Saudi Aramco, Strategic Petroleum Reserve, And The Price Of Crude

Saudi Aramco, the largest state-owned oil company in the world, has signaled that it is prepared to ship enough crude to cover any shortage because of unrest in Libya. That promise may have to extend to make up for interruptions from crude production in other nations in the region. The problem with the pledge is that the political turmoil in the area could spread to Saudi Arabia. That seems to be improbable, but so were the collapses of the governments in Egypt and Libya.

News from Libya is that the opposition to Muammar Abu Minyar al-Gaddafi has taken control of enough of the nation to insure the normal production levels of crude. That could change in days because the situation in Libya is so fluid.

Oil prices have come down over the last day or so because of the Saudi offer and the belief that the situation in Libya is about to become calmer. None of that guarantees that other nations in the region, not just Saudi Arabia, could face changes in regime.

One solution mentioned recently by members of Congress and some economists is that the Administration begin to release crude from the Strategic Petroleum Reserve, a 727 million-barrel pool of oil held by the United States. Among the arguments against such an action is that the US may find it hard to replace the reserve with oil priced much below $90. That would cost taxpayers money. Another argument is that it is not the business of the American government to “manipulate” the price of oil.

Most oil traders would agree that oil prices are part speculation and part supply and demand. The Strategic Petroleum Reserve is unlikely to be used to put 100 million barrels of crude into the market place, but even a small release would raise the specter that oil supply in the US could quickly move higher.

The Strategic Petroleum Reserve would probably best be used to push oil prices down. The Administration could place it effectively as a chess piece. That would work, as long as Obama does not show how much crude he is willing to let flow.

Douglas A. McIntyre