Last week’s decision to release oil from the strategic petroleum reserve (SPR) indicates the U.S. now views the SPR as a tactical stock rather than an emergency reserve. In today’s GR Energy and Climate Brief, DC-based consultant Donald Hertzmark argues that the SPR was never intended to be a buffer stock and the release of the reserves marks a tenuous new governmental strategy of using the SPR as a tool to alleviate the public pressures of higher gasoline prices.

Last week’s announcement of releases from the Strategic Petroleum Reserve is a shift from its traditional and intended role of safeguarding against short term disruptions in the physical supply of oil, to a buffer stock used to manage oil prices. The United States has used supplies from the SPR only twice in the past – after Hurricane Katrina and during the first Gulf War. In both cases, temporary disruptions in supply were alleviated by SPR releases until production volumes returned to normal levels. However, this larger release is a reaction to a series of political events that have roiled world oil markets throughout the course of 2011, and is being used as a tool to alleviate the public pressures associated with higher gasoline prices. This approach, however, may have unintended long term consequences if it allows policymakers to avoid addressing the supply side issues that underlie higher oil prices. Today’s GR Energy and Climate Brief examines the new use of the SPR and its implications on short and long term energy policy choices. 

Oil Price Trends and the SPR Release

The SPR release comes after oil prices rose steadily upwards from the $70-80/barrel range to their peak of $110/barrel in April 2011 due to the Libyan conflict and other regional unrest. The rise in oil prices has been particularly severe for US refiners, given the lack of pipeline infrastructure in the United States. The US faces oil infrastructure difficulties that make additional supply of US and Canadian crude to the Gulf Coast refiners increasingly problematic, resulting in depressed WTI crude prices relative to Brent crude. The decision to release 2 million barrels per day from the SPR for the month of July was responsible for a $4-5/barrel reduction in prices within twenty-four hours after the announcement. This decline in crude prices accelerates a trend beginning in May, which saw an overall reduction in crude prices of about 15-20% from the peak levels of $110-112. Since the start of conflict in Libya more than 150 million barrels of oil have disappeared from world markets; the SPR release will replace about 40% of that reduction, with increased Saudi production covers another 1 million barrels/day. But, both the SPR release and the increase in Saudi production are meant as temporary measures.

Managing Long-Term Prices in the US Market

A strategic release of oil is intended primarily to counter a short-term emergency. If the “emergency” is going to last for a longer period than the initial release, then the US and IEA members need to have policies in place that can mitigate the emergency conditions and take oil prices back to a more “normal” level of $70-80/barrel.

See full article here.