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Energy / ANALYSIS

Move to Tap Oil Reserve Has Far-Reaching Implications

Oil Rigs(Getty Images/Chris Ross)

photo of Coral Davenport
June 23, 2011

In a move with major political, economic, and foreign policy implications, Energy Secretary Steven Chu announced on Thursday that the U.S. and its partners in the International Energy Agency will release a total of 60 million barrels of oil onto the world market over the next 30 days to offset the disruption in the oil supply caused by unrest in the Middle East. The U.S. will release 30 million barrels of oil from the nation’s Strategic Petroleum Reserve.

This is only the third time the U.S. has tapped the emergency oil reserve since its creation in 1973 in response to the Arab oil embargo. President George H.W. Bush authorized an emergency oil release during the first Gulf War in 1991, and President George W. Bush released 11 million barrels in 2005 after Hurricane Katrina, to help ease gasoline prices.

And administration officials said they may consider releasing even more oil next month, depending on the impact on global markets of Thursday's move.

 

A senior administration official said the move was made in response to fears that tightening oil supply and growing demand threaten U.S. and global economic recovery, and that the U.S. has been discussing it as an option for months with the world’s other major oil producers and consumers.

The official said the move was driven purely out of deep concern that tight oil supplies could hamper economic growth, and not by political motivations. It does, however, have significant political implications. As gasoline prices have climbed this spring, President Obama’s polling numbers have dropped – and many strategists have noted that voter anger over high gasoline prices is likely to play a major role the 2012 elections. 

Energy experts say both motivations are likely at work.

“All that can be true – and it can also be politically motivated,” said Paul Bledsoe, director of strategy at the Bipartisan Policy Center, regarding the White House contention that the move was driven strictly by broader economic concerns. Bledsoe's organization advises the White House and Congress on energy matters.

“The SPR release is entirely in keeping with the populist bent that the administration has adopted regarding high oil prices in recent months," Bledsoe said. "This is intended to convince the American people that they’re doing everything they can to ease the burden of high gasoline prices.”

The announcement had an immediate effect on the price of oil: Benchmark West Texas Intermediate for August delivery dropped $3.86 to $91.55 per barrel on the New York Mercantile Exchange. Brent crude, which is used to price many international varieties, dropped $5.16 to $109.05 per barrel on the ICE Futures Exchange. Gasoline prices dropped for the 20th consecutive day to an average of $3.61 for a gallon of regular.

Officials from the International Energy Association said they will release details in the coming days about how much oil its 28 member states will contribute from their reserves. IEA Deputy Executive Director Richard Jones said the decision has been under discussion since the Libyan crisis broke in February, but has intensified in the last two weeks after a meeting of the Organization of Petroleum Exporting Countries, at which member states refused to collectively increase production, despite pressure to do so from oil-consuming countries. 

After that meeting, the IEA issued a statement saying that failing to increase production could lead to “a further tightening in the market and potential increases in prices risk undermining economic recovery.”

White House and IEA officials said they agreed to release the reserves only after full consultation with major oil producing and consuming countries, including OPEC.

But one energy analyst, Kevin Book of ClearView Energy Partners, said the move appears to be a clear response – and rebuke – to OPEC.

“It is a response to the way the oil producing nations of the world appear to be at an impasse on the supply side," Book said. "This is the largest sale in the history of global strategic reserves. This is the big dog. And this is how it’s supposed to work if you use the negotiating power of the SPR. This is going to be a day OPEC will never forget.”

On Capitol Hill, Democrats generally cheered the move while Republicans dismissed it as a marginal effort and said the administration should instead do more to increase domestic oil and gas drilling.

“This decision would have been more timely if made when the disruption in Libyan oil supplies first occurred,” said Senate Energy and Natural Resources Chairman Jeff Bingaman, D-N.M. “However, I hope it helps deflate speculative froth in the markets and further settles prices back to levels where most experts believe they should be.”

House Energy and Commerce Chairman Fred Upton, R-Mich., who has aggressively pushed a slew of bills to increase domestic drilling, griped, “The bottom line is this: It’s hard to believe that the administration would rather tap into our emergency supply than support legislation to produce and develop North American supplies, which will create American jobs. The Strategic Petroleum Reserve was designed for energy emergencies, not political convenience. Releasing our reserves to calm the market is emblematic of an administration whose energy policy is irrational and counterproductive.”

Although Republicans have consistently called for new domestic production as a cure for high gasoline prices, energy experts point out that new supply from the U.S., which holds only 2 percent of the world’s oil reserves, would do little to change prices on the global market.

WTI Crude Dollars Per Barrel*, January 1988 to May 2011

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U.S. Strategic Petroleum Reserve, January 1988 to May 2011 (millions of barrels)

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*Inflation adjusted; Sources: Energy Information Administration; Graphic by PETER BELL and BRIAN McGILL

Olga Belogolova contributed contributed to this article.

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