Oil

Save Strategic Oil Reserves for When They're Really Needed


Tunnels wind through subterranean chambers in West Hackberry, Louisiana, where the Strategic Petroleum Reserve stores crude oil in huge underground salt caverns along the Gulf of Mexico

Photograph by Robert Nickelsberg/Liaison

Tunnels wind through subterranean chambers in West Hackberry, Louisiana, where the Strategic Petroleum Reserve stores crude oil in huge underground salt caverns along the Gulf of Mexico

In the war of wills over Iran’s nuclear program, strategic oil reserves are a crucial weapon for the U.S. and others trying to keep Iran from developing nukes. Iran can’t win by embargoing its own oil because it needs to export more than its customers need to import. The existence of strategic oil reserves in the U.S., Europe, Japan, China, and elsewhere was a key consideration for President Obama in his March 30 decision clearing the way for sanctions on banks that aid the Iranian oil trade.

But it’s important to save strategic oil reserves for when they’re really needed. If reserves are drawn upon every time prices go up, eventually they will be gone, leaving no buffer to deal with genuine emergencies.

Trouble is, there’s increasing political pressure to tap into strategic reserves now to lower gasoline prices. On March 29, French Prime Minister Francois Fillon told French radio that prospects of an accord between the U.S. and Europe on tapping strategic reserves are “good” and consumers can “reasonably expect” a release.

To understand the situation better, I called Sarah Emerson, president of Energy Security Analysis, a market-research and advisory firm in Wakefield, Mass. Emerson said she thinks there’s no need to release strategic reserves now because the world is well-supplied with oil. Production is up, thanks to new fields in the U.S., Canada, Brazil, the former Soviet Union, and Africa, she says, while consumption has actually fallen from a year ago in the U.S. and Europe and is growing only tepidly in the developing world.

Emerson says that reported commercial inventories remain low, but are growing. And she says inventories are understated because there is unreported oil at the site of production and on ships.

“All other things being equal, I think the president’s right” to conclude that the world can withstand the hit to supplies if tougher sanctions reduce Iranian oil exports, Emerson said.

“It wouldn’t be slam dunk easy,” she said. “It would take a couple months” for more oil from Saudi Arabia and elsewhere to fill the gap. But she said releases from strategic reserves might never be needed, because Iran could be forced to the negotiating table within a matter of months. “They can compromise or lash out. Lashing out isn’t going to do anything for them.”

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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