U.S. Energy Secretary Steven Chu announced on June 23, 2011, that the U.S. would lead an international effort to tap petroleum reserves, dipping into its Strategic Petroleum Reserve (SPR) to replace some of the oil production lost due to unrest in the Middle East, particularly in Libya.
In all, the 28 countries that make up the International Energy Agency -- an agency formed to respond to major disruptions in oil supply -- will release a total of 60 million barrels of oil onto world markets over the next 30 days. Half of that, 30 million barrels of oil, will come from the United States' Strategic Petroleum Reserve (SPR).
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," said Energy Secretary Steven Chu. "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary."
According to the Department of Energy press release, "the situation in Libya has caused a loss of roughly 1.5 million barrels of oil per day -- particularly of light, sweet crude -- from global markets. As the United States enters the months of July and August, when demand is typically highest, prices remain significantly higher than they were prior to the start of the unrest in Libya."
In its own press release about the international effort, the IEA estimated that the unrest in Libya had removed 132 million barrels of light, sweet crude oil from the market by the end of May.
"Although there are huge uncertainties, analysts generally agree that Libyan supplies will largely remain off the market for the rest of 2011," the IEA release stated. "Given this loss and the seasonal increase in demand, the IEA warmly welcomes the announced intentions to increase production by major oil producing countries. As these production increases will inevitably take time and world economies are still recovering, the threat of a serious market tightening, particularly for some grades of oil, poses an immediate requirement for additional oil or products to be made available to the market. The IEA collective action is intended to complement expected increases in output by these producing countries, to help bridge the gap until sufficient additional oil from them reaches global markets.
The SPR was created in response to the 1973-74 oil embargo, and it holds the world's largest emergency supply of oil, currently 727 million barrels. The oil is stored in caverns created in underground salt domes along the coast of the Gulf of Mexico. It can be tapped at the discretion of the president, as it was during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005.
President Barack Obama's campaign promise to release a limited amount of oil from the SPR was made in the summer of 2008 when gas prices shot up to about $4 a gallon, and Washington was abuzz with proposals to make it cheaper. But by the time Obama took office in January 2009, gas prices had fallen to an average of $1.84 a gallon and there was no need to take the emergency step promised in the campaign.
Prices at the pump are back up again this year, though they have dipped recently. According to the AAA Daily Fuel Gauge Report, the average price of a gallon of regular gasoline was at $3.61 on June 23, 2011. That's down from $3.83 a month ago but up markedly from the $2.74 price per gallon a year ago. As a result, Obama had been under increasing pressure to tap the reserve.
With prices actually falling, Doug Cote, the chief market strategist for ING Investment Management, told the New York Times, "This looks like thinly veiled stimulus. The big question weighing on the market is why now?"
Some speculated the timing was largely political.
"The cascade of bad economic news is poison for a president running for re-election," Larry Sabato, political science professor at University of Virginia, told Reuters. "But politics is about smoke and mirrors. This now allows the Obama administration to claim credit for the fall in oil prices."
Asked about the timing of the decision to tap the reserves, White House Press Secretary Jay Carney said it was due to the upcoming summer season when demand increases.
"We don't anticipate or predict prices," Carney said. "What we are addressing is an impact caused by a supply disruption (due to unrest in Libya) and at this time it's necessary to do it because we're about to enter a season when demand is at its highest."
Whatever the reason, Obama has made good on his promise. We rate this one Promise Kept.