Reuters has an "exclusive" claiming that President Obama and British PM Cameron have agree that the US will release oil from its Strategic Petroleum Reserves:
Exclusive: U.S., Britain to agree emergency oil stocks release
Britain has decided to cooperate with the United States in a bilateral agreement to release strategic oil stocks, two British sources said, in an effort to prevent high fuel prices derailing economic growth in a U.S. election year.
A formal request from the United States to the UK to join forces in a release of oil from government-controlled reserves is expected "shortly" following a meeting on Wednesday in Washington between President Barack Obama and Prime Minister David Cameron, who discussed the issue, one source said.
At least some of the reasons for this are obvious. As the article notes, oil prices have risen substantially in the last month and a half, based largely (though not solely) on increasing tension with Iran. Just the rumor of this release has already helped moderate prices:
Brent crude has gained more than 15 percent since January, trading. It fell $2 on Thursday on news of the likely U.S.-UK release to just under $123 a barrel.
Thus, there is a $15-20 increase in the price of every barrel of oil due to recent events. By releasing a certain amount of oil, Obama can tamp down on speculation and control prices, thereby protecting the weak American economy from an oil shock, relieving consumers, and taking away one of the Republican political attacks. Additionally, as the US moves toward what Obama describes as the last diplomatic opportunity to deal with Iran nuclear program through talks scheduled for April, Obama can send a signal that the US can undermine the effectiveness of Iran's real nuclear weapon, it's ability to choke off oil flows from the Persian Gulf.
Thus, on the surface, this is a win-win-win move for Obama. It's a win politically, a win economically, and a win strategically. But is that really the case?
Short Term Thinking
The essential problem with using the Strategic Petroleum reserve to control prices is that it is a very limited resource. According to the Reuters article:
The United States has sold crude oil directly from the SPR, which holds 696 million barrels at the moment -- enough to meet domestic demand for about 37 days -- only a handful of times, almost always in conjunction with the IEA.
696 million barrels is a lot, but Obama cannot release all of it. Why not? There are two key reasons. The first is strategic: the point of the Strategic Petroleum Reserve is to allow the US military and economy to function if oil were cut off for any reason. It cannot all be used simply for price support, especially at a time when one of the serious policy options (a war with Iran that could temporary block nearly half the world's oil exports) being considered could cause precisely that type of crisis.
The second reason is that everyone knows the first reason. Since releasing oil controls prices largely by reducing speculation, if everyone can look forward to a day when the releases will stop, that fact would increase speculation, destroying the desired effect.
Thus, Obama can release only a limited amount of oil to control prices. If we assume he can release half of it (probably a large overstatement), that would be around 350 million barrels. How much would he need to release? Well, according to a recent IAE report:
The IEA said in a report issued on March 14 that Iranian crude output fell to 3.38 million barrels per day last month, the lowest level in at least three years, and that exports were below 2 million barrels, down from 2.6 million in November.
The head of the IEA's market and industry division, David Fyfe, said that when European sanctions come into effect, Iranian oil exports will fall by some 800,000 barrels a day.
"Iran will be casting around trying to find buyers for 800,000 to 1 million barrels," Fyfe said, adding that potential reductions in oil exports "could be much bigger than that."
Obama's policies (supported by Europe) are supposed to drive down Iranian exports from 2.6 million barrels per day (mbpd) to around 1.2 mbpd or lower, a total reduction of at least 1.4 mbpd, never mind other reductions elsewhere in the system for other reasons. To control prices then, Obama would need to release a non-trivial amount, say on the order of 1 mbpd. This would mean that the could keep releases going for, at the absolute outside, one year.
This is great for the political calendar, since it gets the US through the election. It certainly helps on the economic side, giving a year of buffering for the economy to strengthen. But on the geopolitical side, what is the end game?
If tensions surrounding threats of war with Iran are driving up oil prices enough to cause the release of strategic reserves, what is the plan for changing that dynamic? Obviously, there are talks in April, but the US would have a very weak hand indeed if it required the talks to be successful in order to solve its own oil dilemma. Since the US cannot force Iran to accept any terms in the negotiations, there must be another way resolving the issue, or the US in a year's time will simply be in the same position but with its reserves drained and oil more volatile than ever. How would Obama force a resolution to the Iranian tensions? He could simply back off, reducing the tensions unilaterally, but this is something he has promised never to do. The other alternative to force a resolution is, of course, force itself: a military attack on Iran.
One way or another, if Obama releases oil reserves to counter-act the price increases of tensions with Iran, he must have a plan to either deal with those tensions or their effect on oil markets within at most one year. Otherwise, he actions would risk a very nasty reverberation.
In this light, Obama's statement yesterday should not be taken lightly:
Mr Obama warned: "The window for solving this issue diplomatically is shrinking. I'm determined to prevent Iran from getting a nuclear weapon."
He added: "Tehran must understand that it cannot escape or evade the choice before it. Meet your international obligations or face the consequences.''
Obama's message clearly indicated that if the April talks fail, the US is moving toward war. He pointedly made this statement with the Prime Minister of Britain, whose troops have aided every American war in the Middle East, standing by his side.
If Reuters is correct and Obama is indeed moving toward release of the Strategic Petroleum Reserve, he may also be backing himself into a corner where war appears necessary to get the US out of a trap of its own making.
