Friday, March 30, 2012

Strategic Petroleum Reserve for Supply Crisis, Not High Prices

Attempting to offset rising oil prices by tapping the Strategic Petroleum Reserve would be both shortsighted and ineffectual.

The price of oil seems to be front-page news nearly every day now, and it's clearly a hot topic among American drivers filling their cars with gasoline each week.

The price of West Texas Intermediate (WTI) crude reached $100 per barrel in November and has experienced highs of at least that level for five consecutive months.

WTI is domestically produced oil and it is the benchmark for oil pricing on the Chicago Mercantile Exchange.

In January, the U.S. Department of Energy predicted that, for the first time ever, the price of crude oil would average more than $100 a barrel this year.

The elevated price of oil is raising food costs, as well as the costs of all other transported goods. Shippers, such as UPS, have raised their rates and airlines are also raising ticket prices to compensate for rising fuel costs.

The current state of affairs is spurring some people, including assorted politicians and news pundits, to call on the President to release oil from the U.S. Strategic Petroleum Reserve (SPR).

However, such a move would be unwise and ineffective.

According to the U.S. Department of Energy, with a capacity of 727 million barrels, the SPR is the largest stockpile of government-owned emergency crude oil in the world. It is stored in four locations; two in Louisiana and two in Texas.

"Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy," reads the DOE's Website.

The purpose of the Reserve is to to maintain a backup oil supply in case of national emergency, such as another oil embargo that could cripple the U.S. The SPR also provides a reserve for the national defense.

The President can order the release of oil from the Reserve in the event that the United States faces an economically threatening disruption in oil supplies. This has occurred just three times since the creation of the Reserve in 1975.

The first was in 1991, at the beginning of Operation Desert Storm.

The second was in September 2005, after Hurricane Katrina struck the Gulf Coast and devastated the vital oil production, distribution and refining industries in the region.

The third Presidentially-directed release came on June 23 of 2011 and was used to offset the disruption in global oil supplies caused by unrest in Libya and other countries.

Though the Reserve has a capacity of 727 million barrels, the current inventory is 696 million barrels. At the current usage level of 19 million barrels per day, the reserve would supply oil to the U.S. for just 36 days.

Apparently, those calling for the release of oil from the SPR are unaware of this fact. Attempting to offset rising prices in this way would be both shortsighted and ineffectual.

Moreover, the maximum total withdrawal capability from the Reserve is just 4.4 million barrels per day, less than a quarter of current daily usage. At that draw-down rate, it would take 160-plus days to exhaust the supply.

So even a full emergency release wouldn't offset a foreign oil embargo, the results of which would devastate the U.S. economy.

Critically, the price paid for the oil in the SPR is $20.1 billion (an average of $28.42 per barrel). If the U.S. were to run through the Reserve supply and then have to replenish it, the cost would be nearly four times the previous expense. This makes tapping the Reserve a last ditch effort.

The Strategic Reserve was designed as an insurance policy in case of significant supply disruptions; not rising prices due to rising global demand or the behavior of unscrupulous Wall St. speculators.

At this point, the U.S. is not facing a genuine oil shortage or energy emergency. Drawing down the SPR would leave the U.S. defenseless in the event that a genuine global crisis should erupt.

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