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Eight Reasons to Release Oil from the Strategic Petroleum Reserve

SOURCE: AP/Energy Department

A technician inspects a gauge on a meter station at the Strategic Petroleum Reserve's Bryan Mound site near Freeport, TX. Selling a half million barrels of oil per day from the reserve would increase supply and reduce prices.

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President George W. Bush plans to announce today that he will lift the executive moratorium on oil drilling in the Outer Continental Shelf, which was first established by his father, President George H.W. Bush, in 1990. The current president has argued that the United States should be “drilling for more oil here in America to take the pressure off of gasoline prices.” The congressional moratorium on OCS drilling—first signed into law by President Ronald Reagan—remains in effect, but must be renewed annually.

A Department of Energy analysis determined that opening the OCS to offshore drilling “would not have a significant impact on domestic crude oil and natural gas production or prices before 2030.”

A much faster, more effective action to reduce oil prices would to sell a half million barrels of oil per day from the Strategic Petroleum Reserve to increase supply, reduce prices, and burst the “speculative bubble” that leads speculators to buy oil futures based on the assumption that supply will remain fixed and prices will escalate.

On July 8, Speaker of the House Nancy Pelosi wrote President George Bush to urge him to “draw down a small portion of the oil held in the Strategic Petroleum Reserve in order to expand available supplies and help reduce the record prices.”

The White House predictably rejected this common sense suggestion that would lower oil prices—and oil industry profits. White House spokesperson Tony Fratto said that the Strategic Petroleum Reserve, “is not there to try to market-time and to try to manipulate prices in the market.” Yet he did confusingly acknowledge that, “as long as we keep the sources of oil off the market, we’re not going to see increases in supply…if you don’t increase supply and you only increase demand, prices are going to rise.”

There are many reasons that selling a small amount of oil from the Strategic Petroleum Reserve is our best short-term option for lowering oil prices. Here are eight.

1. Record oil prices have hurt American families

Ordinary families are struggling with record high energy prices. Many families’ gas costs have increased by hundreds or even thousands of dollars a year. The price of home heating oil has doubled in the past year. And the Department of Energy predicts that average electricity prices will increase by 5 percent this year, and go up 9 percent in 2009.

A recent Center for American Progress analysis found that families are spending an average of 4 percent of their after-tax income on gasoline—the highest proportion in 25 years. Rural and low-income households are hurt even more because they spend an even greater proportion of their post-tax income on gasoline.

2. There is a lot of oil in the reserve

The United States sits on 706 million barrels of oil in the Strategic Petroleum Reserve, which is 98 percent full. It is “the largest stockpile of government-owned emergency crude oil in the world.” It was created in the wake of the 1973-74 oil embargo to prevent future supply disruptions from wrecking our economy. Although there is not currently a supply disruption, the record oil prices are nonetheless wreaking havoc on our economy and families. This situation warrants using reserve oil to help alleviate the pain of record prices.

3. Reserve oil can get to the market fast

Under the Energy Policy and Conservation Act, “decisions to withdraw crude oil from the SPR are made by the President…SPR oil would be distributed by competitive sale.” President Bush agreed to sell up to 30 million barrels after Hurricane Katrina. The on-line sale of this oil ended September 9, 2005, and the first oil was delivered to oil companies for refining on September 26. More significantly, it reduced oil prices in a day (see #4).

President Bush and many conservative congressional leaders want to drill for oil in the protected Outer Continental Shelf to address price and supply problems. Yet this “solution” would take over a decade to produce any results. As noted above, the Department of Energy says that drilling in the OCS will have no impact until 2030—a generation from now.”

4. Reserve oil would significantly increase worldwide supplies

The International Energy Agency believes that “these abnormally high prices are largely explained by fundamentals. Supply growth so far this year has been poor and higher prices are needed to choke off demand to balance the market.” The IEA predicts that worldwide oil demand will average 86.8 million barrels per day in 2008, while oil supply was 86.6 million barrels per day in May 2008. “OPEC countries are running close to flat out” to keep up with demand. Adding a half million barrels to the daily market would be a significant addition to the worldwide supply of 86.6 million barrels.

To put this increase in perspective, compare it to President Bush and Vice President Dick Cheney’s efforts to beg Saudi Arabia to increase production. Eventually, the Saudis agreed to increase production to 9.7 million barrels per day, a total increase of 600,000 barrels per day since March 2008. Selling a half million barrels per day from the SPR would nearly double this production increase, and this additional SPR oil would only be sold in the United States. This will ease competition for the world oil supply, which should reduce prices.

5. Past reserve releases lowered oil prices

In the wake of Hurricane Katrina, oil markets were roiled due to some damage to oil rigs and infrastructure. On September 1, 2005, the spot price for oil was $69 per barrel—up 10 percent from two weeks before. President Bush announced the impending release from the Strategic Petroleum Reserve the next day. Oil closed at $66.91—a 3 percent decrease. On October 10, a month after the oil sales closed, the spot price was $60.74, a 12 percent drop from September 1. Oil averaged $62 in October, $58 in November, and $59 in December.

On January 16, 1991, on the eve of the first Gulf War, President George H.W. Bush announced that he would sell 34 million barrels from the Reserve to “minimize world oil market disruptions.” That day oil sold for $32 per barrel. The day after the announcement, the price dropped to $21 per barrel. Oil remained in the $20 per barrel range during and after the war. The Department of Energy concluded that the “partial drawdown…help[ed] restore stability to world oil markets during the Persian Gulf War.”

6. There is plenty of oil in the reserve to withstand a supply disruption

The SPR has more oil than ever before—706 million barrels, which is 98 percent capacity. Selling 50 million barrels over 100 days would still leave it filled to over 90 percent capacity. This is enough oil to cope with a complete foreign supply disruption for nearly two months, assuming zero reduction in demand in the wake of such a catastrophe.

Is such a supply disruption likely? No. There has never been a complete supply disruption. The last major disruption occurred nearly 30 years ago during the Iranian revolution. What’s more, the United States gets its 13.4 million barrels of oil imported daily from a diverse array of producers, including Canada (18 percent of imports), Mexico (11 percent), Saudi Arabia (11 percent), Venezuela (10 percent), and Nigeria (8 percent). This means that even if we are suddenly unable to import oil from one country, it will not affect the availability of imports from other nations, thought it could affect price.

7. Selling SPR oil would yield significant funds to help families cope with high energy prices

Selling 50 million barrels of oil at today’s prices would produce over $7 billion. Even if the oil price was cut by 40 percent to $100 per barrel, selling this amount of SPR oil would still raise $5 billion. These funds could help families cope with high energy prices via the home weatherization program, the Low Income Heating and Electricity Payment program, or via direct rebates. Or these funds could promote research, development, and deployment of energy-efficiency technologies that would reduce consumption, energy bills, and global warming pollution.

8. Putting SPR oil on the market could help burst the speculative bubble

Various government and private energy experts believe that speculators account for one-third or more of all oil trades, and have increased the price of oil by anywhere from $10 to $30 per barrel. Since January 2, oil prices increased from $100 to $145 per barrel. This steady ascent in price makes it tempting for speculators to buy oil futures as a safe bet, particularly given that record prices have not led to more supply. Putting some SPR oil on the market in one sudden spurt could burst the speculative bubble. Investors and speculators in oil contracts could no longer assume that oil supplies will remain stagnant even as prices rise. When institutional investors and oil traders sense that the supply and price of oil might go in different directions, all bets are off.

Thanks to James Kvaal and Adam Jentleson

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