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  • Open Areas to Drilling, Don’t Open the Strategic Petroleum Reserve

    The 28 member countries of the International Energy Agency (IEA) agreed to release 60 million barrels of oil reserves—2 million barrels per day over 30 days—to offset the supply disruption as a result of the political unrest in Libya. The Obama Administration announced that 30 million of those barrels will be met by releasing supplies from our domestic Strategic Petroleum Reserve (SPR).

    The problem is that releasing reserves from SPR does not pass legal, rational, or economic muster. A much more prudent move for the Administration would be to open access onshore and offshore for drilling and exploration. Doing so would minimize the impact of foreign supply reductions and help stabilize future energy prices.

    The President’s authority to release reserves from the SPR, which holds about 727 million barrels, is limited by law. The Energy Policy and Conservation Act requires a presidential finding that there is a “severe energy supply interruption.” Three conditions must be met:

    1. “An emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;
    2. “A severe increase in the price of petroleum products has resulted from such emergency situation; and
    3. “Such price increase is likely to cause a major adverse impact on the national economy.”

    Libyan production of oil has been offline for quite some time (almost three months), but Libya produces 2 percent of the world’s oil (about 1.5 million barrels per day) with most of its oil going to Europe. Does this constitute a significant reduction in supply? Or a severe increase in price? No. Rising demand for the better part of a year has steadily increased oil prices, and prices have since leveled off.

    When the Administration first considered the release of reserves from the SPR, Senator Jeff Bingaman (D–NM), chair of the Energy and Natural Resources Committee, said:

    I believe that it would be appropriate for the president to be ready to consider a release of oil from our Strategic Petroleum Reserve if the situation in Libya deteriorates further. Any additional oil market disturbance—such as turmoil spreading from Libya to Algeria, or from Bahrain to Saudi Arabia—would clearly put us into a situation where there would be a very strong argument in favor of an SPR sale.

    If that were the case, then perhaps there are justifiable geopolitical reasons to tap SPR; cutting off Saudi production would also likely meet the conditions in the Energy Policy and Conservation Act. But that hasn’t been the case. Given the current turmoil in the region, now is not the time give up the nation’s energy safety net, even if it is a small portion. And because it is a small increase in supply, the effects on gas prices in the United States will be marginal, especially as markets adjust to increased supply.

    Releasing reserves now simply allows the Administration to avoid addressing the underlying problems with U.S. energy policy that exacerbate the market impact of global supply disruptions. The problem is that the Obama Administration is artificially constraining supply to the market by denying Americans access to domestic oil.

    As the global economy recovers, and India and China continue to use more oil, global demand is only going to increase, and if the Administration has its way, the U.S. won’t be in a good position to help meet that demand. The Administration’s own Energy Information Administration projects that oil production will decline significantly in 2011 and 2012.

    Production in the western Gulf of Mexico dropped nearly one-third of a million barrels per day since last April, and the increased production in 2010 is a result of increased horizontal drilling in North Dakota. We can’t drill off the Pacific Coast, Atlantic Coast, or the eastern Gulf of Mexico. The U.S. Environmental Appeals Board withheld air quality permits preventing Shell from moving forward to develop 27 billion barrels of oil off the coasts of Alaska. The Environmental Protection Agency already issued two air permits, but Earth Justice filed a petition to review the permits, delaying the process.

    Thus far, the supply disruptions in the Middle East do not constitute a severe supply disruption. The SPR is not a political tool; it exists for moments of national crisis. Now is the time to open access to America’s onshore and offshore resources, not its energy supply backstop.

     

    Posted in Energy [slideshow_deploy]

    7 Responses to Open Areas to Drilling, Don’t Open the Strategic Petroleum Reserve

    1. Stirling says:

      The SPR is just "temporary" fix, and really tips everyone to the fact that this administration still is not serious about doing anything except subsidize foreign governments (Brazil) in draining more of our dollars to foreign countries. Bush didn't even tap the SPR durring his tenure in office and prices got to $4.00 a gallon then. Our president is just doing it for political points which like anything else is also temporary and will put us in worse shape then before.

    2. Mike, Wichita Falls says:

      While I don't agree with the release of 30 million barrels from our SPR, the terms "significant", "severe" and "major" in the law are pretty subjective. Congress should amend the law to specify what constitutes "significant", "severe" and "major".

      Secondly, regardless of one's interpretation of this law, isn't Obama a little late to the party? This "kinetic military action" in Libya is more than two months old, and the initial spike in prices, due, I suspect, more from the emotional reaction of that action, has waned.

      Finally, isn't this release, whether legal or illegal, a subtle admission by Obama that increased supply brings down prices? I won't hold my breath though that he has finally embraced free market principles. Obama could leave alone the SPR and simply announce that he will lift moratoriums, both explicit and bureaucratic, to bring down prices. This must include calling off the EPA attck dogs too.

    3. Bobbie says:

      Only a mind with the will to destroy a country would consider the country's LIMITED strategic oil supply when there is an abundance of natural resources in various locations that could build the economy in various ways.

    4. John B. Williams says:

      None of the three conditions exists at the present time. The President's decision to do this now shows that he is a day late and a dollar short. We needed this when the price of gasoline skyrocketed and he violated our own Constitution by ordering an attack on Libia. If anything should happen, Joe Biden should make good on his threat and impeach this President for violating the Constitution AGAIN. You and I know were a Republican President to violate the Constitution as many times as this President has, he'd be dragged out of the White House kicking and screaming. So why is this President able to get away with it? Because the last three Presidents stacked the deck. Put their cronies in key positions in each of the three branches of Government so they could accomplish THEIR agenda.

    5. Ed Foster says:

      Do I misremember, or was it not the stated intention of the Obama administration to come up with a way to increase the cost of gasolene to the level suffered by Europeans? Now that they've almost achieved their wish and the election season is beginning, they are afraid of the reaction of the American people to their idiocy.

    6. derekcrane says:

      This move is long overdue. Obama finally gets something right! In addition to crushing some of the longs (the speculative demand for crude is the marginal force driving the market), the government gives a warning that the oil in the SOR will be occasionally released to calm the markets. This is also good business — buy low, sell high. These reserves can be replaced when crude oil falls to $30 a barrel (which it will within a year). There is a very low probability that we will experience, "shocks from sudden disruptions in oil supplies," during this time.

    7. derekcrane says:

      This move is long overdue. Obama finally gets something right! In addition to crushing some of the longs (the speculative demand for crude is the marginal force driving the market), the government gives a warning that the oil in the SPR will be occasionally released to calm the markets. This is also good business — buy low, sell high. These reserves can be replaced when crude oil falls to $30 a barrel (which it will within a year). There is a very low probability that we will experience, "shocks from sudden disruptions in oil supplies," during this time.

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