Why is Obama tapping the Strategic Petroleum Reserve, really?

The administration's decision to release 30 million barrels of oil from the Strategic Petroleum Reserve is pure politics, say some. The White House says it's trying to offset a drop in Libyan light sweet crude – needed for gasoline – at the height of the summer driving season.

By , Staff writer

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    A worker lowers the price of gas at a Shell gas station in Menlo Park, Calif., Tuesday. The White House refused to speculate on whether the release of 30 million barrels of oil from the Strategic Petroleum Reserve will drive down gas prices.
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Within the next 24 hours, the nation’s refiners will be asked to bid on some 30 million barrels of oil President Obama is releasing from the Strategic Petroleum Reserve.

Even before the first barrel has been refined, Republicans and Democrats are taking opposite sides on the issue. The Republicans call it bad policy to use the oil in a non-emergency and would rather see more permits issued to drill for oil. Democrats are hailing the move as a way to bring relief to the middle class.

Yes, call this a matter of oil and politics mixing.

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“Of course this is a political decision – these guys are trying to save their jobs,” says Phil Flynn, director of research at PFG Best, a commodities brokerage house in Chicago. “Every move is political when the economy is in trouble.”

In a conference call with reporters, administration officials argued the disruption in Libya and other areas in the Middle East warranted the release, especially because those areas produce light sweet crude, which is used to produce gasoline. They said they had been talking to the other 27 members of the International Energy Agency – which is composed mainly of the world's developed countries – about this move for weeks. Other IEA members will release an additional 30 million barrels of light sweet crude from their stockpiles as well.

“They didn’t do this willy-nilly,” says Mr. Flynn. “They waited to see how the war would develop.”

Administration officials maintained the action was not taken to lower gasoline prices and in their briefing with reporters refused to discuss or predict what action the move would have on prices. Later, Jay Carney, White House spokesman, said the timing of the action was related to a rise in demand during the summer driving season.

“What we are addressing is an impact caused by a supply disruption, and at this time it's necessary to do it because we're about to enter a season when demand is at its highest," said Mr. Carney.

However, some oil industry groups assailed the move, calling it a short-term fix at best. “It not only reduces our capacity to protect ourselves in case of a true emergency in the future, but also increases America’s reliance on the politically volatile countries that currently provide most of our oil,” says Barry Russell, the president of the Independent Petroleum Association of America, a lobbying group in Washington in a statement.

Some Republican leaders tried to walk a fine line – agreeing that it was a good idea for Americans to have lower prices at the pump but arguing it was a bad idea to do it by releasing oil from the SPR.

“Everyone wants to help the American people and lower prices at the pump – especially now, in tough economic times,” said House Speaker Rep. John Boehner (R) of Ohio in a statement. But, he added, “by tapping the Strategic Petroleum Reserve, the president is using a national security instrument to address his domestic political problems.”

Democrats fired right back. Democratic leader Nancy Pelosi of California took some credit for the action since Democratic members of the House had asked the President to release the SPR oil in March. And, she blamed speculators and special interests – which she claimed were protected by Republicans – for standing in the way of lower gas prices.

Each time the national reserve has been opened, the price of oil has dropped between 9 percent and 33 percent, said Sen. Jay Rockefeller, who sent a letter to President Obama on March 3, asking him to release oil from the SPR if further disruptions took place.

On Thursday, just before the close, the price of oil was $3.83 a barrel lower on the New York Mercantile Exchange. The price of gasoline on the futures market was sharply lower as well.

The US move is only the third time oil has been released from the SPR, which is now at a historically high level of 727 million barrels. The other times were during the Persian Gulf War and after Hurricane Katrina disrupted supplies in 2005.

Business reaction was divided. Karen Harbert, president and CEO of the US Chamber of Commerce’s Energy Institute called the release “ill-advised and not the signal the markets need.” Instead, she called on the administration to increase domestic production of oil.

However, the Air Transport Association, which represents the nation’s major airlines, said the move would help its members. “Every $1 drop in the annual price of a barrel of oil translates to $415 million in reduced annual jet-fuel expenditures, so every little bit helps,” said ATA President and CEO Nicholas Calio.

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