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Analysis: Does storing oil raise prices?

disclaimer: image is for illustration purposes only
by Rosalie Westenskow
Washington DC (UPI) Feb 18, 2008
As oil prices skyrocket, some policymakers want to halt efforts to increase the nation's emergency oil reserve, but the administration says energy security depends on the stockpile's size.

The Department of Energy pulls approximately 70,000 barrels of oil off the market every day for the Strategic Petroleum Reserve, the world's largest oil stash, stored in massive underground salt caverns along the Gulf of Mexico's coastline.

To date, the SPR holds 698 million barrels of oil, but the DOE has been actively working to increase the reserve's size in order to meet the Bush administration goal, announced by the president last year, of doubling its contents to 1.5 billion barrels by 2027.

But with oil prices reaching records highs of $100 per barrel this year, some congressmen say the administration's actions are worsening the load on consumers and adding to market instability. Last week Sen. Byron Dorgan, D-N.D., introduced a bill calling on the Department of Energy to cease adding oil to the SPR for the rest of 2008, or until prices fall below $50 a barrel.

"We need to use a little common sense here," Dorgan said in a statement. "I believe maintaining the current reserve is important for our economy and national security but the time to stock up is not when prices are highest."

A pause in purchases for the SPR would stimulate the economy, Dorgan said, by moderating energy prices.

Administration officials disagree.

The total amount of oil going into the reserve each day represents such a small portion of the market that it couldn't possibly affect prices in any significant way, said Julie Ruggiero, a spokesperson for the DOE.

"The department is continuing to fill the SPR at a modest rate żż that equate(s) to less than one-tenth of 1 percent of daily world oil consumption," Ruggiero told United Press International.

But even a small percentage can have a big impact on prices, said Philip Verleger, president of PKVerleger LLC, an energy economics consulting firm. Verleger told senators at a December hearing the recent spike in oil prices cannot be pinned on traditional factors, such as international events.

"By deduction, then, the cause of the increase must lie elsewhere," he testified. "The one and only significant change was DOE's decision to begin filling the Strategic Petroleum Reserve."

Prior to August 2007, Verleger said, the DOE had not been actively adding to the SPR, and it was the specific mix of crude oil it began adding to the reserve last fall that caused the rise in prices.

Although there have been recent surpluses of sour crude oil, sweet crude accounts for a much smaller share of the market, and a significant portion of it is not available to consumers.

Of the oil going into the SPR this fall, sweet crude represented 33 percent -- or as much as 0.1 percent to 0.5 percent of the total sweet crude market, according to Verleger's calculations. He said he believes this could be responsible for up to 10 percent of the sweet crude price increase.

But administration officials say efforts to fill the reserve should not fluctuate with the market.

"The Strategic Petroleum Reserve is not a tool to be used to manipulate prices," said Scott Stanzel, a White House spokesperson. "When it has been used, say in the previous administration (to do so), it has had a very limited affect."

The SPR functions as an insurance policy for the nation, Stanzel told UPI, in the event of a natural disaster, a terrorist attack or some other disruption to supply. The increasing demand for oil, and tightening market, make the need to bolster the SPR even more imperative, he said.

U.S. daily imports of oil have risen dramatically since the SPR's inception in 1975, effectively decreasing the length of time the SPR can satisfy the country's energy needs every year.

"We have a net less protection from potential disruptions (to oil supply) than we did nearly 20 years ago," Stanzel told UPI.

Currently, the reserve holds a 56-day supply of oil imports. Under an agreement with other industrialized countries through the International Energy Agency, the United States is obligated to have the equivalent of 90 days worth of imports stored for emergencies. The president's plan to double the reserve would result in a stockpile of that size in the SPR, Energy Secretary Samuel Bodman testified in the Senate Energy Committee last week.

However, the IEA does not mandate the 90-day requirement be met be government entities alone. When industry stores are factored into the equation, the total reaches 118 days -- well above the IEA requirement, said Barry Piatt, communications director for Dorgan.

However, the IEA supports the administration's push to increase the SPR, said Jason Elliott of the IEA.

"The U.S. does not oblige industry to hold minimum levels of stocks, as many other IEA countries do, so while the U.S. is compliant with the IEA commitment, the IEA has encouraged the U.S. administration to expand the SPR cover in order to guarantee sustainable compliance," Elliott told UPI.

Adding to the SPR doesn't actually increase security, though, said Frank Verrastro, director of the Energy and National Security Program at the Center for Strategic & International Studies, a bipartisan think tank.

Currently, the SPR's drawdown rate, or the speed at which oil can be removed from the reserve, is only 4.5 million barrels per day. Since daily imports total close to 13 million barrels per day, the SPR alone couldn't actually substitute for gross daily imports if a supply disruption did occur.

"What volume of oil is in the reserve doesn't matter ... because you can't cover your full import rate," Verrastro told UPI, pointing to a greater need to increase the drawdown rate than to increase total volume.

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