The Obama administration plans to release 30 million barrels of crude from its emergency oil stockpile as part of an international effort to put more oil in the market.
The move comes as political pressure mounts on President Barack Obama to do something to arrest rising gasoline prices fed by unrest in Libya and throughout the Middle East. Western nations also have been frustrated by OPEC countries’ failure to raise production after a meeting earlier this month.
“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” Energy Secretary Steven Chu said in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”
The release of oil from the United States’ Strategic Petroleum Reserve was coordinated with a similar move by theInternational Energy Agency. With the U.S. contributing 50 percent, 28 IEA member countries pledged to release a total of 60 million barrels of oil in coming months, according to Executive Director Nobuo Tanaka.
“Today, for the third time in the history of the International Energy Agency, our member countries have decided to release stocks.” Tanaka said in a news release. “I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy.”
U.S. officials said the release would help offset a loss of roughly 1.5 million barrels of oil daily — mostly light sweet crude preferred by refiners — tied to the unrest in Libya as Americans enter the heavy summer driving season.
“We’re heading into a period in which demand for oil tends to be at its highest,” a senior administration official said during a conference call with reporters. “This release is intended to address an increase in demand, even as Saudi Arabia and (other) countries ramp up production over the remainder of the year.”
The news immediately sent prices down for West Texas Intermediate crude, the U.S. benchmark. WTI futures were trading at $90.36 — down $5.05 — in early morning trading.
Lawmakers who have pressed the Obama administration to tap the Strategic Petroleum Reserve said the decision could be a soothing balm for an ailing U.S. economy.
“With our economy teetering on the brink of a double-dip recession, and American families still struggling during peak driving season, this is the one tool America has at her disposal to immediately help drive down prices at the pump,” said Rep. Ed Markey, D-Mass. “Deploying just a small fraction of our nation’s oil reserves will have a huge effect on the everyday lives of American families and potentially on the health of our economy.”
But Sen. Jeff Bingaman, D-N.M., the chairman of the Senate Energy and Natural Resources Committee, questioned the timing of the move, since oil and gasoline prices have backed off recent highs.
“This decision would have been more timely if made when the disruption in Libyan oil supplies first occurred,” Bingaman said. “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.”
Early reaction from analysts was mixed.
Craig Pirrong, a finance professor at the University of Houston who specializes in commodities, also was skeptical of the timing of the release. And while oil prices have fallen on the news today, it’s hard to truly say what the short and long-term price impacts will be, Pirrong said.
“Markets are down broadly due to lousy U.S. jobs numbers,” he said, noting the dollar is also rallying, which typically leads to lower oil prices. “Economic news other than IEA accounts for a good chunk of the sell-off.”
Pirrong also cautioned that releasing oil from storage means decreasing tomorrow’s potential supply, even as it boosts supply immediately. “That has offsetting effects on prices over time,” he said. There may be “some initial relief, perhaps, but (it’s) not a long term palliative.”
Amy Myers Jaffe, a senior fellow at Rice University’s Baker Institute of Public Policy, said the release is both politically and economically motivated, but insisted it’s still the right thing to do.
“Given the instability in the Middle East it is important to signal that the SPR is on the table and that a supply crisis can be avoided,” Jaffe said.
She noted that there is a real supply and demand problem given that the Libyan unrest has disrupted deliveries of sweet crude oil generally preferred by most refiners and there may be more sweet crude disruptions from small producers in Syria and Yemen.
“The only way to get sweet crude into the market is a release,” Jaffe said. “This is what we have the SPR for.”
Randa Fahmy Hudome, an energy consultant in Washington, D.C., and a former Bush administration energy official said the U.S. could have tried other tactics — including allowing more blending by American refiners of other crudes — to get around any shortage of the light sweet variety.
She called the Obama administration’s move “extraordinary” and “unprecedented,” given that most SPR sales have been in response to wars or natural disasters and this appears to be motivated by economic considerations.
“The only thing i can assume is that this was done for a political need to satisfy consumers,” Fahmy Hudome said. But, she warned, “it creates a slippery slope. The SPR is supposed to be used for an emergency situation.”
The administration “might say this is an (economic) emergency, but even that is questionable,” she added. “Gas prices are high, yes, but they’re not so unbearably high that this is the only thing affecting the economy today.”
Some Republican lawmakers suggested that political motivations — not purely economic ones — had driven the United States’ decision, since oil prices have been stabilizing.
“The Strategic Petroleum Reserve is intended for situations when there’s a dramatic supply shut down, not to achieve short-term political gain,” said Rep. Doc Hastings, R-Wash., the top Republican on the House Natural Resources Committee. Tapping the U.S. stockpile means “weakening our domestic security should a real supply disruption occur,” Hastings added.
Rep. Fred Upton, R-Mich., said it was shortsighted for the administration to release emergency oil supplies instead of pushing for more domestic development of resources in Alaska and the Gulf of Mexico.
“The Strategic Petroleum Reserve was designed for energy emergencies, not political convenience,” said Upton, the chairman of the House Energy and Commerce Committee. Upton said “this administration’s decision to drain down our reserves (signals) to the world that we are vulnerable to political unrest and supply disruptions because we refuse to develop our own resources.”
And Rep. Pete Olson, R-Sugar Land, said the decision “looks like a politically motivated move to avoid implementing a sound energy policy that will reduce our dependence on Middle East oil.”
“Tapping the SPR simply to manipulate oil prices defeats the purpose of the reserve,” Olson added.
But administration officials insisted that the decision had been months in the making and was essential to adding “stability” to the market. “There’s been a significant supply disruption,” a senior administration official told reporters. “That’s evident in the tightness of the market that we’ve seen.”
Administration officials declined to say specifically whether Saudi Arabia had committed not to drop production to offset the 60-million-barrel release from IEA countries.
“We view what we are doing as complementing that which the Saudis and other producers have agreed to do” in ramping up production,” a senior official said. “We have been in continuous communication with all of the producers and we believe there is a high coherence of view” about the markets’ “supply and demand” needs.
Established in the 1970s to protect the U.S. economy from price spikes caused by oil supply disruptions, the Strategic Petroleum Reserve is meant to fulfill federal requirements that the U.S. stockpile about 90 days’ worth of oil.
Roughly 727 million barrels of crude are now stored in the underground salt caverns in Texas and Louisiana that make up the reserve.
The government is expected to provide more details on the oil sale within a day, but administration officials said they were focusing on releasing light sweet crude. The oil will be sold through a traditional auction process and drawn from a number of caverns.
The United States consumed roughly 19 million barrels of oil and petroleum products per day in 2010, according to the Energy Information Administration.
Much of that is imported. In 2009, the U.S. imported about 9 million barrels of oil daily and produced about 5.4 million barrels daily from domestic sources.
This is the third time that IEA member country stocks have been released since the organization was formed in 1974. IEA member countries last released oil stocks in 2005, after Hurricane Katrina damaged offshore rigs, pipelines and refineries in the Gulf of Mexico and along the Gulf Coast. Before that, the last coordinated IEA release was after Iraq invaded Kuwait in 1990.
Hurricane Katrina also spurred the most recent drawdown of the Strategic Petroleum Reserve in September 2005, when the U.S. sold 11 million barrels for $702 million to Astra Oil Co., BP Oil Supply Co., and Marathon Ashland Petroleum. The U.S. had initially planned to put 30 million barrels on the market in response to the hurricane damage.
The U.S. has sold or exchanged oil from the Strategic Petroleum Reserve nine times since 2000.