In 1975, after the tense days of the Middle Eastern oil embargo, Congress passed the Energy Policy and Conservation Act.  One part of this act was to create a Strategic Petroleum Reserve–a massive quantity of crude oil owned by the government and stored on U.S. soil–that could be used to alleviate shortages and depress prices in the event of a major disruption of foreign oil supplies.

Schematic drawing of a salt cave storage reservoir for the SPR

The Strategic Petroleum Reserve (SPR) exists in the form of several salt caves located near the Gulf coasts of Texas and Louisiana.  The reserve is intended to hold a maximum of 1 billion barrels of crude oil, and currently holds 702 million barrels (97% of its 727 million barrel capacity).  Based on current oil consumption levels in the U.S (21 million barrels a day), the reserve holds a roughly 33-day supply of oil.  However, estimates put the maximum withdrawal capability at 4.4 million barrels a day (Wikipedia)–a rate which has never been tested–so the actual availability of the oil in the SPR is highly questionable.  According to the Energy Policy and Conservation Act, oil may be released from the reserve to prevent an “economic dislocation” similar to the economic crunch caused by the 1973-1974 embargo–although the specific requirements for release are unclear, as the term “dislocation” is not clearly defined in the text of the bill.

Photo of empty SPR salt cave storage reservoir

As oil prices began to skyrocket last Spring Congress, believing the purchase of expensive oil to be an inefficient use of government funds, hastily passed a bill halting purchase of new oil for the SPR until the end of the 2008 calendar year.  After initially opposing it, President signed the bill into law on May 19, 2008.

The SPR re-entered the news last Friday, when the Department of Energy announced, following the expiration of the congressionally-imposed moratorium, that it would resume purchasing oil for the reserve.  Although the existence of and use of oil contained in the SPR are not major hot-button issues, they are somewhat controversial.  The DOE’s recent announcement elicited commentary from two prestigious oil experts on opposite sides of the political spectrum:

Eric Bolling, a former commodities trader and member of the NYMEX board of Directors and current co-host of the conservative news show “FOX Business Happy Hour,” applauds the DOE’s decision in an opinion piece on Foxnews.com.  Bolling argues that current rock-bottom prices (the lowest in five years) for crude oil are a “gift” that our government should take advantage of by filling the SPR to the brim.  He asserts that filling the SPR will help assure affordable gasoline and other crude products in the near future.  Bolling warns that the three anti-American “thugs” that are heads of state in oil-producing nations (President Chavez of Venezuela, President Ahmadinejad of Iran, and Prime Minister Putin of Russia) will do anything to drive up the price of oil, and is certain that an SPR full of cheap oil would protect against any drastic action the “thugs” might take.  He cites the Russian government’s (under then-president Putin) dissolution of the Russian oil giant Yukos en route to creating the national oil and gas monopoly Gazprom as an example of Russian action that resulted in a spike in oil prices.  President Obama should not tax oil companies, Bolling advises, and should continue to purchase oil for the SPR–an important investment in our country’s short-term economic stability.

Former commodities trader and author of Over a Barrel: Breaking Oil’s Grip on Our Future Raymond J. Learsy expresses an opposite view in a blog posted on the liberal news site HuffingtonPost.com.  He makes his case with pointed language, making the argument that, “in essence, the SPR has become a welfare program for the oil industry.”  Learsy opines that the DOE’s recent announcement is one more development in the Bush Administration’s history of offering direct and indirect support to the oil industry that has helped consistently inflate oil corporations’ profits.  He argues that rumors of the DOE’s decision and it’s official announcement last Friday were direct causes of the sudden rise in oil prices at the end of 2008–the largest one-week (December 29th to January 2nd) price increase since 1986.  As a previous example, Learsy notes that in January of 2007, oil prices were on the decline and turned around only after President Bush called for a doubling of the size of the SPR in his State of the Union Address.  During these dire economic times, Learsy argues, federal funds should not be used to further boost profits of oil companies, and the partisan decision-makers in the Department of Energy should be given the boot.

Both crude and heating oil prices dropped slightly on NYMEX today, losing about 1% each.  Ever-present worries about low global energy demand continued be the dominant emotions on the commodities markets.  From Bloomberg.com:

“The bottom line is that you don’t have anything solid out there to support a sustained rally,” said Peter Beutel, president of energy consultant Cameron Hanover Inc. in New Canaan, Connecticut. “The financial crisis has led to economic weakness and falling demand in the U.S. The problems in the U.S. are now spreading to China and other developing countries.”

Analysts also predicted tomorrow’s energy report from the Energy Department would include news of U.S. crude stockpiles increasing by about 1 million barrels.

HEAT USA price experts were pleased to report a moderate decline in tomorrow’s retail prices, despite only incremental decreases in market prices.

HEAT USA Price Report
Evening projection (for Wednesday’s average price per gallon): DOWN $0.04