Tapping Oil Reserves: Smart Play or Fool's Bet?

Should the U.S. tap into our emergency fuel supplies to reduce the pressure on fast-rising oil and gas prices?

That is the key question this morning and the first real stress test for the government since the financial crisis.

It is very easy to say that we should hold off and be prudent but when gas prices have jumped ~$0.60/gallon since the start of the year and over $0.15/gallon in just the last week, but rationale is rarely present in times of panic and fear spreads quickly.

As you may have noticed, I have stopped talking about oil prices in terms of barrels.

The idea is to underscore the shifting values of our times.

A few years back, the country as a whole looked at oil prices as an usissue. Today, people are a lot more concerned with how will I get to where I need to be. The attention is on individual pockets and savings, not necessarily...overall economic improvements.

Market driven logic hasn't waned in value, but it certainly has in terms of effects on decision making. Keep that in mind as you read on.

The Expert's Take



Daniel Yergin became a household name in the academic world in 1992, with his Pulitzer Prize winning book The Prize. More than aptly titled, it's a great historical primer on the oil industry and the myriad of factors which surround it.

Today, Yergin is the chair of IHS Cambridge Energy Research Associates. In a video interview worth watching Yergin suggests the U.S. Strategic Petroleum Reserves should be used solely to combat supply shortages, and not to lower fuel prices.

Recently, several House Democrats went on record, asking the President to open up reserves as political instability in Libya fueled oil prices to a 2 and a 1/2 year high.

With the summer driving season fast approaching, it is understandable why some would be nervous.

Even though I almost always agree with the logic Yergin puts forth, perhaps things are different this time around?

Perhaps, a release of American oil supplies would have a calming effect on oil markets?

Perhaps a demonstration of American oil reserve capacity and more importantly, the will to use IT, would send a subliminally stabilizing message to the MENA region.

Even though nobody will come out and say it in the mainstream press...we all know full well there are some serious power plays going on behind the scenes right now. Maybe a reserve tap could have a positive effect?

Though it goes against my general beliefs, I am open to hearing this side of the argument...

How do you guys feel about it?

Is it time to unscrew our spigots?

Or should we let the markets sort it out?

Comments (16)

Feb 25, 2011

I think we should wait a bit. I haven't been following the ongoings in Libya and stuff, but I don't think this could blow up tooooo much could it?? Maybe I should stop posting and reading WSO so much and read the real news more

It's what you put into it

Feb 25, 2011

We shouldn't tap in to the reserves to help BHO's re-election bid...

We need those for a real disaster, not to suppress oil prices

Feb 25, 2011

Lets wait for some more saudi protesting before we go too far...
Did we open up reserves when we had 140 crude?

Feb 25, 2011
EarTotheStreet:

Lets wait for some more saudi protesting before we go too far...
Did we open up reserves when we had 140 crude?

ETTS and others, is there any more news on that March 11th date in Saudi Arabia? Last I heard King Abdullah was trying to pay off the masses from protesting. Should be an interesting day either way...

Feb 25, 2011
EarTotheStreet:

Lets wait for some more saudi protesting before we go too far...
Did we open up reserves when we had 140 crude?

ETS,

$140 was the result of the SPR. The SPR kept filling up its reserves throughout the spring into early June. Then, congress passed a lawrequiring the SPR to stop purchasing oil. It takes a lot of buying to make a market go up, but a lack of it to send a market back down. About a month or two after the SPR act went into effect, oil prices peaked.

Feb 25, 2011

Midas,

The only way we should tap into the reserves is if we see destruction of Libyan oil production capabilities and the fall of another oil producing country to the point where prices are exceeding $6+ a Gallon. Yes, in the short term, it will be a real drag on the wallets, but the entire point of a Strategic Reserve is to use it when it becomes absolutely necessary. At $6/Gallon, you will see enough price inflation that it becomes a warrented use of Strategic Reserves to help reduce the burden slightly. Strategic Oil is not meant to be a tool to get votes, but a reserve if we ever need it.

Feb 25, 2011
Frieds:

Midas,

The only way we should tap into the reserves is if we see destruction of Libyan oil production capabilities and the fall of another oil producing country to the point where prices are exceeding $6+ a Gallon. Yes, in the short term, it will be a real drag on the wallets, but the entire point of a Strategic Reserve is to use it when it becomes absolutely necessary. At $6/Gallon, you will see enough price inflation that it becomes a warrented use of Strategic Reserves to help reduce the burden slightly. Strategic Oil is not meant to be a tool to get votes, but a reserve if we ever need it.

I hope Gaddafi doesn't pull a Hussein move on his way out. I say wait until shit really hits the fan.

Feb 25, 2011

ETTS, we didn't.

Feb 25, 2011

If we do tap into the reserves we have no excuse for not increasing domestic production. Oil or gas I don't care, those fields take time to get fully on line so we should start now.

Feb 25, 2011

Let's do what we did after Katrina- we tapped 25-50 million barrels out of the 700 million barrel reserve and left most in the bank like we did in 2005 just in case Chavez or Ahmanuttajob wanted to screw us.

If this spreads to Algeria or Iran or Saudi Arabia, we'll be very glad we left some oil in reserve, but 25 million barrels is not a large amount and can help mitigate some of the economic disruption.

Feb 25, 2011

Thanks for that LIBOR i was not aware of that.

Thursday's abrupt close keeps me alittle on edge today but we are seeing some strength. I am thinking the world will not kiss and make up this weekend so I am looking bullish flat price over the weekend.

Feb 25, 2011

Do NOT tap our reserves.

Feb 25, 2011

At some point we will need to be serious about bringing new way of using energy. We are just too dependent to foreign oil (including Canada). Even though off-shore drilling or tapping on our reserve would help in the short and medium term, but we need a long-term plan.

How hard is that to see?

Feb 25, 2011

And put it where? If you've been following the market at all this year you'd know that WTI is at extreme discounts to Brent, primarily because we have a glut of crude in inventory right now without any way to get it down to the Gulf Coast, where most of the refining capacity is. Oil prices right now aren't a result of supply or demand, its all fear and speculation about what might happen in the Middle East. Opening the SPR might put some pressure on WTI but it wont do anything to Brent, which is more a benchmark for global crude prices. If you look at product prices (gasoline and distillate) you'll see they're much more correlated to Brent than to WTI. So if your goal is to lower the price at the pump I really don't see opening the SPR having much of an impact there.

Feb 25, 2011

Yergin is 100% correct....you don't tap reserves to ease prices. There is no current supply problem, only speculation and the threat of one. Saudi Arabia is also a 'swing' producer, in that it can increase and decrease production to compensate for shortages elsewhere, as it did in 1979, 1990 etc.

Tapping reserves would only leave the US more vulnerable to a real supply shock.

Feb 25, 2011
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