Will The SPR Oil Release Save Consumers From High Gasoline Prices? (Guest Post)

By Bob van der Valk

The Obama administration's decision to release 30 million barrels of sweet crude oil from the Strategic Petroleum Reserve (SPR), located in Louisiana, makes no sense.

House Speaker John Boehner remarked “President Obama is using a national security instrument to address his domestic political problems.” His observations may be an over simplification of our current crude oil supply situation. Here are some of the immediate impacts this decision will have on consumers and the markets:

First – To answer the question asked in the headline - it will temporarily provide lower prices at the pump as motorists head out for their favorite summer vacation spots.

Second – It also gives East Coast refineries some relief from recent high Brent crude oil prices. On the other hand, it will assist West European refineries more in supplementing short crude oil supplies from their North Sea and overseas exports.

The spread between Brent and WTI crude oil has already narrowed down from $20 to $14 a barrel since President Obama's announcement about the infusion of 60 million barrels of sweet crude oil into the oil markets per the Reuters graph:


On Friday, June 24, 2011 Brent crude oil price lost more than $2 and settling at $105.12 a barrel. WTI went below the $90 mark at one point but recovered and went up 14 cents to close at $91.16 a barrel.

Brent presents a “truer” price in the big world of oil trading since Cushing, Oklahoma, on which the WTI benchmark price is based, is landlocked and controlled by the big Wall Street hedge funds and oil speculators.

Third – It sends an important message to Iran that the United States is capable of protecting its domestic market even when it refuses to increase crude oil production.

Iran was the main instigator at the June 8, 2011 Organization of the Petroleum Exporting Countries (OPEC) meeting leading the opposition on any increase in crude oil exports by its members. The meeting ended up in disarray with quotas being left alone based on a non-agreement between their members.

After the meeting Saudi Arabia said it would pump as much as 1.5 million more barrels a day until the end of the year. The bad news is they can only supply sour crude oil as the “extra” barrels over their current 8.5 million barrels OPEC quota. Hidden behind all this is a simple power-play by Iran, assisted by Venezuela, to undercut Saudi Arabia's traditional leadership position.

At previous OPEC meetings, Saudi Arabia maintained a moderate position on pricing, usually willing to increase production even if it would forestall a price increase and at times, even if would cause a price decrease. Iran, by contrast, is a hard-liner. They need to increase domestic social program spending and cannot afford a possible drop in oil prices.

On June 21, 2011, the Saudis dropped another bombshell. Prince Turki Al Faisal of Saudi Arabia said they would make a significant reduction in the price of oil if Iran continues with its nuclear program. Turki, a former ambassador to the U.S. and Great Britain, presently has no official position in the Saudi administration. However, he often has been used to publically float a policy change that later becomes reality.

In making this announcement, he used the terminology to "squeeze Iran." By taking this action, the Saudis will be putting not only be the end of quotas, but of OPEC as well.

Members of the International Energy Agency will release an additional 30 million barrels for 60 million barrels over the next 30 days, which is aimed at making up the loss of nearly two million barrels a day of sweet crude oil a day in exports interrupted by the unrest in the Middle East and North Africa. It will have more effect on the Brent crude oil price on the Intercontinental Exchange (ICE) of London, which for the moment has stabilized.

The strategic petroleum reserve, established after the 1973-74 Saudi Arabian oil embargo, contained 727 million barrels before this draw down. It will be down below 700 million barrels, which means the oil will eventually have to be replaced.

The average price paid for oil in the SPR is $29.76 per barrel per the Department of Energy website statistics at: http://fossil.energy.gov/programs/reserves/spr/spr-facts.html In the 1980s Saudi Arabia overproduced to punish cartel members who would not follow the dictates of what the Kingdom wanted to do with oil production and prices.

Back then, Saudi Arabia wanted higher prices and less production but Venezuela and other OPEC members were over producing oil in violation of cartel quotas.

The Saudis cranked up production to drive the price of oil down to punish those violators as an incentive for them to get in line behind the Saudi policy. It eventually drove crude oil prices down from a high of $38 to $12 a barrel in the span of seven years.

It was the last time US motorist paid less than $1 per gallon for gasoline at the pump. Operation Desert Storm ended the oil glut and consumers have had to live with ever gyrating crude oil prices translated to today's high pump prices.

About the Author - Bob van der Valk lives in Terry, Montana is a Petroleum Industry Analyst with over 50 years of experience. You can reach Bob at: tridemoil@aol.com or (406) 853-4251

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

EconMatters, June 28, 2011 | Facebook Page | Twitter | Post Alert | Kindle