Is Releasing the Strategic Oil Reserve About Strategy or Pure Politics?

What problem are releases from the Strategic Petroleum Reserve trying to solve?

For 30 years, the Strategic Petroleum Reserve has been more lethargic than strategic. Its roughly 700 million barrels of oil have sat in their salt caverns on the Gulf Coast, not doing anything more ambitious than providing a feeling of security. That may have changed last month, when the Obama administration arranged for a release of 30 million barrels from the SPR, and an equivalent amount from IEA worldwide reserves.  This move, rife with what we'll call "strategic ambiguity" may be one of those smallish moves that turns out to be decisive in the long run of history. Will the US now take a more Strategic (with a capital S) approach to world oil markets? Will we come to guard moderated world oil prices as we now use our navy to guard the world's oil choke points? Is this even a worthy goal?

The SPR was initially designed to be our answer to the 1973 Arab Oil Embargo's "oil weapon." Yet by the time it was built in the early '80s, the evolution of the world oil market had made embargoes obsolete. So, until recently, there had been just two "emergency" releases: once after the beginning of the first Gulf War, and again after Katrina. The SPR was probably more notable for what it didn't do: The Bush Administration didn't release oil from the reserve at the start of the Second Gulf War. Instead they asked Saudi Arabia to increase its production, which was exactly the sort of political sausage making the SPR was created to avoid. And in the aftermath of Katrina, the SPR release did not relieve US prices, because the SPR, the pipelines, and the refineries were all in the path of the hurricane. Instead it was tankers of refined gasoline from Europe that sailed to our rescue.

The "emergency" that triggered the oil release this time was the disruption in Libya's sweet crude production -- many months after the fact. Libya provided a cover story for the release, says John Shages, a DC-based consultant who worked on SPR issues at the Department of Energy for many years. "This (release) is being used strategically, but the administration has a lawyer's mentality and they need an emergency event." The strategy, as he sees it, is to bring down oil prices enough so that the US and world economies can continue to recover, essentially because the administration has run out of political options for stimulus at home. "Regardless of whether you think the government should intervene in oil prices," he said, the rise in oil prices was threatening a repeat of 2008, and more ominously, a return to the middle years of the Great Depression. Allowing that to re-occur would be, according to Shages, "poor public policy," not just for the US, but for the world.

So how does this SPR strategy work?  One would expect that the administration would use the SPR both to add more oil to markets, and more importantly, to generate "policy uncertainty," so that traders aren't tempted to bid up oil prices.  Energy Secretary Steve Chu signaled this when he announced the sale, adding: "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary."  Shages believes, and others agree, that the administration will have to make good on that threat of releasing more oil to make this first release worthwhile.

But why did the administration release the oil now, and not several months ago when the troubles in Libya started?  One theory has it that they were either backing or undercutting the Saudis, who failed to get OPEC to put more oil on the market in early June.  Another, more alarming, possibility was raised by a provocative piece in the Wall Street Journal The article quoted Prince Turki, a member of the Saudi royal family and former government player, saying that Saudi hoped to "squeeze" Iran by putting enough oil on the market to lower prices and "cripple" the government.  A deliberate US role in this scheme strikes me as unlikely, but Flynt Leverett and Hillary Mann Leverett have a glum read on the regional "strategery" of the US move, whatever its intention.

Intervening -- whether on behalf of the world economy or to influence Middle East politics -- brings up a huge question. Should the US be extending its expensive "self-sacrificing hegemon" role beyond providing military cover for all of the world's oil shipping lanes, and into providing price cover for the world economy? Even if it sounds a little attractive right now, it would quickly become a burden. Taxpayers currently support the idea of policing shipping lanes -- maybe because they want cheap gas at all costs, and they have a dim sense of what this policing entails. But SPR releases will be publicized, judged harshly against oil market prices, and will come to seem burdensome over time. It'll be even worse if the IEA backs off its promises to release strategic stocks, as it did this time, and leaves the US to shoulder most of the task alone.

SPR aside,  there is a strong case to be made for the US taking a more strategic approach to oil prices. Many, including oil super-pundit Daniel Yergin, believe that the market has become prone to bubbles. These analysts claim that oil has not only become commodity exchange, but also an enormous financial play. If that's so, then the SPR release should be a beginning, not an end of a thoughtful engagement with the oil market. We might start by requiring refiners to keep larger stocks of oil on hand, as Europe does, to buffer price swings. We should also reconsider the primacy of West Texas Intermediate as the index oil. In his thoughtful analysis of the workings of the world oil market, Oxford's Bassam Fattouh calls WTI, the crude oil traded at the NYMEX, a "broken benchmark."  Reading his report may make you wish the government would attend to the obvious fundamental issues in the market, rather than trying to monkey with outcomes like price. And in fact, the deeper one looks into the problems in today's oil markets, the more the SPR seems like a convenient approach rather than an appropriate one.

Ironically, as the US is releasing strategic stocks to stimulate the economy, American merchants are giving away free gasoline to try to lure cash-strapped consumers to their stores. Can "free gas" ever be the answer to the problem of expensive oil? Releasing SPR oil can't be the answer to real long term issues in worldwide supply and demand, as well as the functioning of the markets themselves.

We can and should take a more direct path to reducing the harm of high oil prices -- helping US consumers reduce oil demand. The Obama Administration's firm stand on increasing CAFE standards to 56.2 mpg by 2025 will get there in the long term. We go much further with incentives and gas taxes. An immediate approach would be to follow the recommendations of the IEA report Saving Oil In a Hurry ( pdf), released in 2005, which outlines a slate of cost-effective ways to reduce oil consumption quickly and dramatically. Such measures include reducing the speed limit, increasing telecommuting and carpooling, and an eco-driving campaign.  If the US adopted these five measures, the report projects (page 116), we could cut consumption by 2.3 million barrels a day -- more than double what we're trying to do with the SPR -- and it would save American consumers about $2.4 billion per week at current gas prices.

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