The Oil Piggy Bank - Time to get a Hammer?

Original Link: http://noquarterusa.net/blog/2008/08/06/the-oil-piggy-bank-time-to-get-a-hammer/

By LisaB

Last month, Barack Obama rejected the idea of tapping into the Strategic Petroleum Reserve as a way to hopefully offset high gas prices for consumers.

What a difference a month makes. Right on the heels of Obama’s dead fish flop on drilling off the coast of FL (even Jeb didn’t want to do this) comes an Obama proposal to sell 70 million barrels of oil from the stockpile.

The WaPo reported Tuesday that during a speech in MI:

Sen. Barack Obama called Monday for using oil from the nation’s strategic reserves to lower gasoline prices, the second time in less than a week that he has modified a position on energy issues, as he and Sen. John McCain seek to find solutions to a topic that is increasingly dominating the presidential race.

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The Obama campaign did not predict how much releasing reserves would lower gas prices. But it said prices at the pump went down more than 19 percent within two weeks when President Bill Clinton made such a move in 2000.

His proposal comes a month after Obama said he would consider using oil from the reserves only in a “genuine emergency,” such as “terrorist acts.” Aides said the plan is not a reversal because he would replace light crude oil in the reserves with less-expensive heavy crude. They also noted that the senator from Illinois last week described the country’s economic conditions as an “emergency.”

On July 24th, USAToday reported that democrats wanted to open the reserves for just this reason.

WASHINGTON — House Republicans on Thursday scuttled a bill that Democrats hoped would help lower gasoline prices by forcing the Energy Department to release 70 million barrels of oil — about a three-day supply — from the national stockpile.
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Democrats said the release from the oil reserve could provide relief at the pump within two weeks, though they would not say how much it would help $4-per-gallon gas. Earlier releases, such as a 34 million barrel drawdown in 1991 during the Persian Gulf War, caused prices to fall.

Interestingly enough, Republicans opposed the sale because Democrats opposed offshore drilling.

Also curious is another story from USAToday on July 23rd about the airline industry supporting selling reserves.

WASHINGTON (Reuters) — The U.S. government should tap the national petroleum reserve to relieve ailing airlines that have been stung by soaring oil prices, the industry’s leading trade group told lawmakers on Wednesday.

“History shows us that even a temporary increase in supply will immediately lower oil prices,” James May, president and chief executive of the Air Transport Association, told the House of Representatives Select Committee on Energy Independence and Global Warming.

Three major U.S. airlines reported second-quarter losses on Tuesday of more than $3.3 billion, blaming skyrocketing fuel costs.

May testified as the House is expected to vote Thursday on legislation to release millions of barrels of light sweet crude from the Strategic Petroleum Reserve (SPR) and swap it with heavy sour crude in an effort to calm the market.

The Strategic Petroleum Reserves has a website with information on current inventory here.

About the Strategic Petroleum Reserve (Wikipedia)

Access to the reserve is determined by the conditions written into the 1975 Energy Policy and Conservation Act (EPCA), primarily to counter a severe supply interruption. The maximum removal rate, by physical constraints, is 4.4 million barrels per day (700,000 m³/d). Oil could begin entering the marketplace 13 days after a Presidential order. The Dept. of Energy says that it has about 59 days of import protection in the SPR. This, combined with private sector inventory protection, is estimated to equal 115 days of imports.

The SPR was created following the 1973 energy crisis. The EPCA of December 22, 1975, made it policy for the U.S. to establish a reserve up to one billion barrels (159 million m³) of petroleum. A number of existing storage sites were acquired in 1977. Construction of the first surface facilities began in June 1977. On July 21, 1977, the first oil—approximately 412,000 barrels (66,000 m³) of Saudi Arabian light crude—was delivered to the SPR. Fill was suspended in FY 1995 to devote budget resources to refurbishing the SPR equipment and extending the life of the complex. The current SPR sites are expected to be usable until around 2025. Fill was resumed in 1999.
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On August 17, 2005, the SPR reached its goal of 700 million barrels (111,000,000 m³), or about 96% of its now-increased 727-million-barrel (1.156E+8 m³) capacity. Approximately 60% of the crude oil in the reserve is the less desirable sour (high sulfur content) variety. The oil delivered to the reserve is “royalty-in-kind” oil—royalties owed to the U.S. government by operators who acquire leases on the federally owned Outer Continental Shelf in the Gulf of Mexico. These royalties were previously collected as cash, but in 1998 the government began testing the effectiveness of collecting royalties “in kind” - or in other words, acquiring the crude oil itself. This mechanism was adopted when refilling the SPR began, and once filling is completed, revenues from the sale of future royalties will be paid into the Federal treasury.

So, what are the threads here? Democrats and Republicans have been at loggerheads for some time over how to deal with climbing gas prices, with Republicans wanting to drill more and Democrats wanting to use the “oil piggy bank.” Now, it looks as if someone has achieved a “meeting of the minds” with Obama suddenly supporting drilling. Will Republicans suddenly support selling reserves?

We’ll have to see. Right now John McCain does not.

In addition, whether or not 70 million barrels will make a huge difference to the average consumer is a matter of debate. Although any savings is appreciated, such a sale isn’t likely to lower price all that much. Selling oil to make gas prices go down is a little like selling apple trees to lower the price of pie.

So, who benefits the most? Well, consumers who use LOTS of gas. Airlines come to mind. It might help that industry - but that’s not why the idea is being sold. It’s for the driving consumer, stupid.

Lastly, the sale would be of stockpiled “sweet crude.” Reports say this “sweet crude” would then be replaced by the “sour type” (are there crude tasters??). So, that’s not a one-for-one swap. Also, haven’t we been hearing for some time that refinery capacity is a problem and that adds to the price? Just because we could sell it, would we be able to quickly refine it?

We’d be selling the apple trees, putting twigs back in the ground, waiting on a backlogged pastry chef and hoping the pie gets cheaper.

And Obama was against it before he was for it.

So, what’s the calculation, Barack? What changed your mind? And while you talked about this in MI on the 4th, it doesn’t show up in the transcript of your speech in Ohio on the 5th.