Oil raid?

Americans have reached their pain threshold at the pump. Since the Bush Administration took office, the price of oil has increased fivefold, from less than $30 per barrel to nearly $150; the price of gasoline has trebled from $1.47 per gallon to $4.11. House Speaker Nancy Pelosi wants to dull drivers’ pain; she has called upon Bush to dip into the country’s cache of black gold that has been squirreled away for lean times, thereby expanding available supplies in the market and reducing prices. US lawmakers may even attempt to pass new energy legislation aimed at increasing domestic production early this week.

Pelosi thinks that if Bush were to raid a few million barrels from the Strategic Petroleum Reserve (SPR) -- the country’s emergency supply of oil held in huge salty caverns along the Gulf of Mexico -- it would have an immediate impact on the price at the pump. In terms of emergency oil inventories, now is as good a time as any; the US cup runneth over. The US Department of Energy has already halted all deliveries to the SPR, which as of July 15, is 97% full, with about 702 million barrels of oil. At current market prices, the SPR holds over $38.7 billion in sweet crude and approximately $50.9 billion in sour crude, making the total value of the crude in the cellars nearly $90 billion.

The SPR has been raided before:

• Gulf War measures: Bush’s father withdrew about 17 million barrels of oil from the SPR ahead of the first Gulf War on January 17, 1991. When the 1991 SPR drawdown was announced in conjunction with Operation Desert Storm, the price of oil immediately dropped $8 per barrel.

• Clinton’s oil swap shop: In late 2000, President Bill Clinton authorised a swap of oil, in which 30 million barrels were released from the SPR to address rising oil prices and alleviate the threat of a home heating oil crisis due to low inventories. The psychological impact fed through to the market; by the end of the year, actual oil prices had dropped from $30.94 to $20.38 per barrel, a 34% decrease.

• Katrina drawdown: After Hurricane Katrina in 2005, Bush’s Administration also offered 30 million gallons of SPR oil -- although only 11 million gallons were actually withdrawn -- helping reduce crude prices by about $5 per barrel.

Short-term relief?

Yet these interventionist measures have only produced the opposite of a ‘dead cat bounce’, a short-term correction to oil prices, rather than a lasting fix. As far as populist measures go, raiding the SPR is up there with notions like the extended federal gas tax holiday that could have jeopardised investment in the US transportation infrastructure for a few ‘mercy’ gallons. It is like drinking cheap cola; the thirst is temporarily quenched, but the craving returns with more intensity a little later. As John Schoen writes for CNBC, the recent surge in oil prices is largely based on the fear of future interruptions in supplies, and the belief that the global growth in demand for oil will continue to outpace the growth in new supplies. Indeed, the gas price has yet to show the effects of the halt in deliveries to the SPR, so releasing oil from the reserve is also unlikely to prevent long-term price increases.

Ideology also makes it unlikely that Bush, who claims the market fundamentals of tight supplies and strong demand are greater factors in pushing up crude costs rather than Hobbesian speculators, will dunk his cup into the SPR backup. He will argue that the SPR is the nation's first line of defence against an interruption in petroleum supplies, not a tool to be used for market influence. The idea of stockpiling crude in case of emergency had its roots in during the Second World War, but the project was finally launched after the 1973-74 Arab oil embargo. If there is a disruption of supply due to war, terrorism, accident, or natural disaster, depletion of the reserve would prevent it from fulfilling its proper purpose.

Bush believes more production is the answer to high gas prices. He said if Congress passed legislation to boost US oil output, it would change the ‘psychology’ in the energy market about concerns over future oil supplies, which in turn would lower prices. Last week, he rolled back the years, lifting the White House's almost two-decades-old order that banned oil drilling along most US coastal states and called on Congress to end its separate drilling moratorium. Bush is right about production if were enough oil to make a difference. But there is not. As a blogger writes in The New Scientist, drilling in Alaska would shave 75 cents off that $150 dollar barrel of oil, according to Bush's own study.

Nothing to lose?

With the likelihood of permanently pricey oil and gloomy production prospects, it looks like a lose-lose situation. Bush can cut Americans some short-term slack if he loses the will to maintain the SPR for its original purpose, yet it would be surprising if such a limited and selective release of oil transformed market prices swiftly, and it is unlikely that consumers would be satisfied by a small downward movement in prices. In any event, voters don't have much confidence in either Bush or Congress. The approval rating of Congress is down to a new low of just 18% from 23% last month, according to a new AP-Ipsos poll. Bush's approval is at 28%. Unless something changes, voter outrage at the pump will yield voter action at the polls in November.