Unrest in Libya and elsewhere in the Middle East drove oil prices to $98 per barrel yesterday. This oil price spike increases the relevance of a little-noticed provision of the Department of Energy’s proposed fiscal year 2012 budget, which would sell some oil from the Strategic Petroleum Reserve, or SPR—the nation’s emergency supply. The budget “proposes a $500 million non-emergency sale of SPR oil.”
At yesterday’s closing oil price, the DOE proposal would translate into a sale of approximately 5.1 million barrels of oil from the 727-million-barrel supply in the SPR, which is at capacity. The budget proposal does not specify the use of the revenue from the sale of this oil, so it could pay for other DOE budget proposals or reduce the deficit by a small amount.
Selling this amount of oil in the market would increase worldwide supply by a small amount and offset some of the demand increase that occurs during the spring as driving grows. This sale should be larger. Selling 30 million barrels of SPR oil at yesterday’s price would generate $2.9 billion in revenue to invest in oil-reduction programs such as electric cars and natural gas trucks, and still have some funds to reduce the deficit. Even with a sale this large, the SPR would remain at 96 percent capacity.
In addition to raising revenue, this sale of SPR oil would immediately reduce oil prices that are one more day of unrest away from $100 per barrel. After Hurricane Katrina damaged oil rigs and onshore petroleum infrastructure leading to a price spike, President George W. Bush ordered the sale of 30 million barrels from the SPR. Oil prices dropped by 12 percent in the following month.
This DOE proposal would not be the first time SPR oil was sold to raise revenue. In 1996, 28 million barrels of oil from the SPR were used for “deficit reduction sale[s]” as mandated by the budget agreement between President Bill Clinton and the Republican-led Congress. Three different sales generated $647 million, which would equal $908 million today. At the time, the SPR had “an inventory of less than 600 million barrels,” or less than 83 percent of capacity.
In 2008, CAP proposed to sell SPR oil as prices continued to set new records. This would have burst the speculative bubble that contributed to skyrocketing prices that eventually hit $145 per barrel on July 14, 2008. Congressional Democrats urged President George W. Bush to put SPR oil on the market to reduce prices but he refused.
DOE’s proposed SPR oil sale is a good idea but it should be increased to raise more revenue, fund efforts to reduce oil use, and reduce prices. Lower prices would help hard-pressed American families while reducing reliance on foreign oil in both the short and long run.