To Tap or Not to Tap

It is tempting to think of the strategic petroleum reserves like a big kegger party: just open the spigot and let the good times roll.

But it’s not the case, unfortunately, for a world where too much demand is chasing too little oil. Any release is difficult to pull off and relief may be temporary, especially if the Obama Administration does not have at least a coalition of the willing among some of the major western consuming countries.

The administration, however, does seem keen to tap the U.S. Strategic Petroleum Reserves — after all it’s brimming with nearly 700 million barrels of oil — and has been talking up the idea with key allies such as Britain and France.

But the very fact the administration has not moved shows how difficult it is. Last June, with concern about the Libyan uprising wiping out much needed high quality crude from the market, the United States and Western allies coordinated an oil release in a strong show of unity.

All together some 60 million barrels of oil were discharged and it quickly knocked the stuffing out of the surging oil market. U.S. prices, which had topped $115 a barrel in May, fell $10 a barrel on the day of the release and even by October the price was under the $100 mark.

But of course the relief was temporary. U.S. crude is around $102 a barrel now after climbing down from $110 in recent days. More worrisome for policy makers, the Brent crude benchmark is mired at around $125 a barrel.

There is a lot of concern about tapping the reserve just one year after the release last year. The physical logistics could be a challenge all by itself. As Reuters reported, the country’s rapidly changing energy infrastructure, including the reversal of key pipelines and clogged waterways, will make it tougher to get the oil to the right markets as quickly as in previous years.

The SPR is supposed to be tapped only in supply emergencies. But how is that defined? Some say there is an emergency now because with U.S. sanctions on Iran, countries are cutting back on buying Iranian crude. This serves to tighten supplies even further, and it comes with demand still strong from the likes of India and China, if not the United States.

It is interesting to note that the Obama Administration recently assessed oil markets and ruled there is enough oil for the United States to impose sanctions on countries that refuse to cut their Iranian purchases. And one reason it said there was enough oil? Because the world has strategic stocks on hand!

But if this is a budding justification of a release, there still seems to be a lack of political consensus. Any release would work much better with the International Energy Agency on board, as was the case last year. But some allies don’t appear ready to support a move just yet.

Saudi Arabia, the world’s biggest oil exporter, is worried oil prices are too high and has been increasing production. But they have also let it known that they are not thrilled about another release of stocks. Reuters, howeerver, recently reported that the Kingdom likely will not try to neutralize any release by cutting its own production.

All this leaves much uncertainty on how the United States will proceed. But one thing does seem certain: the Obama Administration doesn’t want to throw an oil release party where only a few show up. After all, cynics would say, he needs to keep the party going until at least until the November elections.

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