Exports Raise the Bar for US Strategic Petroleum Releases

I've seen a number of Tweets suggesting that the US will release oil from its Strategic Petroleum Reserve (SPR) sometime in the next month or two, perhaps in tandem with other member countries of the International Energy Agency.  Although circumstances might provide several possible rationales for such a release, including the implementation of tougher sanctions on Iran's oil sector and the possibility that Hurricane Isaac will disrupt some production in the Gulf Coast, it's hard to avoid a political interpretation, as well.  As we head into a close Presidential election, gas prices are rising again, and that's never good for an incumbent.  Selling oil from the SPR is one of the few levers available that might affect short-term energy prices.  However, much has changed since the Clinton administration released 30 million barrels (via exchange) in the lead-up to the 2000 election.  In particular, the country's switch from net importer to net exporter of petroleum products implies that a release in response to events other than a physical disruption in oil supplies could result in some of the benefit of such a release being exported, as well.

When it comes to uses of the SPR, I'm a purist, probably because I can recall sitting in gas lines and participating involuntarily in the bizarre "odd-even" rationing-by-license-plate scheme introduced during the oil crisis following the Iranian Revolution.  The SPR was designed to provide a backstop for our vital energy supplies in a true physical emergency, not as a tool for price manipulation.  I've also suggested for some time that the SPR is overdue for a comprehensive reassessment of its structure.  Our energy situation has changed significantly since the mid-1970s, when the present SPR was established, and we are in the midst of the biggest changes in US energy supply and demand patterns in decades.  We ought to invest the time and money required to bring this institution into the 21st century.  Earlier this year, I also suggested an alternative mechanism for leveraging SPR inventories without depleting them. These are tasks for after the election, whoever wins.  For now, we have what we have, and we should think carefully about the implications of using it in situations less compelling than a war in the Persian Gulf or an unanticipated disruption in North American or global supplies.

One of the changes that must be taken into account is our recent shift in refined product exports, about which I've written previously.  US refineries are capitalizing on the expansion of domestic oil production in a period of weak US demand to continue to operate at high utilization rates and export the resulting surplus output to growing economies in Latin America and elsewhere.  This is generally a good thing, because it helps preserve capacity that might otherwise no longer be available when our own economy eventually resumes healthier growth. It also sustains employment we would sorely miss in a terrible job market.  Furthermore, we have benefited greatly in reliability and flexibility from participating on both sides of the global market in refined products. Still, although I view our petroleum product exports as generally positive--just as I do Boeing's exports of jetliners--I wouldn't advocate using petroleum stockpiles purchased with tax dollars to drive down oil prices to give these refiners an even bigger export advantage.  Yet because of its temporary nature, in contrast to new pipelines or new production, that's exactly where at least some of the benefit of SPR oil released in the absence of a serious supply crisis would go now. 

That doesn't mean I regard rising oil or gasoline prices as harmless to the economy. Consumers are facing the highest pump prices heading into Labor Day weekend since 2008, and that could have a ripple effect throughout the economy.  But even if one ignores the longstanding bi-partisan principle that the SPR is intended only as a crisis-management tool, its effectiveness at moderating oil-price volatility is limited.  Last year's coordinated SPR release, prompted by the Libyan revolution, had little persistent effect on either oil or gasoline prices. A release now is likely to be no more effective when US refineries are already running above 90% utilization and the current 4-week averages show 3.6% of US gasoline production and 23% of diesel output being exported. None of these statistics suggest refiners are experiencing difficulties in obtaining feedstocks, other than on price.  Putting SPR oil into such a market might boost refiners' margins for a while, but it's doubtful it would do much for the product prices that matter to consumers. 

There are sharp differences between President Obama and Governor Romney, not least on energy policy. We're sure to hear more about energy from both campaigns in the weeks ahead, and I plan to analyze their positions closer to election day.  However, one factor this election doesn't need is a release of oil from the SPR that appears to be aimed at dampening gasoline prices that often decline after Labor Day without intervention, rather than being justified by a tangible threat to US oil supplies, and that fails to take into account the added complexity of net product exports. That wouldn't serve the interests of voters, taxpayers or consumers, and it would come at the expense of a little bit of our collective energy security. 

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Is There A Better Way to Use Strategic Petroleum Reserve Oil Now?

With US gas prices rising rapidly to record levels for this time of year, it was inevitable that some politicians would start calling for a portion of the oil in the Strategic Petroleum Reserve (SPR) to be released in hopes of moderating high oil prices, which are mainly responsible for the current gas price spike. A narrow majority of Americans apparently agrees. This is a profoundly bad idea, for reasons of both actual US energy security and the uneven effectiveness of past releases. However, rather than railing against this proposal, it occurred to me that there might just be a better way, an alternative that could send the signals that those concerned about commodity speculation wish to send, but without draining oil that we would miss in an actual supply crisis. What if instead of instructing the Secretary of Energy to sell a certain quantity of oil from the SPR, the President told him to sell an equivalent volume of call options on SPR oil, on the condition that they that could only be executed in an actual emergency?

The SPR was established in the 1970s, and as I've noted on several occasions it's overdue for a major redesign to reflect the ways in which both the world and US energy consumption patterns and infrastructure have changed in the interim. However, this is clearly not the appropriate time for such an undertaking, with the very real prospect of a major disruption in the Middle East that might require the largest-ever SPR release to address.

The past history of SPR releases is well-documented. The two releases most relevant to the current situation include last year's release of 30 million barrels in coordination with other member countries of the International Energy Agency, to compensate for reduced exports from Libya resulting from the revolution that overturned Col. Gaddafi's regime. Although one could argue about the appropriateness of that response in the absence of a meaningful disruption in oil deliveries to the US, its outcome is now clear. The market impact of the release was small and quickly dissipated in the noise of market volatility. That stands in marked contrast to the SPR release announced at the start of hostilities in the Gulf War in 1991. Following the announcement of a 34 million barrel SPR sale, only half of which was ultimately delivered, oil prices fell by 33% literally overnight. I will never forget that, because I was trading petroleum products in London for Texaco at the time and the sudden shift in prices was stressful, to say the least. The lesson I take from these and other examples is that SPR releases are much more effective in an actual emergency than when they are perceived as merely attempts to manipulate the market.

But let's give those calling for a release now the benefit of the doubt that $125 oil and the resulting near-$4 gas prices might be at least partly the result of speculation--all the while recognizing that for every speculative buyer there must be a seller taking the opposite view of prices. If the Department of Energy were to sell options on SPR oil, instead of the oil itself, it could accomplish several useful things in this scenario. First, it would send a stronger signal to the market than the will-he-or-won't-he cloud that customarily hangs over such releases, conveying that the US is serious about covering a shortfall that might result from the manifestation of the various risks that have driven up oil prices by about 13% since the beginning of the year, notably focused on tensions with Iran. It would also generate a bit of revenue for the Treasury, in the amount of the option premiums collected. More importantly, it could significantly shorten the normal delay between the decision to hold an SPR sale and its actual execution, by identifying, pre-qualifying and contracting with specific buyers ahead of actual need. Hastening the flow of SPR oil in a crisis by a week or two could be very helpful. And the best feature from my perspective is that the whole time the oil would stay right where it should remain until it's really needed, in the SPR caverns on the Gulf Coast.

A number of crucial details would have to be worked out, including the careful specification of the precise circumstances under which the options could be triggered, how long they would remain active before expiring, who would be eligible to purchase them, and for what purposes. In order to be of value to buyers, the triggering event(s) would have to be objectively observable and not under the seller's control. Perhaps a specified reduction in exports through the Strait of Hormuz, or the outbreak of hostilities between Iran and Israel or the US would be the most suitable choices, since it is presumably such risks that have taken oil prices to their current level.

I don't know whether selling SPR options would be permissible under current statutes. If not, it might be hard to get a change like this through a deadlocked Congress, even though the idea of selling options rather than physical oil ahead of an actual emergency straddles the concerns of both parties. I'm also sure there would be unintended consequences, as well as a lot of finger-pointing after the fact if some trader or refiner made a fortune on one of these transactions. Still, it seems worth exploring as an alternative that might be useful, not just when we're facing high prices and a potential crisis but under more routine circumstances.

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SPR Release Catches Market Napping

I see that the administration has decided to release 30 million barrels of oil from the US Strategic Petroleum Reserve, in coordination with a matched release from the strategic stocks of other OECD member countries of the International Energy Agency (IEA.) The release will be spaced over the next month, though it's not clear how soon it can begin, since it should take at least a few days to line up the requisite buyers, sign contracts, and schedule pipeline space. Politicians who have been calling for such a release to punish speculation in oil futures and alleviate pressure on consumers are crowing, and the oil markets have responded by dropping $5-6 dollars per barrel. As welcome as this will be for consumers, it is simultaneously a drop in the bucket and an unwelcome precedent for the future stewardship of these emergency reserves.

As I noted when I assessed the outcome of the recent OPEC meeting, oil inventories aren't unusually low, and the current shortfall in global production compared to demand will take a while to develop into a problem. I suspect the main concern behind the IEA's decision to release stocks now, rather than waiting for a true physical shortfall to materialize, is the mismatch between the quality of the Libyan and Middle Eastern oil that has been taken off the market as a result of the ongoing turmoil of the "Arab Spring" and that of the OPEC spare capacity available to fill in for it, mainly in Saudi Arabia. In this context, the US SPR release looks more like an expression of solidarity with its EU partners, for whom the Libyan shortfall is much more significant, than a direct assault on the market.

Nevertheless, the concerns I expressed in my posting of June 2nd regarding a smaller "operational" release from the SPR apply to this release, as well. The SPR doesn't exist to game the market, especially not for political purposes. It's there in case of a serious interruption in supply, the scenarios for which are numerous and unfortunately not very hard to imagine for either us or the potential perpetrators.

Perhaps an extra 2 million barrels per day will alter the psychology of the futures markets and catalyze a larger price drop than we've seen today. By itself, that seems unlikely. Because it's a temporary measure, the market will want to know what comes next, and that's the real problem. Unless the designers of this program have made a lucky choice and timed their release to coincide with a further easing of prices due to weakening demand, the calls for another release will start in a month, if prices remain at a level deemed high enough to threaten the economic recovery. Selling off 4% of the SPR in the absence of a real emergency--and with no clear plan for replacing it--might not be a big problem, but additional releases that added up to a substantial portion of the reserve would be. Let's hope we don't have cause to regret this.

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Hedging the Risks of Selling Oil from the Strategic Petroleum Reserve

I see that the administration has asked Congress to approve a non-emergency sale of oil from the US Strategic Petroleum Reserve (SPR), in order to allow a storage cavern to be repaired before it starts to leak. That's fine, as far as it goes, though the article I read suggested this would be done as a net sale into the market, rather than an exchange for future oil, as has been done for many previous SPR releases. The distinction means that the government will either be exposed to buying the oil back at higher prices later, or would simply forgo refilling that portion of the reserve. The current shape of the oil futures market provides another alternative, though without the presumed political benefits of being seen to sell SPR oil when gasoline prices are high.

The sale in question was included in the administration's annual budget request and identified 6 million barrels to be sold "for operational purposes." That amounts to less than 1% of the 727 million barrels of oil currently in the SPR, equating to a little more than one day of import disruption insurance at the SPR's maximum output of 4.4 million barrels per day. Of course at current oil prices it would be worth over a half-billion bucks, so I can understand the appeal of doing this when federal finances are tight. However, the purpose of the reserve was never to speculate on the price of oil and harvest those gains when we came up short elsewhere; the oil is there to mitigate a serious disruption in the roughly 9 million barrels per day of oil imports on which our economy depends. Unless the administration now wants to undertake a comprehensive review of our SPR strategy--something I've advocated for several years--it is more or less obligated to replace the oil once the cavern has been fixed.

In that case, selling the oil, rather than offering it to refiners on a time-trade, will expose the government to a substantial amount of price risk while repairs are completed. For example, if they had sold this oil last fall and needed to buy it back now, the Department of Energy would have incurred a loss of up to $180 million, based on the increase in oil prices in general and the divergence of physical markets, which tend to track UK Brent Crude, from the futures market in West Texas Intermediate. Prices might fall in the meantime, but it is not the role of the DOE to bet on that prospect. The futures market offers a uniquely better alternative today.

Most of the time, the oil futures price curve is bent either up or down, in "contango" or "backwardation" in trader's terms, with oil for delivery several months or more from now selling for considerably more or less than for prompt delivery. That's usually an indication of expectations that the balance between supply and demand will be either tighter or looser in the months ahead, compared to today. The contango that prevailed until recently has flattened dramatically, so that if it acted quickly, the DOE could sell the oil from the caverns to refiners and lock in its future repurchase price on the futures market at only a dollar or two per barrel more than the sales price. Of course this would involve having the government participate in the dreaded futures market, even though it wouldn't be for the purpose of manipulation or stabilization, but for simple hedging of the kind that producers and refiners do every day of the week. (Backwardation would offer an even better deal, and the Brent market is currently mildly backwardated, but I can only imagine the hullabaloo if the US government hedged SPR oil on a European exchange.)

We would argue all day about which approach is riskier: hedging the oil sold from the SPR with futures contracts or waiting to buy back at whatever price prevailed later. In the larger scheme of things, neither looks as risky as emptying the cavern and not refilling it at all. Based on my experience and at least in this special case, hedging seems like a good way to ensure that the SPR cavern repair doesn't end up costing a lot more than the DOE expects, if its managers ignored oil-price risk.

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Are Strategic Inventories Adequate to Handle Another Oil Crisis?

In a thought-provoking op-ed, Michael Levi of the Council on Foreign Relations has provided a very timely reminder of the role that the strategic petroleum reserves of the US and other nations would play if the turmoil in North Africa and the Middle East spawned another oil crisis. Neither additional drilling nor an accelerated effort on renewable energy would make any near-term difference if oil exports from the Middle East were disrupted. Both strategies are important for our future needs, but the only two tools we have for dealing with an immediate oil crisis are the Strategic Petroleum Reserve (SPR) and old-fashioned conservation. Unfortunately, we've wasted the last couple of years of relative oil-market stability that could have been spent bringing the SPR into the 21st century.

The US government currently has 726 million barrels of oil stored in underground caverns around the Gulf Coast, for use in emergencies. At that level, the SPR is essentially full. The stored oil notionally equates to around 80 days of supply at our current rate of net crude oil imports, though in practice it would provide 165 days of drawdown at the SPR's maximum pumping rate of 4.4 million barrels per day. That is in addition to commercial supplies of crude oil and gasoline and other petroleum products, which currently stand at the equivalent of 24 and 28 days, respectively. However, commercial stocks aren't much of a backstop, because the difference between current levels and those at which the system would start to run out in places amounts to less than a week of normal consumption.

We needn't worry about relying on the SPR if exports from Libya dry up. As I noted in Tuesday's posting, OPEC has more than enough spare capacity to make up such a shortfall, although it's of different quality and might result in some tightness in global diesel markets. But if the current unrest spread and threatened exports from the big producers on the Arabian peninsula, the only thing standing between consumers and much higher oil and product prices would be the SPR and its counterparts in other consuming countries. With combined inventories of at least 1.6 billion barrels, these reserves are in good shape to respond to a drop in exports of a few million barrels per day for several months, though not necessarily a sustained curtailment or a much larger one. And any use of these reserves should be coordinated among consuming nations, as Mr. Levi pointed out in his op-ed.

This all sounds good in principle, and I have no doubt that even the announcement of the intent of the US and others to draw promptly on these stocks if the situation deteriorates further would do a lot to calm markets. At the same time, it's important to understand how much the world has changed since the SPR was first planned and implemented, as a result of the first oil crisis in 1973-74. As I commented three years ago:

"In addition to importing much larger volumes of crude oil, our refinery capacity hasn't kept pace with demand, resulting in steadily growing imports of gasoline and gasoline blending components. And in the interim, oil production in Alaska and California has fallen into deep decline, requiring crude and product imports into a maxed-out West Coast refining system.

So instead of a strategic reserve designed to provide a back-up supply of crude oil to Gulf Coast and Mid-continent refineries serving the entire US east of the Rockies, our needs have expanded to encompass oil and refined product imports on all three coasts. These altered circumstances suggest the need for a more diverse and dispersed SPR, perhaps modeled along the lines of the federal Northeast Heating Oil Reserve. Nor do I believe that the only practical model of such a reserve entails government ownership and custody of the hydrocarbons in question. Other countries achieve the same end with a requirement for oil companies to maintain mandatory minimum inventory levels at no direct cost to taxpayers."

That's as relevant today as when I wrote it, with the addition that the SPR's potential effectiveness has been further affected by the buildup of crude in the Mid-continent as a result of increased output from Canadian oil sands projects and the rapidly growing output of the Bakken Shale. This is one of the main reasons why West Texas Intermediate is trading at roughly $100 this morning, while UK Brent crude, which is normally within $2 of WTI, has spiked over $118. I also can't resist pointing out that the market is hitting us in the face with a two-by-four concerning the potential energy security value of US natural gas, which is still trading at an oil-equivalent price under $27 per barrel for all of 2011, despite the events in the Middle East.

I don't blame the last two administrations or Congress for not having made SPR reform a higher priority in the last three years. They had a few other things on their plate. However, even if the current crisis in Libya and the Middle East resolves itself quickly and without further impact on world oil supplies, it provides another unwelcome reminder that we live in a world in which the President and other world leaders might need to call on our strategic oil inventories on very short notice to prevent a catastrophic breakdown of the economy. In that context, redesigning our 1970s-vintage SPR to be more effective in a greatly altered landscape ought to rise to a similar priority as addressing other urgent concerns such as the deficit.

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An Energy Bill for the Other 92%

Now that the Waxman-Markey Bill, the American Clean Energy and Security Act of 2009--all 1428 pages of it--has been narrowly passed by the House of Representatives, its fate rests in the hands of the US Senate, a body that has spurned a long series of cap & trade bills. The Senate's rules will require a much larger plurality just to bring such a bill to a vote, and that doesn't look easy, despite the belated resolution of the Minnesota race. The situation is further complicated by the existence of the Senate's own recently-drafted energy legislation, the American Clean Energy Leadership Act of 2009 (ACELA) from the Senate Energy and Natural Resources Committee chaired by Senator Bingaman (D-NM). Although lacking a counterpart to Waxman-Markey's cap & trade provisions, ACELA seems in many respects the better bill, promoting both renewable energy and the sources that supply 92.5% of our current energy needs and are likely to dominate our energy diet for many years: fossil fuels and nuclear power. This broader scope will be crucial, if our goals extend beyond reducing emissions to include shoring up energy security and fostering net job creation, not just "green jobs."

The full text of the Senate energy bill isn't yet available, nor has it been assigned an "S-number", by which it can be tracked. In reviewing the summary of ACELA on the committee website, I was struck by a marked contrast in its approach, compared to the House bill. ACELA is the product of a deliberately bi-partisan process, and the results of the horse-trading that went into it seem more cohesive and less jarring than the non-cap-and-trade portions of Waxman-Markey. ACELA's renewable electricity standard--which really ought to be a low-emission electricity standard--would start at 3% of electricity sales and ramp up to 15% by 2021. Importantly, the bill emphasizes energy efficiency, particularly for buildings, which would account for most of the greenhouse gas emissions reductions it would promote.

It also includes several provisions that echo themes I've advocated in a number of previous blog postings, such as updating the strategy for the Strategic Petroleum Reserve and opening up more of the Gulf of Mexico for offshore drilling. That would provide prompt access to identified hydrocarbon resources such as Destin Dome and take in a healthy portion of the currently-understood resource potential of those areas that had been kept off-limits by the expired offshore drilling moratoria. In addition, the bill would expand our knowledge of our offshore energy resources, conventional and renewable, through a detailed inventory including seismic exploration. If we're going to have a meaningful national debate concerning the expansion of access for oil & gas drilling, a better understanding of what's actually there is a critical prerequisite. If that seems contrary to the goal of reducing our emissions, consider that the main CO2 cuts from the hydrocarbon sector will result from reduced consumption, which would come at the expense of our enormous oil imports, not from suppressing the domestic production and access to Canadian production that underpin our energy security.

As for energy markets, unlike the heavy-handed regulations buried in the miscellaneous provisions of Waxman-Markey, ACELA would increase the transparency of oil & gas trading by expanding the Energy Information Agency's data and analytical coverage and bolstering industry reporting requirements. And in another provision, the bill would commission a long-overdue assessment of the critical connections between energy and water that I mentioned in last Tuesday's posting.

The bill also emphasizes job creation, both explicitly and implicitly. Its provisions for renewable energy, efficiency, and electricity transmission and grid improvement would promote the same kinds of green jobs claimed by the supporters of Waxman-Markey. At the same time, its oil & gas provisions would stimulate jobs of the kind highlighted by a new labor-industry partnership between the American Petroleum Institute and 15 labor unions. The US oil & gas industry employs 1.8 million people directly and another 4 million or so indirectly. Both figures could grow further with expanded access to US resources, and these jobs typically pay well over the national average.

The gaps and conflicts between the House and Senate bills look too big to overcome through reconciliation, which would in any case require the Senate first to pass either its own energy bill or a version of Waxman-Markey. I spent some time on the phone yesterday with contacts on Senate staffs to try to understand the likely process. Several paths appear possible, with the simplest involving the use of Rule 14 to bring Waxman-Markey directly to the Senate floor. The controversy around the bill and its narrow margin of victory in the House suggest a low likelihood of success for this route. Another avenue would involve moving the House bill into the Environment and Public Works Committee chaired by Senator Boxer (D-CA) and modifying it extensively. That would create the opportunity to include or substitute the measures in the ACELA bill for those in Waxman-Markey. However, that might still not avoid the fate of last year's Boxer-Warner-Lieberman cap & trade bill, which fell significantly short on the cloture vote required to bring it to a full vote of the Senate. The composition of the Senate has changed significantly since last June, yet it remains to be seen whether supporters of cap & trade have gained enough votes to carry the day.

My strong preference would be for the Senate to graft a clean version of cap & trade onto Senator Bingaman's energy bill, jettisoning the distortions that Waxman-Markey acquired in the process of lining up enough House votes to ensure passage. Some of those distortions neatly cleaved the natural business coalition against the bill by lavishing so many free emissions allowances on the utility sector, but in the process severely undermined the bill's potential for achieving prompt and significant emissions reductions. They effectively gave a temporary Get Out of Jail Free card to the sector of the economy that is responsible for the single largest share of our emissions, yet possesses the best options for substituting cleaner natural gas for its highest-emitting energy sources. The legislative fusion I'm suggesting could put a price and a cap on CO2 emissions, while ensuring adequate supplies of nuclear power and North American fossil fuels to manage the long-term transition to a lower-emitting economy.

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Buy Low?

Yesterday I received a question from a reader inquiring whether the price of oil has fallen to a level at which the US should consider resuming additions to the Strategic Petroleum Reserve. I hadn't looked at this issue since oil was much more expensive, when I supported efforts to halt additions to the SPR, but not to sell oil from the reserve to manipulate prices. Upon reflection my answer is no, at least for now. Oil at 50 bucks looks very cheap, relative to where it has been this year, and also to where it's likely to be again, once the global economy gets back on its feet. However, I see three primary impediments:

1. Under the law passed by Congress and signed by the President this May, filling of the SPR cannot resume before the end of 2008, or until the President certifies to the Congress that "the weighted average price of petroleum in the United States for the most recent 90-day period is $75 or less per barrel." By my reckoning, the three-month average price of West Texas Intermediate crude oil on the New York Mercantile Exchange is still somewhat above that level. As rapidly as it has fallen, it could meet that criterion in December, but with very little time for the current administration to act on it. If we use reported refiner acquisition costs, a more accurate gauge of what the nation pays for oil, the latest figure available is the $104/bbl indicated for September 2008. With August even higher, no crude could be bought without the help of the much lower assessment expected for November, which probably won't be published until January.


2. Even if that condition could be satisfied, I doubt that the administration--outgoing or incoming--or the Congress would regard buying more oil for a reserve that already holds a 160-day supply at its maximum drawdown rate of 4.4 million barrels per day as urgent, compared to the needs of addressing the financial crisis and recession. As slack as the oil market is, I'm not even sure it would help US producers. More importantly, none of the potential threats to our oil imports look so pressing that we should make adding oil to the SPR a top priority, at least for the next few months.


3. For me the most compelling reason to hold off on this buying opportunity is my hope that the new administration would not feel bound by the current administration's determination of the need for a 1-billion-barrel SPR in its current form, without further study. As I've commented periodically, the basic architecture of the SPR was designed three decades ago, in a very different world. It is in urgent need of a top-to-bottom review, to assess how it aligns with our strategic need to ensure continuity of fuel supplies to the US economy in all 50 states and to the US military wherever it operates, under various scenarios of supply disruption. Until that assessment has been carried out, we shouldn't rush to add more oil to the existing SPR.

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Leveraging the SPR

Election-year politics and prudent energy policy do not mix well. The combination is even worse when the election cycle coincides with a genuine energy crisis, and both parties seek to curry favor through short-sighted proposals aimed at producing votes, rather than BTUs or kilowatt-hours. We saw this earlier in the year with suggestions by Senator Clinton and Senator McCain to suspend the federal tax on motor fuels for the summer, and we are seeing it again in calls by the Speaker of the House and others to release oil from the Strategic Petroleum Reserve to drive down fuel prices.

It's remarkable how quickly the debate over the Strategic Petroleum Reserve (SPR) has shifted from halting additions to it, to draining it. The former was eminently sensible, in light of the cost of the program and the possibility that diverting small quantities of light, sweet crude into storage was having a disproportionate impact on the price of all oil. The balance of risks strongly favored suspending additions to the SPR; quite the contrary is true for using SPR oil to create a brief, convenient slump in the oil market, while diverting attention from the more serious discussion of increasing supply and reducing demand--both sides of which would be harmed by a non-emergency release from the SPR.

Make no mistake: the current SPR is a relic of the energy crisis of the 1970s that merits serious re-thinking about its fundamental purpose and the best way to achieve it in a very different economic and geopolitical environment. It is also possible to conceive of ways in which oil in the SPR could be used to speed up the contribution of production from new oil fields, once they are identified and under development, via SPR vs. reservoir exchanges. However, such considerations are quite different from simply dumping SPR oil into the market--volumes that under the policy passed by this Congress could not be replaced as long as oil remains expensive--for no purpose other than to provide some relief at the gas pump, where prices are already likely to fall by another 25-35 cents per gallon, based on the past week's drop in the crude oil and gasoline futures markets.

The problems with releasing SPR oil now are straightforward. Inventory is not production. The proposed draw-down is not sustainable, while the production that new drilling could add would contribute to our energy supplies for a generation. Moreover, oil prices are a classic stock-and-flow system, reflecting the current balance between actual supply and actual demand, and the difference between actual inventory and desired inventory. Although the flow of SPR oil into the market would create a temporary glut and drive down the price of oil for prompt delivery, the subsequent lower inventory levels--even for an emergency back-up such as the SPR--could result in even higher prices after the release program ended than before it began. At the same time, this signal--not just from lower current prices but also from the demonstrated willingness of the government to use the SPR to manipulate the market--would deter new energy projects, including those for alternative fuels that are more attractive when oil prices are high, while impeding our transition to more efficient vehicles.

The world has changed in many ways since the SPR was first opened, and some of those changes make it even more essential for the US to have quick access to large volumes of oil in extremis. Among other things, our net oil imports have doubled since President Ford signed the SPR into law in 1975. Although oil prices remain high, supply still meets demand. Yet it is far too easy to envision plausible scenarios in which that would not be the case, involving terrorism, expanded conflict in the Middle East, or the effects of Peak Oil. In any of those cases, we might find that the SPR's current 160 days of supply at its 4.4 million barrel per day maximum delivery rate are not nearly as ample as they seem.

Aside from expediency, the theory behind releasing SPR oil now is based on a flawed narrative involving a bubble in oil prices. If the evidence were clear that supply and demand would balance at a much lower oil price, and that speculators were responsible for a large fraction of the current oil price, then I could support using a brief release from the SPR to crush speculation. The reality appears much different. Oil prices have fallen since this debate started, largely because of the extraordinary reduction in demand that high prices and a weak economy have triggered--and not because the market sees a realistic prospect of a SPR release this year. Oil is trading today below $125 per barrel for delivery in September 2008, as well as for delivery in December of 2010, 2011 and 2012. That could change tomorrow, due to some event, but it suggests that the impact of speculation is more like the foam in a glass of beer than a steadily-inflating bubble. The interests of the nation would be better served by a Congressional commission on re-engineering the SPR for the 21st century, than by Congressional legislation to fritter away this $88 billion asset in the pursuit of short-term goals.

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