Monday, May 5, 2008

Bush Administration Is Helping To Keep Oil Prices High

There is a very disturbing trend with the Strategic Petroleum Reserve (SPR). In the current environment of rising oil price into record levels, the Bush Administration is adding to the Strategic Petroleum Reserve. In fact, as of May 2, the SPR held 701.5 million barrels of oil, one of the highest levels in the history of SPR. Since the draw down of oil in 1991 2000, the SPR has been steadily rising:

Since the end of 2007 (year-7), the SPR increased from 696,941 million barrels to current 701,500 million barrels, an increase of 4,559 million barrels in the first four months of 2008. The U.S. consumes 20.7 million barrels per day, as of July 2007. (When the EIA (Energy Information Administration) conducts its next study in June 2008, it is likely that our consumption would have gone up.)

So, while the average world spot price of oil has steadily gone up from an average of $54.63 per barrel in January 2007 to $119.27 per barrel, as of close of business May 5, 2008, a 118% increase in price, the Bush Administration has been increasing the SPR.

Why would the federal government add to the SPR while Bush publicly state that there is no short-term solution? The President has the authority to sell the oil from the SPR in an event of energy emergency. This event occurred twice: in 1991 during Operation Desert Storm and in 2005 after Hurricane Katrina.[i]

After Hurricane Katrina, Bush authorized release of 11 million barrels of oil “to mitigate any shortfalls in crude oil that could affect our consumers,” according to his statement back in 2005. The problem with that statement is that it wasn’t any shortfall of oil that caused the increase in the price of gasoline. Rather, the hurricane had reduced refinery operations by about 5.4 million barrels per day.[ii] Therefore, all the release of oil from the SPR would do is to add more oil into the system that could not process them: “Analysts and Energy Secretary Samuel Bodman said the move would be of limited use. The main problem now is lack of refining capacity to turn crude oil into gasoline.”[iii]

In fact, U.S. had to borrow “545,000 bpd of refined crude products from Europe, consisting of 317,000 bpd gasoline, 190,000 bpd middle distillates and 38,000 bpd fuel oil.”[iv]

At the time, $3 gallon of gasoline and $70 per barrel of oil was making people very nervous and concerned about very high-energy prices. Bush even called for Americans to conserve energy.

Questions to Ponder

  • What is different today? The prices of oil and gasoline are higher than in 2005. The higher price of oil and gasoline are directly affecting the U.S. economy. Even Bush admitted this today in his statement that it is "like a tax on the working people." So, if it is like a tax on the working people, one of the drivers of the current economic slowdown, does it not merit a draw down from the SPR?
  • Are we not in an energy emergency? Is the energy emergency defined only as a shortage or disruption in production or does it include its negative effect on the U.S. economy? In the case of the SPR release in 2005, the purpose was to
  • Is it only energy emergency if the oil refineries are affected?
  • If 11 million barrels of oils released in 2005 was able to drive down the price of oil and gasoline, then shouldn’t a similar release of oil from the SPR do the same today? I think it would as the price of oil is partially driven by the speculators. As the supply of oil in the market increases, then the spot price of oil will come down, forcing the speculators to sell out of their positions, thereby further reducing the price of oil. Moreover, the 11 million barrels will not affect our SPR goals.
  • Since the average price of oil in the SPR is $28.42 per barrel, would it not make more economic sense to release oil from the SPR at a profit instead of suspending the federal gas tax over the summer, which would cost the U.S. upwards of $8.5 billion? Since the Department Of Energy will be selling the oil at near market price, the 11 million barrels of oil, if released should fetch an average of $90 per barrel, this would result in gross revenue of $677 million. Isn’t it better to use the SPR in a ‘strategic’ way that can benefit the U.S. economy while making money for the Federal Government? To me, this would be an ideal business approach to the problem.
Given his past records, I highly doubt that Bush will do anything that will be beneficial to the economy or anything that would be considered to be a smart move. Therefore, I am not going to continue questioning his reason for adding to the SPR instead of releasing the supply. Bush made several promises when he was elected President in 2001. However, the only promise that he is able to keep is his 2001 Fill Initiative, which will bring the reserves up to 700 million barrels.

Ed Kim
Practical Risk Manager

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