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By Robert Rapier on Sep 6, 2012 with 3 responses

Are Democrats More Likely to Release Strategic Oil Reserves?

Election Season

In Issue #7 of Energy Trends Insider, a reader asked about the potential implications of the Obama Administration’s recent announcement that they were considering a release of oil from the Strategic Petroleum Reserve (SPR). My view is that since it is an election season and gasoline prices have remained stubbornly high, the chance of a release from the SPR is high. Having a Democrat in the White House also increases the odds, as illustrated by this post.

If the Obama Administration orders a release, it would be the 2nd time the administration had tapped the SPR. In 2011 the Obama Administration ordered a release of 30 million barrels of oil in conjunction with a 30 million barrel release from other members of the International Energy Agency. At that time, oil prices were already well off their highs, and the impact was short-lived.

With the 2011 release, the price of West Texas Intermediate (WTI) dropped by 4% on the day the release was announced, but one week later the price was higher than it was before the release was announced. If you look at the data from the EIA, you can see the fleeting impact of that 30 million barrel release (the announcement was on June 23, 2011 when the price of WTI was $94.96). The price dipped, climbed back up, dipped again as summer driving season ended, but by year-end was back above $100/bbl.

In contrast to last year’s release, the International Energy Agency disagreed with the need this time, stating “There is no reason for a release” and “The market is sufficiently supplied.” I think the Obama Administration is signaling that they may release some oil for two reasons. One is to spook the markets and cause a sell-off of oil, with the hope of lowering gasoline prices. The other is to test the reaction from the American public and from U.S. allies so they can better judge the political risks of such a blatant attempt to manipulate prices heading into the election.

I have often noted the irony that the Democratic Party — which is the party that believes we need to get off of oil and strongly address climate change — is the party that is so outspoken about using the SPR in an attempt to reduce gasoline prices. It’s as if there is no recognition that lower prices lead to higher demand, and thus more oil consumption and more carbon emissions. There is a total disconnect there.

History of SPR Inventory

As I was considering the possibility of an SPR release before the presidential election, I reviewed the history of prior releases. I knew that the largest ever release from the SPR took place under President Clinton in 1996 — a year in which Clinton was running for reelection. But then I began to wonder if there was a pattern to SPR additions and withdrawals depending on which political party is in the White House. It turns out that there is. While both political parties have tapped the SPR, Democrats are more inclined to apply a liberal standard toward tapping it, and not to replace the oil they removed.

The Energy Information Administration keeps a history on inventory levels in the SPR. The SPR was created in response to the 1973 OPEC oil embargo. It was established with the 1975 Energy Policy and Conservation Act which was signed into law by President Gerald Ford. The SPR began to be filled during the Carter Administration. At the end of President Carter’s term in 1980, the reserve had been filled to a level of 108 million barrels.

SPR stocks as days of petroleum net imports, derived by dividing end-of-year SPR stocks by annual average daily net imports of all petroleum (1977-2010). Courtesy: EIA.

President Reagan placed a high priority on filling the reserve. The SPR reached the 250 million barrel mark during Reagan’s first term and the 500 million barrel mark during Reagan’s second term. At the end of Reagan’s second term in 1988, the level stood at 560 million barrels, which represented 85 days worth of petroleum imports.

The Energy Policy and Conservation Act (EPCA) states that oil can be released onto the market from the SPR if the President determines that there is a “severe energy supply interruption” or if the President declares that a condition “exists that constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration.” Oil has been released from the SPR under those conditions three times. The first took place in 1991, when President George H. W. Bush announced that the U.S. would release oil from the SPR to stabilize the oil markets as military action began against Iraq. While 17.3 million barrels were released, the SPR level was still higher at the end of Bush’s term than at the beginning. At the end of 1992 the SPR inventory stood at 575 million barrels. Prior to the release — in Bush’s 3rd year in office — the inventory level in 1991 was equivalent to 86 days of imports. That level has not been achieved since. (The record was 115 days of imports reached in 1985).

President Clinton was often under pressure from fellow Democrats to release oil from the SPR. In 1996 — a year in which he was running for reelection and with oil prices hovering around $20/bbl — Clinton ordered a series of SPR sales that totaled 26 million barrels of oil. 23 million barrels were sold in the name of deficit reduction. A decade or so later that oil would have been worth more than a billion dollars more than it was sold for in 1996. At the end of Clinton’s second term in 2000 the inventory had fallen to 541 million barrels — 52 days of petroleum imports.

President George W. Bush dipped into the SPR in response to Hurricane Katrina. The total release — which included emergency loans as well as direct sales — was 21 million barrels. Nevertheless, the inventory level by the end of Bush’s second term in 2008 had climbed to 702 million barrels.

As a candidate for president in 2008, Barack Obama called for the sale of 70 million barrels of oil from the SPR to mitigate oil prices. But then President Obama actually added 25 million barrels to the SPR in his first year in office. This put the SPR at the all-time high inventory level of 727 million barrels. Those additions stopped during Obama’s second year in office, and then during his third year he ordered a withdrawal of 30 million barrels — taking the level back down below 700 million barrels with the possibility of more releases on the way. The good news is that because of the reduction in U.S. oil import requirements, the present inventory level is back up to about 80 days worth of imports.

Conclusion: Likelihood of an SPR Release is High

So if you look at the past five presidential administrations, there were net additions to the SPR under the three Republican administrations, and net withdrawals under the two Democratic administrations. The only Democratic president who made a net addition to the SPR was Jimmy Carter, under whose watch the SPR began to be filled.

So a Democratic president, rising oil prices, and an impending election combine to increase the possibility of a release between now and the November elections. On the other hand, gasoline prices are likely to decline anyway heading into fall (as they do almost every year), and if President Obama is enjoying a solid lead in the polls it will lessen the chances of a release.

A key question in the event of a release is whether oil prices would rebound before the election, in which case the administration would open themselves to (much-deserved) criticisms about energy policies that leave us more unprepared if a real crisis occurs. For that reason, I think the odds are highest for a late-September or October release. That would have the largest chance for a short term impact with less opportunity of a rebound in price.

But just to reiterate my previous position, I do not view high oil prices as a valid reason for releasing oil from the SPR. I view it as an instrument to be used in the event of actual shortages that could potentially disrupt the transportation system.

Link to Original Article: Are Democrats More Likely to Release Strategic Oil Reserves?

By Robert Rapier

  1. By Moiety on September 6, 2012 at 7:43 am

    To me this just shows a continued lack of understanding on energy issues. I could forgive if the reserve was sold to reduce deficit, but to lower prices is not valid.

    Like I said the last time this came up, this release in the mindset of Joe Soap, will only give a flase impression of the stability and availability of petroleum in the market. It does not help reduce use and is completely contrary to an environmental mandate.

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  2. By Ed Reid on September 6, 2012 at 9:39 am

    Yes, to try to get whatever boost they can from it.

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  3. By Ben on September 6, 2012 at 6:10 pm

    This is helpful analysis and points to the inevitable politicization of something that is, by legislative design of the federal government, of ”strategic” interest to the nation.   To understand that it may be subject to the whim of chief executives seeking favor with teh electorate is of little surprise and no less unsettling.   To the extent there is any temptation on the part of the current occupant of the White House to pander to voters under the pretense of “feeling your pain,” well,  let’s just say that such an initiative would more likely invite a larger measure of criticism than it will ultimately yield political benefits.   Why so?  Well, the advent of annoying bloggers like Rapier and his fellow-travellers would be all over it like a dog on a ham bone.   No, I think the administration will probably keep the powder dry and wait for circumstances that actual justify such a release.   Now, watch these jokers make a liar out of me just to prove that the current cynicism of the American public is so richly earned by the crew in Washington.

    Hey, who about that Clinton speech?  That one was right out of Central Casting, eh!  If nothing else, glad to see arithmetic making a fashionable comeback:)

    Ben

     

     

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