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Using the Strategic Petroleum Reserve Like a Spigot Using the Strategic Petroleum Reserve Like a Spigot

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Energy

ENERGY

Using the Strategic Petroleum Reserve Like a Spigot

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An undated photo shows crude oil pipes at the Bryan Mound site near Freeport, Texas. The U.S. emergency fuel tank _ the Strategic Petroleum Reserve _ is almost full for the first time since its creation about 30 years ago. The most obvious significance is that it gives the country a larger energy-security blanket than ever for the economy in the event of a future supply disruption. And the federal budget will get a small boost as oil companies resume paying royalties in cash, not oil, for operating on government lands. But the stockpiling of 700 million barrels of oil, which is scheduled for completion by the end of August, also could bring some immediate relief to the global energy market.(AP Photo/Energy Department)

In the 36 years since Congress voted to create a Strategic Petroleum Reserve, U.S. presidents have tapped the nation’s emergency oil stockpile only three times.

But in recent years, as gasoline prices have soared, lawmakers, particularly Democrats, have regularly demanded the release of SPR supply to ease pain at the pump—a move that could also have the short-term political effect of blunting GOP attacks on President Obama.

 

“It’s like an annual event now. It didn’t used to be, but we’re in a world with much more volatile oil prices,” said Michael Levi, an energy expert at the Council on Foreign Relations. Experts predict Obama has set a precedent for presidents to use the SPR as a tool to lower gas prices. That’s at odds with the reserve’s legal statue, which says that oil is to be released only in the event of a “severe supply disruption.”  And experts say that using the SPR more often could weaken the impact the fresh supply would have on the market.

“Adding cheap oil to the system can jack it up like a sugar high for a little while, and then it wears off,” said Kevin Book, an analyst at ClearView Energy Partners. “Before, the reserve was just for a rainy day. The effect of using it as a spigot, a price-relief mechanism—traders will very quickly price that in. Then its power to reset prices is limited.”

But it’s already possible that Obama—who released 30 million barrels of oil from the reserves last year in the wake of a price spike following the Arab Spring—could become the first president to tap the reserves twice.

 

Obama has been hammered politically as oil and gas prices rise in part due escalating U.S. tension with Iran over its nuclear programs. On Thursday, Reuters reported  that Obama had discussed a coordinated release of strategic petroleum reserves in a meeting with British Prime Minister David Cameron, although White House press secretary Jay Carney said only that “energy issues” were among the topics the two discussed.

The 700,000-barrel oil reserve was created in response to the 1973 OPEC oil embargo, which cut the physical supply of oil to the U.S. market. The first President Bush authorized an emergency release during the first Gulf War in 1991, and his son as president released 11 million barrels in 2005 after Hurricane Katrina.

Experts say that by and large, those releases met the definition of the reserve’s statutes. By comparison, they say that Obama’s release of oil last June skated close to the edge of the statute’s definition. While fighting in Libya did keep about 1 billion barrels of oil from reaching the global market, it did not threaten U.S. supply—though it did contribute to rising prices.  

The June release did have the effect of briefly depressing oil and gas prices, however—a prospect that could be very tempting to the Obama White House right now.

 

Experts say that Obama’s release last year set a precedent for using the SPR as a quick fix to depress gas prices, rather than as a solution to a national emergency. That’s one reason it will probably stay front and center as a solution in future debates. “It’s going to be part of the debate every year because Barack Obama started using it in a nondisruptive context,” Book said.

But experts also say the stockpile’s statute is out of date. Because oil moves on a global market, the U.S. is far less likely today to experience a physical supply shortage, as it did in the 1970s. Even if Iran were to follow through on its threats to cut off the Strait of Hormuz, through which about 20 percent of the global oil supply passes, the global oil market would ensure that the U.S. still had enough oil, say experts—albeit at higher prices.

Energy analysts say a future in which the SPR is tapped on a regular basis will weaken any impact it could have on prices. “Last year’s effect was very short-lived. It didn’t change very much,” Book said.

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