Will Release of Strategic Oil Reserves Matter?

There have been rumors in the media than President Obama and UK Prime Minister David Cameron may release strategic oil reserves — crude stored by the countries in the event of a supply disruption emergency. The shortage of oil and rising gas prices, due mostly to sanctions on Iran, may not qualify. Oil imports by the U.S. and UK have not been interrupted. Prices have risen, however. And those price increases may undermine the recovery each country counts on for an exit from the most recent recession. So, the potential damage to gross domestic product growth might constitute an emergency in a broad sense of the word. What is hard to say is whether the action actually will help push down prices? There is evidence it will not, at least for any extended period.

The political situation in Libya prompted the White House to release 30 million barrels from the strategic reserve in June 2011. Members of the International Energy Agency released nearly as much. Oil prices did drop over the next three months. No one can say if this was entirely due to the decision to release reserves, to global supply changes, or to some combination of the two. Whatever the cause, crude began to rise again last October and has continued upward on an almost uninterrupted path.

A three-month solution will not much help the oil price problem. And the U.S. and its allies will not back away from one trigger of the rise — sanctions on Iran. A longer term solution almost certainly would require a special pact with OPEC, and particularly Saudi Arabia, the world’s top oil producer. An announcement that the Saudi’s have an absolute commitment to offset all of Iran’s supply drop off likely would press crude prices back down. The price would stay lower if the Saudis made good on their promise over the long term. Other factors, like Chinese and U.S. consumption, already are such that crude prices should not rise. Chinese imports are down, perhaps because of a slowdown in its economy. The U.S. has its strategic oil reserves and a commitment by many Americans to use less oil and gas, mostly because they cannot afford to do otherwise.

A release of strategic oil reserves alone is a half measure in the effort to combat high oil and gas prices. A much larger and more complex alliance of countries will be required to push oil prices down considerably and for a long period.

Douglas A. McIntyre