Barack Obama and the U.K. Prime Minister are allegedly looking into releasing oil from strategic reserves in an effort to bring down prices. But will it work?
I drive a decade-old Subaru with a 13-gallon tank that gets about 23 miles per gallon on the open road. So with local gas prices dangerously close to $4, when I filled up my tank this morning, it cost over $48. Late last month, I paid about a dollar less.
And I honestly can’t remember the last time my total was under $40.
Elsewhere in the country, prices are even worse. In parts of New York, Maine, Washington state and Oregon, it costs $4.12 a gallon for regular. In a few areas of Texas and about half of Illinois, drivers are forking over anywhere from $4.12 to $4.22.
Then there’s California, which always sports notoriously high prices. On March 14, 2012, the L.A. Times reported:
“California’s retail prices were still rising slightly Wednesday, up 0.2 cents a gallon overnight to an average of $4.363 for a gallon of regular gasoline, according to the AAA Fuel Gauge Report. That’s 40.1 cents a gallon higher than a year ago. Nationally, the average climbed 0.6 cents overnight to $3.811. A year ago, the national average was $3.556 a gallon.”
Recognizing that kind of pain at the pump, rumors are abounding that Barack Obama and the U.K. Prime Minister are looking into the possibility of releasing oil from both countries’ strategic reserves in an effort to bring down oil prices.
But if so, that game plan isn’t nearly as simplistic as it sounds…
To Release Oil or Not to Release Oil
Last Thursday, when the news first hit that the United States was going to dip into its reserves, oil immediately started downward.
Though it started out the day at around $105.70 per barrel, by 12:30, it had tanked to just above $104. But then The Wall Street Journal said the rumors were inaccurate, and the commodity spiked right back up to its opening price, vacillating slightly downwards for the rest of the day as news sources and the White House went back and forth about whether it would happen or not.
In the end it, it closed at about $0.50 lower. But the follow day, oil was right back to marching upwards. And that was despite reiterated reports that, yes, the President planned to utilize America’s energy plan of last resort.
At first glance, that kind of action doesn’t bode well for gasoline prices going forward. But rest assured: It wouldn’t have mattered if oil had dipped a whopping $5 on the news. There isn’t nearly enough of the commodity stored away in the U.S. strategic reserves to make a serious or long-term dent in the markets.
By itself and as of February 29, 2012, it held 695.9 million barrels, which could fuel the country for approximately 36 days at our current rate of consumption. And since there’s practically no way the President will even release a fifth of that, even if the U.K., Japan and other countries pitch in (like some stories say they’ll be encouraged to do), it can’t make more than a temporary dent in our current pain at the pump.
For further proof of the futility of the possibly proposed plan, take Stephen Dinan’s article at The Washington Post:
“Last June, when President Obama last ordered a release from the U.S. reserves, oil was trading at $95.41 a barrel. It dropped about $5 over the next few days, but quickly shot back up and two weeks after the announcement the price was right back where it was before the release was announced.”
There’s no good reason why the situation will play out differently under similar action today.
Iran Might Be Ready to Go to War With the United States
There’s another reason why opening up the strategic reserves isn’t a good idea, and it has nothing to do with prices, either temporary or long term.
Congress first authorized the stash in the Energy Policy and Conservation Act of 1976, with the purpose of protecting itself against an OPEC-directed oil embargo against the United States. If worst came to worst and the Middle East monopolized its output, the United States could at least keep itself going for about a month while it found a more permanent solution.
Now with international tensions rising with Iran due to its threats to close the Strait of Hormuz – “the world’s most important oil chokepoint due to its daily oil flow of almost 17 million barrels per day,” according to the U.S. Energy Information Administration – now is the time to have the reserves stocked as fully as possible.
The chances of Iran actually closing it off aren’t astronomically high. Though the Middle Eastern nation is governed by defiant and oftentimes diabolical dictators, that’s not the same thing as saying they’re insane. And it could easily be counterproductive for Iran to cause too much of a fuss concerning the Strait.
But the threat is still clear and present enough for the U.S. Navy to send out an additional four mine countermeasure ships to the waters.
If something does happen, there’s no telling whether other oil-producing countries in the region will side with Iran or not. So if there’s ever a time we need to play it safe with our current energy assets, it’s now.
And even if that wasn’t true and the entire world was perfectly at peace, utilizing the strategic oil reserves is a nice thought… but that’s about all it is.
Good Investing,
Jeannette Di Louie
Article by Investment U
