Bingaman: Stand Ready To Tap Reserve

March 3, 2011
09:56 AM
Like most Americans, Chairman Bingaman is concerned about oil supply disruptions due to the disorder in North Africa and the Middle East.  He is keeping a careful eye on the trouble because supply problems likely would slow our nation’s economic recovery.  Here is what Bingaman said about this today on the Senate floor.
Floor Statement
March 2, 2011
Bingaman: Stand Ready To Tap Reserve
“I would like to take a few moments to discuss increasing oil prices and the evolving situation in the Middle East and North Africa. 
“From an oil market perspective, the turmoil in the Middle East changed course just over a week ago when Libya joined the group of countries that are witnessing historic popular uprisings.  It is the first major energy exporter in the region to experience such an uprising.
“At the moment, as much as 1 million barrels per day of Libya’s total 1.8 million barrels per day of oil production is currently offline, with continued political turbulence threatening to take more oil offline before order is restored.  It appears that international oil companies, which are responsible for over 40 percent of Libyan oil production, have removed their personnel from the country, leading to the shutdown of most fields operated by those international companies.  For the moment, it appears that the Libyan national oil companies are mostly continuing to produce and export oil, although there might be some limited production losses in national oil company production as well.
“There is reason to be concerned that the situation in Libya and throughout the region could become worse before it improves.  I don’t know that it’s useful to try to predict the most likely outcome, but the reality is that many of the potential scenarios are not good for the stability of world oil flows. 
“Fortunately, Saudi Arabia is widely believed to have enough spare oil production capacity to offset any losses in Libyan oil production.  The Saudis have already publicly committed to compensating for any Libyan shortfall, and very likely have already ramped up production to make good on this promise.  However, the additional Saudi crude oil will not be of the same quality as the lost Libyan barrels, which are light and sweet.  About three-quarters of Libyan exports go to Western Europe, whose refineries cannot manage the heavier and sour crudes that come out of the Persian Gulf region.  There will be some crude oil dislocation, as higher quality crudes are re-routed to Europe, and incremental Saudi barrels head for refineries that can handle the lower grade oil.
“Between the lost production in Libya, the crude oil dislocation associated with additional Saudi production, and the prospect of further turmoil in the region, we are now unquestionably facing a physical oil supply disruption that is at risk of getting worse before is gets better.  For this reason, I believe that it would be appropriate for the President to be ready to consider a release of oil from our Strategic Petroleum Reserve (SPR) if the situation in the Libya deteriorates further.  Any additional oil market disturbance – such as turmoil spreading from Libya to Algeria, or from Bahrain to Saudi Arabia – would clearly put us into a situation where there would be a very strong argument in favor of an SPR sale.  While I do not think that high oil prices alone are a sufficient justification for tapping the SPR, I do believe that the announcement of an SPR sale would help to moderate escalating prices.
“My recommendation that we stand ready to release oil from the SPR is squarely in the traditional policy for SPR use, going back to the Reagan Administration.  In testimony before the Committee on Energy and Natural Resources on January 30, 1984, President Reagan’s Secretary of Energy, Donald Hodel, stated that the Administration’s SPR policy in the event of an oil supply disruption was to ‘go for an early and immediate drawdown.’  The SPR would be used to send a strong signal to oil markets that the U.S. would not allow a physical oil shortage to develop. 
“The SPR policy carried out during the 1990-91 Desert Storm operation offers an example of this ‘early and in large volumes’ policy in action.  On January 16, 1991, President George H.W. Bush announced that the allied military attack against Iraq had begun.  Simultaneously, he announced that the United States would begin releasing SPR stocks as part of an international effort to minimize world oil market disruptions.
“Less than 12 hours after President Bush's authorization, the Department of Energy released an SPR crude oil sales notice, and on January 28, 1991, 26 companies submitted offers.  Then-Secretary of Energy James Watkins noted, ‘We have sent an important message to the American people that their $20 billion investment in an emergency supply of crude oil has produced a system that can respond rapidly and effectively to the threat of an energy disruption.’  According to analysis posted on the Department of Energy’s website during the George W. Bush Administration, ‘the rapid decision to release crude oil from government-controlled stocks in the United States and other OECD countries helped calm the global oil market, and prices began to moderate… World oil markets remained remarkably calm throughout most of the war, due largely to the swift release of the Strategic Petroleum Reserve oil.’ 
“In recent years, the policy signals surrounding SPR use have not been as clear.  Some SPR sales were criticized as efforts to manipulate oil prices.  The SPR was then ignored during other oil supply disruptions – including simultaneous oil supply disruptions due to a strike in Venezuela, political turmoil in Nigeria, and the initiation of the current war in Iraq.  I believe that the Reagan Administration set the correct course for SPR decision-making.  The current Administration would be well-served in considering that example, and should be ready to make a decision to calm world oil markets, should the threat to world oil supplies increase in the coming days and weeks.”
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