Why Did the White House Tap the SPR?

Releasing oil from strategic petroleum reserves around the globe was an unnecessary stunt that played only to the media, writes Ed Wallace

By Ed Wallace

The media pounced on the announcement on June 23 that the Obama Administration, in conjunction with the International Energy Agency, had decided to release 60 million barrels of crude from strategic petroleum reserves worldwide. Here was the official proof that something tangible was being done to alleviate the "worldwide oil shortages, caused"—as was published numerous times—by the loss of Libyan oil production in the country’s ongoing civil war.

By Thursday night and continuing into Friday, TV stations across the U.S. were discussing how, around the world, this announcement was already dramatically lowering the price of crude.

In the excitement of a big energy story like this, maybe the media can be forgiven for having let oil-related news they’d gotten the week before completely slip their minds.

Just six days earlier Bloomberg had quoted the American Petroleum Institute as saying "U.S. oil supplies rose to the highest level in 31 years for the month of May, as refineries processed less crude amid a decline in gasoline demand." The API’s website was even more explicit: "Gasoline deliveries were down from May a year ago and down year-to-date from 2010. At 9.2 million barrels per day, they slipped to an eight-year low for May, not including May 2009."

So why did the White House release the oil?

THERE IS NO OIL SHORTAGE, PART VII

It wasn’t because of lack of supply. The Energy Information Administration’s own website showed that oil on hand during the last week of May was a more than healthy 373.8 million barrels; according to the government’s data you’d have to go back to the summer of 1990 to find crude inventories that high. To make a direct comparison, in January of 1999, when gasoline was selling for $1 a gallon and oil had dropped almost to $10 a barrel, U.S. inventories of crude started the year at 321 million barrels.

But it’s not just America’s oil inventories that matter. So it’s worth noting that the day before the oil release announcement, Platt’s published an article on China’s energy demands; it did show that the country’s overall demand for oil was increasing—but, “Coupled with increased production, the fall in consumption helped to boost inventories, and oil product stocks at the end of last month were 1 million mt [metric tonnes] more than a year ago." So, while U.S. inventories of crude are at near record highs, China’s inventories have also risen, although not nearly as much.

As for Europe, it was only two months ago that Exxon Chief Executive Rex Tillerson told the Financial Times that inventories in the U.S. were at "near-record highs" and stocks in Europe and Asia were within the normal ranges. "So there’s plenty of oil on the market."

DEMAND DYING EVERYWHERE

After the announcement the media were quick to say that releasing this oil from strategic petroleum reserves had cut the price of crude by $4 a barrel. Where did they start counting? At 5:00 A.M. CST the morning of the announcement, Bloomberg’s Commodities page showed West Texas Intermediate crude selling for $93.08; and at five the next morning it was $91.71, a net decrease of just $1.37 a barrel.

More important, however, was the news that the oil to be released from the U.S. SPR would have a strike price of $112.79 a barrel, based on the previous five days’ sales of Louisiana Light Sweet Crude. This is a preferred top-grade refining crude, as all light sweet blends are; but the only way the released SPR oil could truly lower market pricing is by increasing the amount of oil preferred by most refiners, thereby taking some pressure off the need for other crudes.