Engineering News

Release of Oil from US Strategic Reserve Questioned
July 12, 2011

Oil and gasoline prices are now higher than they were before the United States and other countries released 60 million barrels of oil and petroleum products from their strategic reserves.

In late June, the International Energy Agency announced plans to release the oil and fuel over a month. Half of the amount would come from this country's Strategic Petroleum Reserve.

The energy agency and U.S. officials said the oil would replace supplies lost when Libya, engulfed in a rebellion, stopped production. But the move was also widely seen as a bid to reduce energy prices and boost struggling economies, including that of the United States.

After the oil release announcement, prices did indeed retreat. But from the beginning there were doubts about how long any price decline would last.

The additional supplies would meet less than a day of world demand, and there was already enough oil on the market, particularly in the United States. Prices instead were being driven upward by increased demand for gasoline worldwide.

The release "was politically motivated, and it has failed," said Lewis Adam, president of Admo Energy, which helps fuel retailers in the Midwest manage their purchases of gasoline and diesel fuel.

The 28-member International Energy Agency surprised the markets on June 23 when it announced 60 million barrels would be released starting in July. The United States would provide 30 million barrels of crude oil, and several European and two Asian nations would provide the rest. More than half of that would be petroleum products, including diesel fuel.

By one measure, the plans were a success. The 30 million barrels to be released by the United States, about 5 percent of the reserve, were snapped up by refiners and oil companies. The light, sweet oil, more easily refined, is a relative bargain at prices about 95 percent of the world price, according to U.S. Energy Department documents.

But the release has faced various criticisms, including the charge that it was designed to improve public perception of President Barack Obama's handling of the economy by appearing to try to lower energy prices.

Some have said news of the release was leaked to some traders before the announcement, allowing them to take advantage of price volatility. The Commodity Futures Trading Commission is investigating.

There are also questions about why the oil from the U.S. reserve is being sold. In the past, a majority of the oil released from the reserve was done so on an exchange basis, and that has been the preferred method since 1996. The oil is released to buyers who agree to eventually return oil to the reserve.

By selling the oil, the federal government could reap a $2 billion profit, and some speculate it could end up helping cover the deficit instead of replenishing the reserve.

In the 1990s, the United States sold 23 million barrels of oil for deficit reduction, although there was a program, since discontinued, that eventually replenished the reserve.

The U.S. Energy Department has said little about the reasons for choosing to sell the oil. But in an email response to a question, it said that the oil was meant make up for the shortage from the Libyan disruption and that a "sale adds whereas an exchange would eventually have to be returned, resulting in no net addition to world supplies."

Jay Hakes, former director of the federal Energy Information Administration, said not replenishing the Strategic Petroleum Reserve was a mistake, especially if it sets a precedent leading to further withdrawals.

The reserve is meant to handle a major disruption of oil supplies, and reducing the stockpile raises the possibility that the United States might someday have to use its armed forces to keep oil coming from another country.

"It's making it more likely we will have to send in troops," he said.

That leaves the question about how the release of the oil affected prices.

The day before the announcement, a barrel of West Texas intermediate crude went for $95.41. The day of the announcement, it dropped $4.39. That was enough to cause wholesale gasoline prices to drop about 14 cents per gallon and could make available $90 million a day to spend elsewhere in the economy.

But it didn't last. A week later, oil prices were back up to where they were before the announcement, and by Friday they were still higher, closing at $96.20 per barrel on the New York Mercantile Exchange. Wholesale gasoline prices, which also briefly dipped after the announcement, have risen from $2.84 a gallon to $3.02 on Friday.

Tancred Lidderdale, an analyst for the Energy Information Administration, said it made sense that adding more oil could have some effect. But there are many reasons for oil prices to rise and fall, including international tensions and the condition of the economy, and trying to pinpoint what effect 60 million barrels could have is difficult.

The International Energy Agency, which is based in Paris, in an email interview reiterated that the 60 million barrels are not about price but are meant to ensure sufficient supplies of the commodity. A spokesman added, "It is very early to attempt to judge the success of the stock release based on individual price metrics."

James Williams, an economist for WTRG Economics, and other analysts aren't buying the contention that the oil is being released just to replace Libyan oil and not to lower prices.

He said oil supplies were ample, with the United States currently having enough oil and petroleum products to cover 53 days of demand when normally at this time of year the United States has enough to meet 50 days.

There would have to be much more oil released over a longer period for prices to have a sustained decline.

"It didn't lower prices, and there is no way to spin it to make it look good," he said. "I'm sorry, it didn't work."

Source: The Kansas City Star, MO

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