The Strategic Reserve Oil Release Is A Drop In The Bucket

 

Last week Energy Secretary Chu announced that the United States will release 30 million barrels of crude oil from the strategic reserve, in coordination with the release of an identical amount by the International Energy Agency. As announced, this is strictly a one-off deal and doesn’t represent a change in policy by either the U.S. or the IEA. It is intended to offset lost Libyan production estimated at 132 million barrels per day, and will be carried out over the ensuing thirty days or so.

The unexpected action raises a number of questions. The national retail price of gasoline peaked on May 15th at $3.98 per gallon and traded down to $3.58 per gallon in the week before the announcement. This was approximately the price at the start of the second quarter. In late March the price of crude oil and gasoline along with most commodities rose in a feverish ascent following the earthquake and tsunami in Japan and floods and other natural disasters in our country. The bubble burst around late May when it became apparent that world economic growth was slowing sharply as a consequence of these events. Crude oil and gasoline were already rebalancing in response to lower growth expectations prior to the release from the strategic reserve. There was no shortage of supply on the market at the time of this action.

The unnecessary release of oil from the strategic reserve is a risky move. While momentarily popular the economic benefits are dubious at best. Saudi Arabia had already announced that it would increase production to offset the shortfall from lost Libyan production. Ultimately the price of oil and gasoline will be dictated by economic conditions, which are recovering, and not by this short term move. The release is a drop in the bucket in a world which consumes about 89 million barrels a day, and will be quickly ignored.

 

Many oil experts believe prices are destined to climb due to rising demand mainly from emerging nations and very thin margins of surplus production around the globe. The U.S. has the clear potential to achieve energy independence but not the political will. The current emphasis on alternative energy sources including extensive tax breaks for producers is fine but in many respects distracts from a more comprehensive solution. The potential for dramatic increases in domestic oil and natural gas production is at hand due to our enormous technological advances. Actions such as releasing some oil from the strategic reserve are meaningless as a substitute for a sound, long term energy policy.

Alfred A. Lagan

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Alfred Lagan is the founder and chairman of Congress Asset Management Company, a respected investment management firm in Boston, MA. Prior to starting Congress in 1985, he held senior investment positions in several financial services firms. Mr. Lagan holds an MBA from New York University with distinction, and a BA in economics from Iona College. He was born in New York City of Irish immigrant parents, and served four years in the Navy.

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