White House and DOE set to tap United States Strategic Petroleum Reserve

In an effort to combat high oil prices causes by geopolitical issues in the Middle East, the White House and the United States Department of Energy (DOE) said this week that the U.S. and partner nations in the International Energy Agency will release 60 million barrels of oil.

The United States itself will account for 30 million barrels of this tally from its Strategic Petroleum Reserve (SPR), which DOE said is currently at its highest level ever recorded at 727 million barrels.

“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” said Energy Secretary Steven Chu in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”

This news does not come as a total surprise, considering the fact that the White House broached this idea in March, when the price per barrel of oil and the price per gallon of diesel hit $100 and $4, respectively. Prices have remained in or close to that range for several weeks.

Political and civil unrest in the Middle East and North Africa, specifically in Libya, has resulted in oil producers in that region suspending or shuttering operations. This has subsequently led to tighter supplies, which is driving up oil and gas prices. 

White House and DOE officials said that the U.S. has “been in close contact” with oil producing and consuming countries regarding disruptions to the international oil market that could affect the global economy. And they added that the situation in Libya has resulted in a loss of 1.5 million barrels of oil per day—specifically of light sweet crude oil from global markets. With July and August, months that typically see the highest demand for oil and gas, approaching, they said that prices are still much higher than they were prior to the situation in Libya, and they said that the decision to release oil from the SPR will compliment recent production increases by major oil producing countries, including Saudi Arabia.

A noted green logistics expert explained to LM that this decision makes sense in this instance but should not become a regular occurrence.

“The release of 30 million barrels of oil from the Strategic Petroleum Reserve to replace the loss of Libyan oil is certainly a prudent move on the part of the Obama administration,” said Brittain Ladd, global supply chain consultant for CapGemini Consulting. “We are moving into the traditional summer peak travel season so I can understand the rationale for the move. However, I think it also worth the effort to revisit our overall petroleum strategy as a nation to ensure that we can maintain a steady supply of oil to meet our needs and not rely on the Strategic Oil Reserves as a matter of policy in the coming months. The Strategic Oil Reserves should only be utilized in times of an emergency so I hope the move today doesn’t become a habit.”

Increases in oil and gas prices are nothing new to shippers and carriers, especially when looking at the situation nearly three years ago, when oil barrel prices were on the brink of $150 and diesel was pushing $5 per gallon.

While carriers can offset these expenses through fuel surcharges, shippers typically do not have as much flexibility.

“Shippers will have to pay to get their goods to market even as the price of fuel increases,” said a shipper in a recent interview. “The fuel surcharge (FSC) is not necessarily an evil thing. Shippers need to [partner] with transportation and logistics services companies and realize that without an FSC these companies would not likely be able to stay in business…but shippers need to do their homework to determine what the actual costs are and what percent they should pay to carriers.”

Derik Andreoli, Ph.D.c., senior analyst at Mercator International LLC and an LM contributor, said that the timing of the SPR announcement is odd from a market perspective, as prices were already falling [in recent weeks] as the market senses that oil demand is subsiding along with the prospects for the U.S. economy.

He added that there is also a reasonable level of concern regarding the economic prospects for much of Europe and China as well.

“Downward revisions of projected economic growth lead to downward revisions in future oil demand, and this leads futures traders to bid down oil prices,” he noted.

The decision to release oil from the SPR was lauded by the American Trucking Associations (ATA), but the ATA made it clear that while this is a good step more needs to be done.

ATA President and CEO Bill Graves said that the trucking industry alone consumes roughly 97.7 million gallons of diesel fuel each day, and the 30 million barrels the Obama administration will release into the market is enough crude oil to supply the U.S. for just a couple of days.

“The administration must act quickly and decisively to implement a longer term solution by expanding access to domestic supplies of oil by expanding offshore production,” Graves said in a statement.