial modest drop in the price of oil on the day of the announcement, though within two weeks the price was back up above where it had been before the announcement.
The price of oil did decline later in the summer, though surely this should be attributed to deteriorating news from Europe rather than the SPR release. For example, last summer's drop in WTI was mirrored by a drop in other financial indicators such as the S&P500.
I see no evidence that last year's SPR release accomplished anything, and would not expect the outcome of another release this year to be very different.
A far more sensible proposal would be to build the pipelines necessary to allow the oil currently in private stockpiles in the central U.S. to flow to refiners on the Gulf of Mexico.
Posted by James Hamilton at March 18, 2012 07:10 AM
I agree.
Posted by: Steven Kopits at March 18, 2012 08:28 AM
"Releasing even a small fraction of that oil could once again have a significant impact on speculation in the marketplace and on prices,"
Meh. If I were a rich man, la da de da dada, I'd be calling Bernanke's bluff and stockpiling oil, oil futures and other assorted commodities with both hands using low interest, ZIRP loans provided by the thief coward himself. Bernanke's policies have been geared toward increasing speculation, I'd dare him to tighten as oil and food prices conyinue to rise. http://seekingalpha.com/article/262391-commodity-prices-show-strong-correlation-with-fed-treasury-purchases
Posted by: MAG at March 18, 2012 08:43 AM
The establishment seeks to pull yet another rabbit out of a hat.
Either the price increases (supply/demand) to to the point of visible rationing by price (diminished access to credit) or the price decreases b/c of collapsing credit.
It's central banks v. geology and a hundred years of waste.
Funny thing is the 2008 spike had a speculative component as J. Aron (Goldman-Sachs) and Nymex traders executed a squeeze on Semgroup and added $20 to the price of WTI in the process: from $130- to $147 per barrel. Nobody thought of using the SPR then (or were bought off by Goldman).
Posted by: steve from virginia at March 18, 2012 08:52 AM
For an interesting case that the release last year did move prices, read this http://streetwiseprofessor.com/?p=5243 post by Craig Pirrong.
Just because he thinks it really moved prices doesn't mean he thinks it was a good idea. But he has some good arguments that it had an effect.
Posted by: ThomasL at March 18, 2012 09:05 AM
You say "pipelines". Do you mean the Keystone south part that will be done in a year plus or other pipelines as well? Are other pipelines proposed? Up for permits? Permitted?
On a not-very-related issue, I've been reading that a reason for Keystone, meaning the entirety not just from OK down, is the ability to get oil to a trade zone so it can be exported at lower cost. Is this true? If it is, is there a sense of what part of that is the motivation?
Posted by: jonathan at March 18, 2012 09:10 AM
... and they're waiting a few months so it hits right before the election.
How convenient.
Banana republic.
Posted by: W.C. Varones at March 18, 2012 09:19 AM
How is this any different from reversing the 11% slide in oil production on Federal lands?
http://cnsnews.com/news/article/obama-s-claim-increasing-domestic-drilling-not-accurate-say-energy-analysts
It doesn't change the long-term equation of buying oil abroad to fill the strategic reserve. It is short-term expediency to relieve political pressure from President Obama's strategy of oil deprivation to support his greenie agenda. How is this any different from allowing more Canadian oil to flow to the U.S. to change the supply-demand equation?
http://hallofrecord.blogspot.com/2012/03/myth-of-us-oil-dependence.html
Posted by: Bruce Hall at March 18, 2012 09:47 AM
JDH I'm not following your argument. How is releasing oil from private stockpiles any different than releasing oil from the SPR? Building the pipeline connecting Cushing and the Gulf is not terribly controversial as a public policy issue, and it would no doubt rationalize refinery utilization, but how does it add more oil to the pipeline beyond what could be added by releasing from the SPR? If releasing from the SPR would have only a small and transient effect on crude prices, then wouldn't releasing from private stocks have an equally small and transient effect on prices? Surely those privately held stocks are dwarfed by the size of the SPR, right?
Just to be clear, I am not advocating that the Administration release stocks from the SPR. And I am not arguing that completing the southern portion of the pipeline would be a bad thing. I just am not following how you got from saying we shouldn't release from the SPR because it would be ineffective to saying that we should expedite building of the pipeline because that would release private stocks. If the pipeline were up and running today, more oil would be sold, but it would physically exist inside the pipeline rather than in the ground. I think you have to argue that there would be in increase in long run production sufficient to both fill up the pipeline and to increase the flow rate. That's a tough argument to make.
It's also not obvious to me that private owners of oil stocks would even want to sell additional oil even if the expanded Cushing to the Gulf pipeline capacity were in place today. As long as people think we're on the uphill side of an oil bubble there's very little incentive to want to sell as long as you have the physical storage capacity to hold oil. The one (admittedly unlikely) thing that releasing from the SPR might do is to help break any speculative bubble and thereby induce private owners of oil stocks to sell what they have in storage.
Posted by: 2slugbaits at March 18, 2012 09:47 AM
'...more sensible proposal?' In an election year with a liberal president up for re-election? Do pigs roost in trees?
Posted by: c thomson at March 18, 2012 09:49 AM
jonathan: By "pipelines" I refer to reversal of the Seaway Pipeline, the Flanagan South Pipeline Project, and the Cushing-to-Texas portion of Keystone, as discussed here.
2slugbaits: Pipelines would not only release private central U.S. stockpiles, but more importantly would accommodate a greater ongoing flow rate, as well as assist with the logistics associated with delivering the SPR oil itself.
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