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Debate flares over strategic oil stockpiles

With oil prices soaring, debate is heating up over whether to use the U.S. Strategic Petroleum Reserves to try to lower them.
With oil prices soaring, debate is heating up over whether to use the U.S. Strategic Petroleum Reserves to try to lower them.

With oil prices stuck above $40 a barrel, attention has turned to the U.S. Strategic Petroleum Reserve, a vast stockpile of oil stored underground that the U.S. continues to add to. While Democrats call for releasing some of those reserves to help ease oil prices, President Bush Wednesday repeated his long-standing position that the stockpile should only be used in the event of a critical cutoff of fuel needed to maintain the country’s national defense.

The main reason oil prices are rising is that a surprisingly strong world economy has stoked demand for crude at a time when oil producers -- including OPEC -- have reached near maximum capacity. More recently, prices have risen on fears that a terrorist attack could put a serious crimp in the global flow of oil. Those fears have intensified in the past 6 weeks following attacks on oil installations in Saudi Arabia and Iraq.

On Wednesday, crude oil futures rose more than $1 a barrel on the New York Mercantile Exchange, as traders said that the latest government data showing a modest build up in gasoline stocks last week was not enough to ease concerns over potential supply shortages this summer driving season. NYMEX crude for June delivery hit $41.55 a barrel, down slightly from $41.85 on Monday, the highest level since the exchange launched the crude oil futures contract in 1983.

And those record prices have renewed calls for the U.S. to use its Strategic Petroleum Reserve stockpiles to push prices lower.

“That petroleum reserve is in place in case of major disruptions of energy supplies to the United States,” Bush said Wednesday. “The idea of emptying the Strategic Petroleum Reserve would put America in a dangerous position in the war on terror. We’re at war. We face a tough and determined enemy on all fronts, and we must not put ourselves in a worse position in this war, and playing politics with the Strategic Petroleum Reserve would do just that.”

Though no one has proposed “emptying” the SPR, Democrats for months have been urging suspension of fresh deposits, freeing up oil to satisfy unexpectedly strong global demand and help ease prices.

“Since the price of oil is so closely tied to inventory levels, filling the SPR under these market conditions both depletes private sector inventories and pushes up prices for America’s consumers,” said Sen. Carl Levin, D-Mich., in a floor speech in April defending an amendment to defer SPR purchases.

More recently, New York Democratic Sen. Charles Schumer has introduced an amendment to draw 1 million barrels a day from the reserve for the next 30 days.

Democratic presidential candidate John Kerry has proposed slowing deposits but does not support tapping the reserve

700 million-barrel stockpile
The Strategic Petroleum Reserve, established in 1975 after the original OPEC-induced “oil shock,” is a series of underground salt domes in four sites in Texas and Louisiana. Beginning in 2001, when the reserves stood at about 540 million barrels, the Bush administration has been steadily topping off the stockpile, which has a capacity of 700 million barrels. Currently, the SPR contains about 660 million barrels.

“The Strategic Petroleum Reserve continues to play a key role in keeping inventories tight,” A.G. Edwards analyst Bruce Lanni wrote in a recent research report. Some 19 million barrels have been added so far this year, on top of 37.5 million barrels that were added in 2003, he said.

So is buying oil on the open market and pumping back it into the ground helping to keep prices high? Oil traders and analysts are divided.

“It’s a drop in the bucket,” said Phil Flynn, a trader at at Alaron Trading in Chicago. Halting deposits "would have a negligible impact on prices. And if government doesn’t buy that drop of oil, there’s no guarantee that it would end up in the U.S. market -- it could end up in Russia or China.”

But others argue that global prices are set by global inventories, and note that when demand is high and supplies are tight, even a small increase in demand of added oil has strong impact on prices.

“If you took away that marginal demand (of filling the SPR) it would have a psychological impact that would outsize the impact on consumption,” said John Kingston, global director of oil for Platts, an oil information service.

To be sure, the amount of oil in the Strategic Petroleum Reserve is tiny compared to the roughly 1 trillion barrels of proven oil reserves in the ground worldwide. And at the current level of U.S. imports -– about 10 million barrels a day -– the SPR represents about a two-month supply in the event the flow of oil to the U.S. was cut off. Even then, only about 3.5 million barrels a day could be pulled out for consumption. And it’s not clear how much of that supply would be ready for immediate refining into gasoline or other fuels, according to Bill O’Grady, director of commodity research at A.G. Edwards in St Louis.

“It’s a little like opening up the trunk of the car and looking at the tire and saying, 'I hope this thing's okay,'” he said.

But some oil analysts say that by even threatening to sell oil the U.S. could use the SPR much the way the Federal Reserve Bank manages interest rates or the value of the dollar by buying or selling currencies. By selling even small amounts, the Bush administration could have a big impact on market psychology, some analysts say.

It’s happened before. In 1990, the first Bush administration made what was then called a “test sale” of about 4 million barrels of SPR oil in the opening days of the Gulf War.

“That announcement virtually coincided with the high (for oil prices),” said O’Grady. “It had the impact of saying, “This is what we’re selling and we’re not telling how much more.”

The U.S. isn’t the only country with strategic oil stockpiles. The 26-member International Energy Agency, also set up after the oil stocks of the early 1970s, requires its members to maintain stocks of 1.4 billion barrels – about a 90-day supply -- to help smooth any possible supply interruptions. More recently, India and China have announced they plan to set up strategic reserves as well.