Q: Will the release of oil from the Strategic Petroleum Reserve cause gas prices to fall?
A: Maybe a little, for a short time. However, the effort could backfire if energy markets come to expect government intervention in oil supplies under circumstances that do not represent serious supply disruptions.
Ironically, the ultimate effect could be even more price volatility, coupled with additional cost to taxpayers as the reserves are replenished at higher prices.
The U.S. Strategic Petroleum Reserve was created in 1975, in response to the Arab oil embargo of '73-'74. The Energy Policy and Conservation Act of that year authorized the Energy Department to stockpile up to a billion barrels of crude oil as an emergency backup supply.
Presently, the reserve contains 727 million barrels, stored in four complexes of underground salt caverns along the Texas and Louisiana gulf coast.
President Obama has the authority to release some or all of this supply under specific conditions arising from severe disruptions in availability of crude. Significant releases have occurred twice before: In 1991 during the Persian Gulf War, and in 2005 to offset a 25 percent reduction in U.S. production after hurricane Katrina.
On June 23, the International Energy Agency announced a coordinated release of oil from the emergency stockpiles of its member countries, half of which (30 million barrels) would come from the U.S. reserve.
The ostensible supply disruption cited is the loss of 1.5 million barrels per day of Libyan oil withdrawn from markets due to the civil war. Given the daily global consumption of 87 million barrels, this represents less than 2 percent of the world's demand.
The timing of the release announcement is curious. Most of the lost Libyan supply was about to be replaced by other producers, including the Saudis.
Furthermore, oil prices (and gas prices) had already commenced a steady decline over the previous two months in response to a weaker outlook for economic growth.
Considering the relatively minor impact of the Libyan shortage, it is hard to escape the conclusion that the release of reserves is intended as another form of economic stimulus.
While a sale of oil reserves may temporarily dent the price of gas at the pump, the impact will probably be transitory.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at dflessner@timesfreepress.com.