Energy markets remain on high alert over a rumored White House plan to tap the country's 695-million-barrel emergency oil stockpile, known as the Strategic Petroleum Reserve (SPR). Spot oil prices have fallen sharply since mid-September (down 6%),taking the edge off the market somewhat. But that price slide does not preclude a release. After all, last summer's announcement of an SPR release came on the heels of a similar down move in prices. So how can investors know whether President Obama will decide to tap the SPR, causing a brief but panicky sell-off in the oil market?
It's important to recognize how much latitude a president has in drawing down national oil stockpiles. There is no hard-and-fast decision rule or trigger mechanism to which he or she must adhere in deciding whether supply conditions in the oil market justify an intervention. This policy uncertainty inevitably breeds rumors about what the White House will do.
That is not to say that the president is unbound by certain legal requirements. If he's thinking about a release, President Obama is unquestionably considering two relevant pieces of legislation that govern SPR release decisions: the 1975 Energy Policy and Conservation Act, or EPCA, and the 1990 Amendment to the EPCA.
The EPCA, which called for the creation of the SPR in the wake of the 1973 oil crisis, requires that the president must determine that a "severe supply disruption" exists before tapping the reserve. This kind of disruption must meet three conditions. First, it must cause a "significant supply reduction … of significant scope and duration." Second, the shortage must have triggered a "severe increase" in oil prices. And third, the price jump must be "likely to cause a major adverse impact on the national economy."
But a 1990 amendment to the EPCA, passed in the wake of the Exxon Valdez oil spill, eased these requirements. It gave the White House power to initiate an SPR release when facing what "[constituted] or [was] likely to become" a significant shortage, though it capped releases under such circumstances at 30 million barrels.
A plausible case could be made that current oil market conditions qualify. Western sanctions on Iran are biting into the country's oil exports. Hurricane Isaac shut in some 2 million barrels a day of Gulf Coast refining capacity, though the recovery is now mostly done. Private-sector inventories of distillates like heating oil are unusually low as winter nears. Moreover, transportation fuel costs are high around the world at a time when there is little margin for error in the economy.
Yet there's a wildcard: a growing chorus of energy and economic experts are calling for a permanent reduction in the size of the SPR, based on the country's current and projected import needs. Their case is persuasive in many ways. Rising U.S. oil production, combined with languishing demand, means that as of the end of 2011, the SPR held well over the 90 days required under International Energy Agency agreements. These excess oil stocks give the Obama administration another legitimate argument to begin unloading crude from the SPR, which it may well leverage.
Some analysts argue that President Obama would never tap the SPR so soon before the election, out of fear it may appear politically self-serving. The country has been down this road before. In September 2000, just six weeks before polls opened for Bush versus Gore, President Clinton pulled the trigger on the SPR, swapping 30 million barrels for replacement after the election.
His opponents cried foul, and with reason. Bush's advisors lost no time in painting Gore, who supported the release, as "playing politics" with the national interest. (Privately, though, they were delighted by the move—"manna from heaven," in their words—because it fed into their argument that Gore was always looking out for number one.)
The Obama team, unquestionably aware of this lesson of history, is likely weighing the potential political costs of an SPR release versus its possible economic benefits. President Obama learned the hard way last year that the SPR can't reliably lower oil prices very long. It is much better suited to helping mitigate a run-away rise in prices, but nothing of the sort is occurring right now. If Americans think using up emergency oil right now is imprudent, it could do the president more harm than good politically.
The most intriguing aspect of the debate over an upcoming SPR release has gone almost unnoticed. The White House is likely more than happy to have oil traders lose sleep wondering if President Obama will send prices plummeting the next morning. To the extent that this fear can discourage traders from buying oil, the president may have a weak, blunt, but not altogether futile weapon against ever-rising prices that does not require lifting a finger. His decision to tap the reserves last year after Libyan oil production collapsed, even when most analysts did not feel it was justified, signaled to the oil market that the president knows he has some oil in reserve—and he's not afraid to use it.
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