Diesel prices: U.S. Senate votes to suspend filling U.S. Strategic Petroleum Reserve

If passed, politicans contend bill would result in significant oil and gas savings but some analysts have a different take

Jeff Berman, Group News Editor -- Logistics Management, 5/13/2008

WASHINGTON—Earlier today, the United States Senate voted to temporarily suspend the acquisition of petroleum for the United States Strategic Petroleum Reserve (SPR).

This vote came in the form of an amendment to S. 2284, The Flood Insurance Reform and Modernization Act of 2007. It passed by a 97-1 margin.

According to a various media reports, oil deliveries to the SPR will be on hold until crude oil prices fall below $75 per barrel for more than 90 days. The objective of the SPR is to provide a supply of crude oil if a national security crisis or event were to occur. Approximately 70,000 barrels of oil are stored underground in the SPR on a daily basis. And the SPR is currently 97 percent full.

The White House, meanwhile, contends that not adding oil to the SPR will not have a meaningful impact on prices, which continue to rapidly escalate, with the average price per gallon of diesel currently at $4.331 per gallon and oil hovering around $127 per barrel.

A CNN report said that estimates for how much this action would save at the pump ranges from a few cents to $0.25 per gallon. It added that the U.S. Energy Information Administration predicts oil prices would fall only by roughly $2 per barrel—or 4 to 5 cents a gallon if SPR deliveries cease.

In recent weeks, politicians have been clamoring for action to be taken to reduce oil and gas costs, which are having a severe effect on the nation’s economy.

A letter sent by U.S. Senator Kay Bailey Hutchison (R-TX) and signed by 16 U.S. Senators on April 29 called for the White House to immediately halt deposits of domestic crude oil into the SPR.

“The SPR had 554 million barrels when President Bush took office and today it has over 701 million barrels,” Hutchison wrote. “We are in an extreme circumstance, now that oil is around $120 a barrel. I support an immediate halt in the deposits of domestic crude into the SPR as we enter the busiest driving season of the year.”

In an interview with Reuters, U.S. Senator Byron Dorgan (D-ND) supported Hutchison, saying that the U.S in the short run can stop putting oil underground and put some downward pressure on gas prices and oil prices.

Even through it appears that politicians have good intentions, some industry experts contend that this legislation may not deliver what it promises.

“The purpose of the Strategic Petroleum Reserve is to assure adequate supply—to prevent long lines at fuel pumps—and not to hold down fuel prices,” said James Haughey, chief economist for Reed Construction Data (a corporate sibling of LM), in an interview. “If it is used to subsidize prices for fuel buyers it will not be there when it is needed to during a shortage of supplies at any price.”

Haughey added that politicians understand that stopping the small amount of crude oil put in reserve will have a negligible impact on fuel prices but he explained that they hope it will have a big impact on their vote counts later this year.

“This is politics not economics,” said Haughey. 

Tim Radbourne, president of Radbourne Consulting in Adrian Mich., agreed with Haughey, noting if ceasing filling the SPR until oil prices drop to $75 per barrel is signed into law, it will be a very long time before anything is put into the SPR.

“This will not have a significant effect on the price of fuel,” said Radbourne. “It is more of a political game if anything. We are hoping the price of fuel goes down, and there is likely an opportunity for that to happen briefly before it heads back up further.”

Tom Kloza, chief oil analyst at Oil Price Information Service in Wall, N.J., told LM that today’s vote is not highly consequential at this point, as prices continue to rise

“This madness will run its course but for now, the perception is that crude prices of $125-$150 per barrel are possible, and it may take a major sentiment shift to alter that thought process,” said Kloza. “There is about $26-billion more money levered on the buy side among speculators, than on the sell side, and yet many of the regulatory entities continue to dismiss the notion that oil prices are inflated by speculative investment.”