Last week, President Obama ordered the release of 30 million barrels of crude oil from America’s Strategic Petroleum Reserve (SPR) in concert with a broader International Energy Agency (IEA) effort to release 60 million barrels. This action was only the third time a President has ordered a release in American history. The first release was during the 1990-91 Persian Gulf War, and the second followed Hurricane Katrina in 2005.
Therefore, the country is not facing a major threat or natural disaster, nor are oil prices increasing substantially. They have only increased 2.3% since the beginning of the year.
So why did the President decide to release oil from the SPR now?
There are three potential reasons:
1. It Was Political
A cynical explanation would be that the President released the reserves purely for political reasons. By adding more oil to the market, prices will likely decline for American consumers as they enter peak summer driving season. In turn, consumers will have more discretionary income to spend on items other than fuel. The net effect of the release would be to boost the American economy.
Nothing is wrong with finding ways to boost the economy. However, releasing oil from the SPR solely to juice economic activity is bad policy. The government should only open the SPR if it expects there to be a massive oil supply shock in the near future.
2. President Obama Wanted to Help America’s European Allies
Another rationale for the release is that the world needed to make up for the loss of ~2 million barrels per day from unrest in Libya and Yemen. The majority of these countries’ exports end up in Europe, so any American release would likely better cushion Europe from higher Brent crude prices than it would cushion the United States from higher WTI prices.
As such, a release for this reason alone, would be insufficient to justify an emergency release from the SPR.
3. Another Shoe Is about to Drop in Saudi Arabia
The third explanation is the most likely and worrisome.
Earlier this year, the Saudis pledged to boost their production by 1.5 millions barrels per day. In the past, the Saudis have reliably met their production targets.
That said, the IEA’s release of 60 million barrels might indicate that the Americans and Europeans are worried that Saudi Arabia might not be able to meet its production targets. If this is the case, the era of peak oil is upon us.
In the end, I think all three reasons influenced the President’s decision. However, I believe concern over Saudi Arabia’s continued ability to extract oil cheaply from the ground is likely what dominated it. If this is the case, the world is likely closer to peak oil than many would concede.
Be afraid. Be very afraid…