Drilling down on SPR
The White House yesterday said that President Bush won't consider suspending deposits to the U.S. strategic petroleum reserve because they did it in 2006 and it didn't work.
But I remembered that gas prices fell pretty dramatically prior to the 2006 mid-term elections, and that there was some speculation that the Bush administration used their influence to lower prices.
I couldn't remember if gas prices fell all summer, or just in the fall. If they fell over the summer, then the White House assertion that the SPR deposit pause in late April had no effect would be suspect.
But it appears that the price drop took place primarily in the fall, just before the Nov. 7 election.
Gas at the pump cost $2.92 for a gallon of regular unleaded on April 25, the day the president announced the SPR pause, and on May 1 the cost was the same. It had dropped slightly to $2.85 on May 5, according to the AAA.
At the end of the summer, on Sept. 1, gas was still $2.79 a gallon. But then it dropped dramatically, to $2.32 a gallon on Sept. 29. By Nov. 1, a few days before the election, the price was $2.21 a gallon.
When the SPR deposits were resumed more than a year after the pause, in July 2007, gas prices were back to $2.96 a gallon on July 1.
The White House used prices of crude to back up their point that SPR deposit pauses don't make a difference. Crude prices were $71.93 a barrel on April 25, 2006, when the president announced the deposit suspension, said White House spokesman Scott Stanzel. The next day, the price was $70.97 a barrel, and then $70.88 the next day.
"It should have impacted the prices right that day, and it didn't," Mr. Stanzel said.
But couldn't the SPR impact gas prices over a longer period of time?
"There are many different factors in whether the demand changed, OPEC supply changed," Mr. Stanzel said. "My understanding is that the markets of oil would react to the initial news."
As we reported in our story today, Mr. Bush said that the 75,000 barrels per day deposited in the SPR would have little impact if they were released for consumption — the U.S. imports about 12 million barrels a day, consumes about 20 million barrels a day, and the worldwide demand is 85 million barrels a day.
As for whether suspending SPR deposits could lower prices over a few weeks or months, Mr. Stanzel suggested I talk to an economist, so I called up John Felmy, with the American Petroleum Institute.
Mr. Felmy agreed with Mr. Bush that SPR deposits are "such a small share of worldwide crude prices."
Mr. Felmy, however, did say that President Clinton was able to influence the oil market when he released 30 million barrels of oil from the SPR in the fall of 2000. But then the Organization of Petroleum Exporting Countries (OPEC) cut output by 44 million barrels over the month of December.
"When you're trying to do these types of manipulations, you have to understand that OPEC might offset anything you do," Mr. Felmy said.
There is one wild card that could possibly explain why prices dropped in the fall of 2006 prior to the election, but it's incredibly complicated.
Deposits to the SPR were suspended in August 2005 after Hurricane Katrina disrupted production by Gulf Coast refineries. The SPR was then at 700 million barrels, an Energy department spokeswoman said (Mr. Bush has mandated that SPR be built up to a billion barrels).
After Katrina, the U.S. government sold 11 million barrels and loaned 9 million barrels to energy companies whose production capabilities had been hit.
Repayment of those 9 million loaned barrels went on through the fall and winter of 2005, but were suspended by the president, along with regular deposits of oil to SPR, in his April 25, 2006 order.
Now, because of Energy Department bureaucratic red tape, regular deposits to SPR did not resume until July 2007, but after the 2006 summer driving season, repayment deposits to SPR did resume.
I don't know what percentage of the 9 million barrels was repaid in the fall of 2006, but the Energy Department has promised to give me that number tomorrow. It does seem like that's a pretty small amount of oil, though, to leverage a change in prices at the pump.
By the way, Congress is considering adding an amendment to the FAA reauthorization bill that would mandate a temporary suspension SPR deposits.
A group of 16 Republican senators sent Mr. Bush a letter this week calling for a pause in SPR deposits.
"Temporarily halting deposits to the reserve can provide some relief because the increased supply of oil available for refinement will send the right signal to all markets that the U.S. Government will take measures necessary to address exorbitant crude oil prices that negatively affect the global economy," said the letter, which was released by Sen. Kay Bailey Hutchison, Texas Republican.
"We believe, in light of the dramatic increase in oil prices, a temporary halt to deposits into the SPR should be considered until the economy stabilizes," the letter said.
— Jon Ward, White House correspondent, The Washington Times
















