President Obama has been quoted as saying that part of his energy policy might include tapping the nationís strategic petroleum reserves (SPR). The underlying notion is that by bringing more crude oil to the market, crude oil prices and ultimately gasoline prices will then decline. My theory is that tapping the SPR would have the opposite effect, and cause crude oil prices and gasoline prices to go up.
According to the Strategic Petroleum Reserves website (www.spr.doe.gov), the current inventory is approximately 725 million barrels. This equates to 34 days of oil at the current daily U.S. consumption levels of 21 million barrels a day. The total value of the crude in the SPR is approximately $85.5 billion USD. The price paid for the oil is $20.1 billion (an average of $28.42 per barrel).
So why would tapping into the SPR cause prices to increase? Because the market price is determined by current supplies, current demand, and an expectations factor of what might happen in the future.
For example, when problems heat up in the Middle East or North Africa, as they have recently, expectations shift toward a concern about the instability of future crude oil supplies coming out of those regions. Similarly, a hurricane that may hit the Gulf of Mexico may cause crude oil prices to increase before the hurricane actually hits, due to the expectations that offshore platforms will shut down and reduce the supply of crude oil on the market.
So if the federal government decides to tap the SPR, traders may well see it as a move that removes the cushion that the SPR provides, leaving the U.S. completely vulnerable to disruptions of crude oil supplies in the future. The expectations factor would then push up the price of crude (which is completely opposite of the desired result). This also reflects the fact that the SPR only provides a short-term increase in crude supplies.
The solution to wild swings in crude oil and gasoline prices in the U.S. is to decrease our dependence on foreign sources by increasing the development of our domestic oil and natural gas reserves. We have more than 100 years of natural gas supplies in shales around the country, the Barnett Shale being the largest producing field at this time. Natural gas is clean, abundant and right here in our own backyard.
Cars and trucks powered by clean burning natural gas emit 75 percent to 95 percent less nitrogen oxides, 50 percent to 75 percent less non-methane organic gases, both ozone precursors, and 20 percent to 30 percent less carbon dioxide (www.ngvamerica.org/about_ngv). Natural gas also costs, on average, one-third less than gasoline and 42 percent less than diesel.
Tapping into our reserves of natural gas and encouraging the use of compressed natural gas cars and trucks makes a whole lot more sense than tapping into the strategic petroleum reserves.
Ed Ireland is executive director of The Barnett Shale Energy Education Council (BSEEC), a community resource that provides information to the public about gas drilling and production in the Barnett Shale region in North Texas. Ireland holds a B.S. in economics from Midwestern State University in Wichita Falls, a Ph.D. in economics and statistics from Texas Tech University and did post-doctoral work at the University of Chicago.