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NJ Daily / ENERGY

Obama Walks Tightrope on Oil Reserve

Gas station manager Fred Oliver, of Lisbon Falls,  Maine, changes the price of gasoline on the pumps at a station in Topsham, Maine, on Tuesday, Feb. 7, 2012. Retail gasoline prices were flat on Tuesday at a national average of $3.48 per gallon, according to AAA, Wright Express and Oil Price Information Service. Prices remain at the highest levels ever for this time of year. A gallon of regular is 11 cents higher than it was a month ago and 36 cents higher than a year ago. (AP Photo/Pat Wellenbach(AP Photo/Pat Wellenbach)

photo of Amy Harder
March 4, 2012

When President Obama tapped the nation’s Strategic Petroleum Reserve on June 24 of last year, the national average price of a gallon of gasoline was $3.60.

It’s only March, and the average price is already $3.74.

Obama is facing more risks this year on all fronts: political, economic, and national-security.

 

“The stakes have gone up as Iran’s nuclear program has continued,” said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, a global consulting firm that is hosting an annual conference of energy-industry executives starting on Monday in Houston. “There [don’t] seem to be any real meaningful channels of communication.”

Obama is already facing pressure to dip into the Strategic Petroleum Reserve from some House Democrats, led by Natural Resources Committee ranking member Edward Markey, D-Mass. That’s where the pressure started last year at about the same time—the calls to use the reserve grew over several months and came from key members such as Senate Energy and Natural Resources Chairman Jeff Bingaman, D-N.M.

The wild card this year—Iran—is different. The Arab Spring was the main factor in high oil prices last year, but Iran’s threat to block the Strait of Hormuz poses a potentially much bigger supply problem. The United States has imposed economic sanctions in response to Iran’s refusal to abandon its nuclear-enrichment program, but they don’t go into effect until summer.

“That’s when the issues might be the most acute,” Yergin said.

At least twice in the past six months, Iran has overtly threatened to block the Strait of Hormuz, a key conduit for 20 percent of all the oil traded worldwide. If that happens, Obama, in coordination with the International Energy Agency, would almost certainly release oil from the SPR, which has 727 million barrels of spare capacity; it has been tapped only three times by presidents since it was created in 1975 in response to the Arab oil embargo. Congress also authorized a pair of sales from the reserve in 1996 as part of a deficit-reduction law.

Energy analysts agree that no actual supply disruption has yet occurred this year, unlike last year when Obama released part of the reserve amid unrest in Libya that cut off that country’s output of 1.5 million barrels of oil per day.

Even if Iran doesn’t follow through on its threat, coordinated action by Europe and the United States to impose sanctions on Tehran are putting the global oil market in what Yergin describes as “uncharted seas.”

“This is the first time the West has really sought to put pressure on Iran by reducing the flow of its exports, which is so central to its economy,” said Yergin, who authored the Pulitzer Prize-winning The Prize: The Epic Quest for Oil, Money, & Power.

On top of the concerns about Iran are two other significant issues: One is the state of the economy, which Federal Reserve Board Chairman Ben Bernanke told lawmakers at a hearing last week will inevitably lead to higher gasoline prices as long as it continues to improve; the other is the presidential election.

If Obama dips into the SPR in response to gasoline prices, which some economists predict could reach $4.50 or $5 a gallon this summer, and then U.S. sanctions lead to even greater tension with Iran, the president runs the risk of having to use the reserve twice in a matter of months.

“His advisers would have to weigh what hurts them most: this potential for a weakening economy and consumer revolt, which is probably the main thing that could lose him the election, versus having to dip twice into the reserves,” said Guy Caruso, who headed the Energy Information Administration under President George W. Bush.

“My guess is, politicians will opt to not take any chances with the economy, since most of the polls show that is going to be by far the biggest thing that could move independents out of Obama’s column to whoever the Republican nominee is,” Caruso said.

Richard Newell, who resigned as Obama’s EIA administrator last June (a couple of weeks before the president tapped the SPR) said that it would be hard to make a purely political decision on tapping the SPR, especially without coordinating with other countries and the International Energy Agency.

“But it’s certainly the case, if you’re making the decision whether to release oil from the SPR, you need to think about what comes next—the risk you face right now [versus] if something worse comes along in the future,” Newell said. “You do always have to think about: How soon will you have to go back again?”

CLARIFICATION: An earlier version of this story indicated that the Strategic Petroleum Reserve has only been tapped three times since it was created in 1975. It has been tapped three times by presidential orders; Congress also authorized two sales from the reserve in 1996.

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