Gas and the Strategic Petroleum Reserve

Escalating Oil Prices have caused growing alarm among cash strapped consumers and are quickly becoming a major issue on the campaign trail.

NEW YORK (CS Monitor) - Uncle Sam is adding 60,000 barrels of oil a day to giant underground caverns in Texas and Louisiana to be used for the proverbial "rainy day."

Is it raining yet?

The price of oil is moving closer to $120 a barrel, up almost $19 a barrel for the month. Gasoline stations can barely change their prices fast enough, and the cost of regular grade hit a record $3.54 a gallon on Wednesday morning, according to GasPriceWatch.com.

The driving club AAA is raising its estimate of Memorial Day pump prices to $3.75 a gallon, up 25 cents a gallon from its earlier prediction.

"At some point, we have to think about whether we have a price emergency on our hands," says Geoff Sundstrom, a spokesman for AAA in Heathrow, Fla.

Proponents of the government taking action to ease the crunch say that storing oil at a time of soaring prices, in what is called the Strategic Petroleum Reserve (SPR), does not makes sense.

Some want some oil released in the hope that it will drive down prices. Opponents counter that using the SPR would probably have little impact. In fact, they maintain, as does President Bush, that there is no emergency.

But on the campaign trail, the prospect of using the nation's rainy-day supply is catching on. Last week, Sen. John McCain, the Republican candidate for president, called for the government to stopping adding to the reserve.

A week ago at a candidates' debate in Pennsylvania, Sen. Hillary Rodham Clinton (D) said she would not only stop adding to the reserve, but would also release oil to try to drive prices down.

Sen. Barack Obama, the other Democratic candidate for president, believes the SPR should be used for short-term supply disruptions, but he does not believe it should be currently tapped, according to Jason Grumet, an adviser on energy to Senator Obama. Like Senator McCain, however, Obama would stop adding to the SPR at these prices, Mr. Grumet says.

Despite the candidates' wishes, Mr. Bush maintains that the SPR is off limits, to be used only in the event of a natural catastrophe or a major supply disruption overseas.

"The Department of Energy will continue to fill the Strategic Petroleum Reserve at very modest rates to provide an added layer of protection in cases of severe disruption," says Megan Barnett, a spokeswoman for the agency in Washington.

The Energy Policy and Conservation Act of 1975 established the reserve. Signed into law by President Ford, the act gives the president the sole authority to decide when to release oil from the reserve. Congress has discussed automatic triggers for release but has never changed the law.

At issue now are the reserve's 701.3 million barrels of oil, enough to replace imports for 58 days. As a member of the International Energy Agency, the United States is required to hold 90 days of net petroleum imports. By 2019, the US plans to reach 1 billion barrels, which will provide 100 days of emergency supplies. Adding in 90 percent of commercial stockpiles, the US has 118 days' supply today and will have 123 days by 2020, estimates Jeremy Cusimano, an economist for the Petroleum Reserves, which is part of the Department of Energy, in Washington.

In February, the Government Accountability Office (GAO) issued a report suggesting that the government make changes in the way it adds oil to the SPR. Currently, the oil is delivered from oil companies as payment in kind for royalties owed for pumping oil from federal land. Instead, the GAO suggested that the government set a dollar amount of oil it wants to acquire.

The Energy Department, Mr. Cusimano points out, is not actually buying the oil. But, he says, a DOE examination has found that holding the oil has been a positive investment. Currently, the average "acquisition" cost is $27.73 a barrel.

In recent times, the SPR has been tapped twice. After hurricane Katrina, which destroyed pipelines, the government released 11 million barrels of oil. In 1991, during the Gulf War, it released 17.3 million barrels.

Energy experts are divided over whether it would make any difference to release oil today. "It's a tight market, an incredibly tight market when every drop matters," says Tim Considine, who has done a study on the SPR and is a professor at Pennsylvania State University. "But looking at the SPR to alleviate market pressure is only a short-term fix."

Phil Flynn, an oil trader at Alaron Trading in Chicago, doubts it would have any impact. "It is such a small amount of oil," he says.

Mr. Flynn notes that a prior presidential candidate, Sen. John Kerry (D), suggested a halt to buying oil for the reserve in March 2004, when gasoline prices were rising. "We should have bought all we could at $35 a barrel," Flynn says.

The US needs the import protection, Flynn says, since some major oil exporters such as Russia and Venezuela are not as friendly toward the US as they used to be. "If you want to bring down the price of oil," he adds, "shore up the value of the US dollar."

While the debate continues, the DOE is getting ready for an increase in reserve supplies. In August, it will start to receive 70,000 to 75,000 barrels per day. Since the current SPR is almost full, it will go to a new facility in Mississippi, farther from the coast.

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Facts about Strategic Petroleum Reserve

Current inventory: 701.3 million barrels

Current storage capacity: 727 million barrels

Highest inventory reached: current level of 701.3 million barrels. The previous peak was 700.7 million barrels in late August 2005.

Length of time that the reserve could currently cover a halt in oil imports: 58 days

Average price paid for oil in the reserve: $27.73 per barrel

Maximum drawdown capability: 4.4 million barrels per day

Time needed for the reserve's oil to enter the US market: 13 days from a presidential decision about the reserve

Source: US Department of Energy