Last Thursday, Energy Secretary Steven Chu announced that the United States would release thirty million barrels of crude oil from the nation’s strategic petroleum reserve. Other members of the International Energy Agency will match the move, releasing another thirty million barrels from their reserves.
“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” Chu said in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”
Spot crude oil prices dropped about $4 dollars per barrel after the announcement, prompting some mainstream media outlets to gush over what appeared to them to be a brilliant move. The New York Times, in a Sunday editorial, played its cheerleader role to the hilt.
“It should provide a modest boost to the American economy,” the Times swooned. “It will help consumers at the pump as they head into the summer vacation season. And it sends an important message to the Organization of the Petroleum Exporting Countries that the United States is capable of protecting its domestic market, at least in the short term, even when those countries refuse to increase production.”
A more thorough analysis leads to much different conclusions. The size of the United States’ release equates to less than two days’ worth of domestic consumption at current levels, while the entire international release of sixty million barrels doesn’t even account for a single day’s worth of world consumption. It is – as even the Times reluctantly admitted – a pitifully small amount of oil.
It’s a pitifully small release for good reason: the nation’s entire strategic petroleum reserve amounts to about 700 million barrels, or a little more than a month’s supply. The stated purpose of the reserve is to provide a means to fill the gaps when there are supply emergencies, such as after Hurricane Katrina in 2005 when President Bush released 11 million barrels to fill a short-term reduction in supply, not to drive long-term market trends.
Administration supporters liken the Obama administration’s move to that of his predecessor. They claim that Obama’s so-called “Arab spring” release helps mitigate the loss of Libyan oil resulting from upheaval in that nation. But Libyan crude has been off the board for a while and will be for the foreseeable future. Adjusting to this decrease in supply calls for market-driven adaptation, not for meaningless government intervention. The free market must find the extra oil, in other words, because governments clearly cannot continue to chew up their reserves for very long.
The timing of the release was interesting as well. It’s true that crude prices fell after Chu made his announcement, but the fact is that national retail gasoline prices peaked in April and May and have been dropping for about the last thirty days. The market, in other words, has already started to adjust to losing Libya. So why release thirty million barrels of crude to “help consumers at the pump” when gas prices were already headed south? A cynical mind might conclude that this release was not timed to help reduce gasoline prices, but to take advantage of – if not credit for – reductions that were already occurring.
One of the biggest reasons for recent price drops was Saudi Arabia’s announcement that it will increase production in order to cover the loss of Libyan supplies. That move will help stabilize markets going forward, even though we now live in a kind of an economic catch-22 when it comes to the energy sector. Today, worldwide crude oil supply and crude oil demand roughly match. If the economy heats up, oil demand will increase and – in the absence of new supplies – energy prices will increase, which will in turn help kill off economic recovery.
Injecting a few more million barrels a day into the equation, or committing to doing so in the future, would change the economic climate considerably. The United States has the reserves and the ability to put at least another 2 million barrels per day on line in the next ten years. That’s probably a low estimate, given the immense reserves we know that we have in the Bakken Fields, off-shore and in Alaska.
Opening up more domestic fields for drilling would have a profound and immediate effect on the market. Leftists sneer that more domestic production doesn’t matter because the new oil won’t hit the market for ten years. Discounting the obvious truth that had we ignored that “wisdom” ten years ago, we wouldn’t be in this fix today, there is another economic reality at work here. Oil markets are – to a great extent – driven by oil futures and what happens ten years from now is of immense importance when it comes to futures. If traders knew that the United States was committed to ramping domestic production back up, crude prices would plummet, no matter what happens in Libya.
Presumably, there are people in the Obama administration who understand this most basic of market realities. Surely, the president himself has listened to the argument when he sat down with industry leaders. Yet, he knows and they know that this administration will not dare to increase domestic crude production because it will not chance offending the always quick-to-take-offense environmental crowd. Instead, Obama will promise that the nation will become Brazil’s biggest customer and he’ll make pointless withdrawals from our strategic reserves. It may be a good way to appease the tree-hugger wing of his party, but it might also be just enough to lose him the next election.
Rich Trzupek is a chemist and veteran environmental consultant with over twenty-five years of experience in the field. He is the author of the Encounter Broadside How the EPA’s Green Tyranny is Stifling America and the upcoming book Regulators Gone Wild: How the EPA is Ruining American Industry (Encounter Books).