Oil prices dip briefly after hint of oil reserve release

Thursday, March 15th, 2012 By

Barrels

The American and British government have hinted at a release from oil reserves. Photo Credit: TrevorMacInnis/Wikimedia Commons/CC-BY-SA

Many nations maintain large reserves of oil in case of emergency, such as the Strategic Petroleum Reserve held by the U.S. Recently, the market price of crude oil dipped after hints of a partial release by the American and British governments, which caused the market to blink.

Reserves are ace in the hole

Though it is politically expedient to blame elected officials for oil and gas prices, it is not in line with the facts. The bulk of the price of gas is the cost of crude oil, which is far removed from the control of anybody in Washington, D.C.

However, one way President Obama can affect gas prices is by releasing oil from the Strategic Petroleum Reserve, the emergency supply of oil that the United States holds. According to the Wall Street Journal, the government holds about 696 million barrels, a five-month supply. The SPR effectively is an “ace-in-the-hole” against oil shortages, or in some cases, rampant oil or gas price inflation.

Market blinks

Hints were dropped recently that the American and British governments were considering a partial release of the respective reserves held by those governments in order to temper oil prices, which some believe are being unjustly inflated. It is estimated that Brent sweet crude, oil extracted from the North Sea, is being sold for at least $30 more per barrel than it should, given costs of production.

The market, according to Reuters, blinked. Several types of oil dipped in trading on the back of the reports, which have been denied by the White House. According to the Washington Post, West Texas Intermediate, a benchmark oil future, dipped by $2 until the reports were denied by the Obama administration.

Oil supply is not a problem. Oil imports have dropped since 2003, according to the Los Angeles Times, due to increased production, as America produced 5.6 million barrels per day by 2011, 120,000 more barrels than in 2010. The issue appears to be that unrest in the Middle East is causing speculators to panic about the possibility of the potential for interrupted supply, rather than any actual disruption.

[High gas prices still make some think of getting installment personal loans to fill up the tank]

Release does little anyway

When oil and gasoline prices rise, some people clamor for oil from the SPR to be released. A release would likely not accomplish much as the last release didn’t amount to very much for very long, according to Fox News.

The last release was in June 2011, when the SPR announced the release of 60 million barrels. Gas prices weren’t affected that much, dropping from $3.6258 per gallon the day before the SPR release was announced, to $3.5412 on June 30. On July 12, it was $3.6321 per gallon. In other words, the last release brought gas prices down by nine cents for about a week.

Sources

Wall Street Journal

Reuters

Los Angeles Times

Washington Post: http://www.washingtonpost.com/business/economy/oil-prices-drop-after-report-of-strategic-reserve-release/2012/03/15/gIQAM5SNES_story.html

Fox: http://www.foxbusiness.com/markets/2011/07/12/spr-release-has-fleeting-impact-on-oil-gas-prices/

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