More Debate Over Release of Strategic Oil Reserves

French paper Le Monde reports that the heads of France, the United Kingdom and United States have begun discussions about a release of some of the crude in their strategic oil reserves. Media coverage of meetings between UK prime minister David Cameron and President Obama claimed that the two nations would undertake a joint venture to put more crude into the markets. Nothing happened. The oil price situation has since become more acute, and French president Nicolas Sarkozy and President Obama are up for reelection. That may be a cynical view of why either nation would participate in a release of reserves, but that does not make it an incorrect one.

What is certain is that $125 a barrel Brent crude could cause an ongoing increase in the prices of gasoline, diesel, heating oil and petrochemicals. Taken together, these increases realistically can be expected to cause a new recession. That, balanced against the release of reserves, argues for the release to happen soon.

There is no obviously powerful case for the reserves to remain untapped. The only reasonable explanation is that the oil will be needed for a greater crisis in the future. The crisis would have to be catastrophic to match the current one.

There also is no likely relief to high oil prices. Supply has become scarce, some experts argue, because of the lack of flow from Iran due to sanctions over its weapons program. In the meantime, oil refineries have shut down because they cannot convert the high price of oil into high-priced gas. That, in turn, takes supply offline.

The last time there was a major release of reserves — in the summer of 2008 — the greatest effects on prices only lasted a few months. Today, a few months could be the difference between continuation of the economic recovery that has taken hold in some parts of the world and an immediate new recession.

Douglas A. McIntyre