What happens if the US taps its emergency oil stockpile

President Donald Trump hasn't been shy about his distaste for high oil prices. But beyond sending angry tweets, there...

Posted: Jul 25, 2018 11:06 AM
Updated: Jul 25, 2018 11:06 AM

President Donald Trump hasn't been shy about his distaste for high oil prices. But beyond sending angry tweets, there isn't much he can do about them.

Unlike leaders in the Middle East, Trump can't simply order American oil companies to pump more oil. West Texas is already producing so much crude that it's running out of pipelines.

The biggest lever Trump can pull is to release oil from the Strategic Petroleum Reserve, the world's largest government-owned stockpile of emergency oil. The administration resorted to this option last summer in response to major refinery outages caused by Hurricane Harvey.

Even though analysts doubt that tapping emergency reserves is warranted now, there's growing speculation in the oil markets that Trump will do just that to combat high gas prices ahead of the November midterm election.

"Nothing gets the attention of members of Congress and presidents of all parties more than rising gasoline prices," said Joseph McMonigle, senior energy policy analyst at Hedgeye Potomac Research.

Oil prices fell sharply earlier this month after The Wall Street Journal reported that the United States was considering teaming up with other Western countries to simultaneously release emergency oil stockpiles. The Energy Department declined to comment on the report.

But prices could rise again if tensions between the United States and Iran keep heating up. Trump sent a fiery tweet late Sunday warning Iranian President Hassan Rouhani that any threats would be met with dire consequences.

Related: Texas to pass Iraq and Iran in oil production

No supply shortage

The strategic reserve is a complex of four sites along the Gulf of Mexico that have deep underground storage caverns. It contains about 660 million barrels of crude oil. It was intended to be used during emergencies such as hurricanes or times of war, but the president can open it as his discretion.

Despite the standoff with Iran, McMonigle believes no emergency oil release is imminent.

"If you're going to do it for political reasons, you'd want to do it closer to the election itself," said McMonigle, who served as chief of staff at the Energy Department in the early 2000s.

Presidents have tapped the SPR for non-emergency reasons. The Obama administration released about 30 million barrels of crude in June 2011. The Energy Department said it was worried that supply disruptions in Libya and elswehere would threaten the global economic recovery.

But using the reserves now would leave "little ammunition down the road if a real emergency arises," said Jason Bordoff, director of Columbia University's Center on Global Energy Policy and a former energy official in the Obama administration.

The government can always refill the SPR, but that costs money - and takes supply off the market.

"If there was a release ahead of the midterm elections, it would seemingly be political in nature given that there isn't a supply shortage," said Matt Smith, director of commodity research at ClipperData.

The Energy Department did not immediately respond to a request for comment.

Related: Trade war threatens America's booming oil exports

'Not a long-term fix'

One possible threat to the oil market is a disruption in supply from Iran.

Sanctions could wipe out up to 1.5 million barrels per day of crude supply from Iran, the world's fifth-largest producer.

Worries about the administration's tough stance on Iran helped lift US oil prices to $75 a barrel in early July. They've since retreated to around $68.

Crude's comeback has caused a bit of pain at the gas pump. The national average price of gasoline is $2.84 a gallon, up from $2.28 a year ago, according to AAA.

But it's unlikely that releasing emergency oil stockpiles would lower prices for long. Refineries in the United States are already operating near their capacity. In other words, they have little room to turn more oil into gasoline.

"It would work temporarily, but it's not a long-term fix," Michael Wittner, global head of oil research at Societe Generale.

Iran threatens critical oil chokepoint

Recent days show how Trump's campaign against Iran runs counter to his goal of keeping oil and gas affordable.

Iran has vowed to answer Trump's efforts to wipe out the country's oil exports through sanctions.

Iranian leaders warned this month that they could respond by disrupting the Strait of Hormuz, a critical oil chokepoint. More than one-third of the world's maritime oil trade goes through the Strait of Hormuz, according to US government estimates.

Although blocking the flow of oil from the Strait of Hormuz would be a drastic move, analysts note that Iran does have a history of harassing US naval vessels in the region.

"War is not imminent, but the probability of an escalatory incident in the Strait of Hormuz is increasing," Cliff Kupchan, chairman of the Eurasia Group, wrote to clients.

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