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Page added on March 9, 2012

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How releasing government oil stockpiles could raise, not lower, crude prices

Two questions hang over the salt caverns in Texas and Louisiana that hold the US government’s emergency stockpile of crude oil: Will President Barack Obama sell any of those reserves this year? And will a release bring down prices?

Politicians in Washington have spent weeks answering those questions in ways that suit their broader views on energy policy. Market watchers, meanwhile, have reached some agreement on the answers.

Many have concluded that Obama is more likely than not to tap the Strategic Petroleum Reserve, given how high gasoline prices have soared in this election year, still months ahead of the peak driving season.

To the second question about the reserve’s potential to pull down prices, analysts have largely answered: not for long, if at all. Barclays Capital researchers Helima Croft and Amrita Sen published a particularly grim SPR explainer this week arguing that any sale from government stockpiles would soften crude prices for so short of a window that drivers would see little, if any, relief at the pump. After the market reacts to news of a drawdown, prices would likely jump to higher levels than they were at before the sale.

“A strategic release would provide a temporary relief at best,” the pair wrote, “and as the market yearns for more crude, the headache for governments would soon be to decide when to stop the release before they effectively make a severe dent in their reserves and before it severely reduces the credibility and market effectiveness of future releases.”

Consider last summer’s drawdown of 60 million barrels of crude and products coordinated by the International Energy Agency. Croft and Sen write:

The day before the release was announced, August Brent settled at $114.21 per barrel. Having lost $8.22 across the next two days and having spent four days below $110, prices rose steadily over the next week and added over $13 since the lows of 24 June over the course of nine days. Exactly two weeks on, prices settled at $118.33 per barrel.

Here’s their bad news: “The fundamental backdrop against which the oil market is operating is perhaps even tighter.”

The chances for a supply disruption go beyond Iran, Croft and Sen remind us. Given that today’s global spare capacity is less than 2% of demand, potential production setbacks in Sudan, Syria, Yemen, Iraq, the North Sea and Nigeria haunt the market.

“Thus, the probability that a release similar to last June’s goes completely unnoticed in terms of price action remains very high indeed,” they said.

Here’s what some other folks have said about the SPR:

Treasury Secretary Timothy Geithner in a February 24 interview with CNBC: “There’s a case for the use of the reserves in some circumstances and we’ll continue to look at those and evaluate that carefully.”

Energy Secretary Steven Chu repeated to a House subcommittee March 8 that tapping the SPR remains on the table: “Both I and the president want very much to do what we can to lower the price of gasoline because it has a severe effect on the pocketbook of Americans. We do want to help in every way we can. But as the president said, there is no silver bullet. We work very hard with all the tools at our disposal.”

Representative Jim Sensenbrenner, Republican-Wisconsin, in a March 8 Politico column: “Democratic proposals to drain the SPR are a political stunt, meant to counteract Obama’s failed energy policy. Far from harmless political theater, releasing oil from the SPR will very likely mask and exacerbate the problems driving energy prices higher. It also weakens an important pillar of the infrastructure designed to protect our national security.”

Democratic Representatives Ed Markey of Massachusetts, Rosa DeLauro of Connecticut and Pete Welch of Vermont in a February 22 letter to the White House: “It is essential that the United States have an aggressive strategy for releasing oil from the Strategic Petroleum Reserve to combat the speculators capitalizing on the fear in oil markets and to send a message to Iran that we are ready, willing, and able to deploy our oil reserves.”

Senator John Barrasso, Republican-Wyoming, in a March 7 interview with Fox News: “That is for true emergencies. It is not for a political disaster, and that is what the president has on his hands right now.

Economist Phil Verleger in a February 27 report: “One can only hope the clueless Secretary of the Treasury learns the difference between gasoline and crude oil. An SPR release would not affect fuel prices today but could harm domestic crude oil producers.”

ClearView Energy Partners managing director Kevin Book in a February 17 report: “As we have written since last year’s ‘non-emergency’ draw of the U.S. Strategic Petroleum Reserve (SPR), we believe continuing high prices make another draw possible in 2012. Last year’s draw did attenuate prices for a period of time.”

Credit Suisse analyst note on March 7: “The recovery in oil prices post the SPR release last year is important in determining the potential impact of another release on retail gasoline prices given that crude oil prices have historically made up 65-80% of the retail price. If crude prices were to rebound to pre-announcement levels post another SPR release, the impact on retail gasoline prices may in fact be muted.”

Platts



5 Comments on "How releasing government oil stockpiles could raise, not lower, crude prices"

  1. Rusty Baker on Fri, 9th Mar 2012 10:58 pm 

    Vote Ron Paul 2012 to fix the economy! Overpopulation is not a problem; all of the world’s current population can comfortably fit in my home state of Texas. The New World Order uses myths of “Overpopulation”, “Climate Change” and “Peak Oil” to scare the sheeple masses into submission. Ya’ll should listen to real journalists like Alex Jones and Webster Tarpley-they speak the truth on world affairs. Don’t believe the liberal media. Frankly, the fact is that the earth can support at least a trillion humans.

    A real issue we should be focusing on is the Federal Reserve System. We have to abolish the FED because they plan on hyper-inflating the US Dollar and then setting up a world government after all the masses are enslaved by debt. Another issue we should be seriously focusing on is the Gold Standard. Ron Paul advocates a return to the Gold Standard instead of fiat currency that the elite world bankers have implemented to enslave the human race. The Gold Standard and Christian values is what made America a great country. Let’s return to them so America can once again be a great country and a beacon of light for the rest of the world.

    Don’t be fooled by Al Gore, Barack Obama and all the socialist liberal scientists. They want to tax you to death by imposing carbon taxes. Mankind doesn’t have that much of an impact on the earth; I don’t know why people are freaking out over “overpopulation” and “global warming.” The earth was warmer during the Medieval Warm Period when the Vikings were farming Greenland. Vote Ron Paul 2012!

  2. Rick on Sat, 10th Mar 2012 12:31 am 

    Rusty, ignorance is not bliss.

  3. BillT on Sat, 10th Mar 2012 1:26 am 

    Rick, Rusty thinks that the US controls oil prices. That is is mistake. Exxon, the worlds largest PRIVATELY owned oil company owns less than 5% of the world’s oil. Nations own the rest. Demand controls price and the demand EXCEEDS available resources. Therefore, prices will continue to climb until demand drops to available production levels. At that point, prices may level out but they are not going to decline unless we have a Super Global Depression and then you will not have any money for gas.

    Releasing oil from the strategic reserves is stupid for any reason other than a national emergency, and high gas prices is NOT a national emergency.

  4. Cam on Sat, 10th Mar 2012 5:32 pm 

    Well, high gas prices (really high) could be a national emergency. Of course by then it may be too late for any remedies!

  5. Kenz300 on Sun, 11th Mar 2012 9:56 pm 

    China and India and their billion plus populations are the new force in energy prices. China is now the worlds largest auto market and second largest economy. They are growing at 8% a year and using more and more oil every day. Their rising demand is outpacing the growth in supply raising the price of oil on the world market.

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